For years, companies alarmed by weak growth in Europe have placed their bets on China’s booming market. This shift to the Far East has long enabled many German businesses with a strong export focus to achieve impressive results.
But now, even the world’s largest growth market is increasingly the source of bad news.
First, Chinese antitrust officials forced German carmakers, businesses long spoiled by success, to lower prices on their replacement parts. Raids in several large joint German-Chinese plants and fines in the hundreds of millions of euros for illegal price fixing were a signal to carmakers that the golden days of unlimited growth are coming to an end.
And now, for the first time in more than a decade, the 30 largest publicly traded German companies in China are no longer seeing double-digit sales growth.
A number of companies on Germany’s benchmark DAX stock index have even reported declining revenues in China. For instance, Siemens and automaker Daimler did less business in China in 2013 than in the previous year.
Chemical producer BASF saw revenue decline by 17.9 percent, to €5.5 billion ($7.3 billion), in 2013, accounting for only 7.4 percent of its global revenue. Deutsche Post, specialty chemical maker Lanxess, industrial gas supplier Linde and pharmaceutical company E. Merck achieved only minimal sales growth.
On balance, German companies are experiencing sobering declines in business in China. The 30 DAX companies generated revenues of €120.8 billion in the last fiscal year.
According to calculations by Handelsblatt in cooperation with the EAC consulting firm, which specializes in emerging economies, this represented a 7 percent increase over 2012. It was the weakest growth figure in China, by far the most important emerging economy for large German corporations, since the 1990s.
Average growth in 2012 was 13.5 percent, and it was much higher in the preceding years.
It was only with exorbitant growth that German companies had repeatedly offset weaknesses in developed, industrialized countries over the last decade. But that key advantage over competitors from other European countries is now disappearing.
To make matters worse, there is no improvement in sight.
“Unfortunately, China’s role as an engine for growth was largely eliminated in the first few months of the year. China trade is stagnating,” said Anton Börner, president of the Federation of German Wholesale, Foreign Trade and Services or BGA, as it is known in Germany.
In a poll of 1,000 companies by the E.U. Chamber of Commerce, two thirds of respondents said the golden years in China are over.
“Unfortunately, China's role as an engine for growth was largely eliminated in the first few months of the year. China trade is stagnating.”
There are many reasons for this.
While Chinese companies operating in Europe have been free to go on a virtually unobstructed buying spree, German businesses are only allowed to do business in China if they enter into 50-50 partnerships with Chinese firms.
This makes it easier for Asian companies to gain access to foreign technology and eventually use it without their joint venture partners.
“German companies are increasingly on a level playing field with Chinese competitors, which are challenging them for traditional market segments,” says Daniel Berger, head of the EAC study.
For instance, a Chinese heavy machinery maker, Sany, no longer depends on German technology to produce its cranes, excavators and crawler cranes.
Sinovel and Goldwind dominate the lucrative wind turbine market, and Chinese state-owned conglomerates CNR and CSR no longer need foreign technology to produce their high-speed trains.
This leaves outfitters such as Siemens empty-handed. The Munich company’s hopes for lucrative deals in the Chinese offshore wind market have also failed to materialize.
Others, such as health care company Fresenius, are adversely affected by government-mandated price reductions. Sporting goods maker Adidas withdrew orders from a Chinese shoe factory affected by a major strike. Because labor is in such high demand in China, many workers see themselves in a better position to demand more pay.
Even the dominant position enjoyed by Germany’s key automobile industry is starting to falter now that Beijing antitrust officials are applying more pressure to Western companies.
Chinese government investigations are now directed against more than 1,000 Western automakers, suppliers and dealers. Audi and its Chinese partner FAW have already admitted to violations of China’s law on monopolies.
Meanwhile, the E.U. Chamber of Commerce accuses China of treating foreign companies unfairly, saying that Chinese businesses are clearly given preference over European companies “when it comes to agreements and ties to other companies.”
Beijing’s tough approach will likely make it difficult for German manufacturers to continue earning hefty profits selling luxury sedans to the Chinese upper class.
This could have serious consequences. In the first half of 2014 alone, the large German automakers sold more than 10 million cars in China. Last year, Volkswagen sold more than one third of its cars in China, which accounted for 22.9 percent of total sales.
The three German automakers, BMW, Daimler and VW, are now earning €84.6 billion in China, which is 70 percent of the China revenues for all 30 companies listed on the DAX.
There is yet another reason why German companies are seeing declining sales growth in China. They now do a substantial amount of business in Asia and have reached a high degree of maturity there.
Last year, DAX companies earned 12.6 percent of their total revenues in China.
Some companies did see strong growth in China last year, but it was based on a lower benchmark compared with those in the car industry.
Infineon, a computer chip maker, posted 11.5 percent growth and steelmaker Thyssen-Krupp increased its China sales by 22 percent. Reinsurer Munich Re saw Chinese revenues increase 25 percent. Still, the combined revenues these three companies achieved in China, €4.3 billion, amounts to what VW earns there in only four weeks.
Despite weaker growth and barriers in the Chinese market, experts agree that maintaining a presence in the most important emerging economy in the world will remain essential.
“Anyone who plans to achieve lasting sales growth in the future has to serve China’s enormous consumer market,” says Andreas Hürkamp, an analyst at Commerzbank.
Most companies continue to answer the call, and are undeterred by the tougher conditions of doing business in China.
Despite slower growth in China, BASF, Europe’s biggest chemical manufacturer, is increasing its emphasis on the Asia region, where it intends to invest about €10 billion by 2020.
BMW announced that it would double the number of models it produces in China from three to six. In addition to a less expensive model priced below its current 3-series, the Munich-based automaker plans to develop a version of the X3 SUV tailored to the Chinese market, along with a vehicle designed specifically for families.
VW and its Chinese partner have just agreed to build two plants, each at a cost of €1 billion, in Tianjin and Qingdao, which will bring the number of VW plants in China to 20.
“China has become our largest and most important market,” the VW chief executive, Martin Winterkorn, said in explaining the investment decision.
Translated by Christopher Sultan