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Trade relations with China are good, but there is always room for improvement. According to the analysis by VDMA’s China expert Oliver Wack, we need more protection of expertise, more free trade, and fewer market barriers. And both Germany and the EU need to develop a strategy for dealing with China in future.

By Oliver Wack

Business with China was extremely positive for the German mechanical engineering industry in 2017. Companies in the sector enjoyed total growth in deliveries to China of around 23 percent compared to the previous year. In absolute terms, the German capital goods industry delivered goods worth approx. 17.5 billion euros to the country. Products from the fields of power transmission engineering, machine tools, precision tools, valves, fluid power, and plastics and rubber machinery were in particularly high demand. This all makes China not only the most important sales market in Asia by far, but the second most important market worldwide after the USA. Looking at trade with China as a whole, the German mechanical engineering industry accounts for just over 20 percent of total German exports to the country.

But the days in which the machinery trade with China was a one-way street are long gone. Although there is still a clear difference compared to German goods, exports from China to Germany have increased significantly in recent years. Chinese manufacturers delivered goods worth around 6.2 billion euros to Germany in 2017 - a further increase of around ten percent compared to the previous year. The largest sources of Chinese export products are the fields of power transmission engineering, conveyor technology and valves. As a result, China has become one of Germany's largest suppliers in mechanical engineering.

German mechanical engineering very important to China

The importance of German mechanical engineering for the modernization of Chinese industry is clear to see. China is trying to shift its focus from quantity to quality, while modernizing its economy with innovative products and customer-specific solutions. Machinery and plants from Germany can make a significant contribution to this, while also making Chinese companies more competitive. Approximately 800, mostly medium-sized German mechanical engineering companies have already invested in China, creating tens of thousands of qualified and well-paid jobs. VDMA members have thus played a key role in China's technological development over the past several decades.

China's answer to Industrie 4.0: Made in China 2025

China would like to continue scaling the technological ladder and achieve international success with domestic brands. These are very ambitious goals and, in VDMA's view, will be difficult to achieve without foreign partners. This technology development plan could certainly create additional business opportunities for the German mechanical engineering industry.

China needs to be more open

According to Western observers, the implementation of Industrie 4.0, which is linked to the further digitalization of the economy, is not possible without a further opening of the market, given the high level of interconnection between international economies - including that of China. It remains to be seen whether this realization will materialize, particularly considering the new cybersecurity law that has just been implemented. In addition, many Chinese companies still view Industrie 4.0 solely as a concept for developing products that are then purchased and "only" have to be implemented in production in order to optimize processes. The fact that there is no silver bullet and Chinese companies have to make their own significant contribution in order to develop and implement the best solutions for themselves is often cause for surprise during talks. In collaboration with its offices in Beijing and Shanghai, VDMA is planning an event for 2018 that will give member companies the opportunity to present their ideas and product solutions to representatives of Chinese customer sectors. The event will be held under the motto, "What is really behind Industrie 4.0?"

More free trade and protection of expertise, fewer market barriers

Medium-sized companies that want to invest in China or expand their activities in the country need a secure planning basis and reliable framework conditions. Equal conditions on the market, protection of expertise and the associated data security are essential here. In this context, VDMA is advocating that the planned investment agreement between the EU and China is concluded as quickly as possible. Various aspects of market access could also be resolved in this manner.

For example, the actual manifestation of the cybersecurity law that took effect in June remains unclear. The new law cannot be allowed to cause disruption, for example to the cross-border services that German mechanical engineering companies offer their Chinese customers. Industrie 4.0 and Made in China 2025 will only increase the number of internet-based products and services. Economic development cannot be impeded.

No disadvantage in subsidies or for tender

German mechanical engineering companies also want the opportunity to invest in and even take over local high-tech companies. Foreign companies and companies with foreign investors cannot continue to be disadvantaged in calls for tender, financing, or subsidies for research and development activities.

As a technology-driven sector, mechanical engineering depends heavily on protecting its innovations. Expertise secures the future, so VDMA is calling on China to make further progress in improving protection for inventions and innovations. This plea comes on the back of feedback from the most recent VDMA survey, which clearly showed that Chinese companies are still by far the worst offenders when it comes to breaching rules on expertise.

Germany and Europe need a strategy

China's economic activities are increasingly posing a challenge for Germany and Europe. For example, China is heavily promoting its Belt and Road Initiative, which has already reached important Asian partner countries and even some countries bordering the European Union. Chinese investment in technology companies is also increasing significantly. How to deal with this given the lack of equivalent opportunities on the Chinese market is another topic that is currently the subject of intense discussions.

It is therefore important that Germany and Europe develop a long-term strategy for dealing with China in future. Attention must also be paid to expanding expertise regarding China and Asia, rather than reducing it.

Further Information

VDMA Foreign Trade   |   VDMA China   |   VDMAimpulse 02-2018: "Trade policy reaches a crossroads"   |   VDMAimpulse 02-2018: "Moscow is ready to use protectionism"

Oliver Wack, VDMA Foreign Trade.