Spending spree

The Middle Kingdom’s Wunderland

china-5 teaser pic
The Chinese dragon is coming.
  • Why it matters

    Why it matters

    German companies may have to resign themselves to fewer Chinese exports, but Chinese money is still flowing into Germany.

  • Facts

    Facts

    • Some 38 percent of all Chinese investments in Europe come to Germany.
    • Data gathered by EY shows that Chinese companies invested in 79 projects in Germany last year.
    • Frankfurt is now the favorite destination for Chinese investments.
  • Audio

    Audio

  • Pdf

By now it is clear that Germany and China rely on each other for economic growth, and have spent the last decades sending money, electronic goods and managers back and forth to build up their special relationship.

The story of how much German companies export to China is well known. But it is also clear that Chinese investors are moving to Germany, in greater numbers than ever before.

Sometimes they want to access Germany’s high tech, specialized firms. Sometimes they want to use the country, with its pleasant lifestyle and efficient transport network, as a base for the rest of Europe.

And this trend is set to continue.

Data gathered by EY, based on the European Investment Monitor, which records all foreign direct investment projects in which business premises and jobs are formed, shows that Chinese companies invested in 79 projects in Germany last year, up from 68 direct investments in 2013 and 46 the year before. Some 38 percent of all Chinese investments in Europe come to Germany, with Britain, which attracted 40 direct investment projects, in second place.

“Chinese companies want to join in at the top of the world market with high-quality products, and to do so they need the know-how from Europe, and especially from Germany.”

Yi Sun, EY China expert

In the last year for example, tire maker Crown Tyre opened a subsidiary in Frankfurt to take care of the European market. China’s largest machine tools manufacturer, Shenyang Machine Tools, also set up its first European showroom in the city.

And China Zhongwang Holdings Group, China’s largest aluminum producer, took up residence through a subsidiary in Frankfurt. Over the medium-term, a research and development center will grow out of the existing sales office.

EY’s China expert Yi Sun is not concerned that China’s hunger for investment in Germany will decrease if growth in the most populous country weakens.

“Germany is the next and most important country in Europe in the eyes of China,” she told Handelsblatt. “Chinese companies want to join in at the top of the world market with high-quality products, and to do so they need the know-how from Europe, and especially from Germany.”

The Chinese government has actively encouraged private and state-owned companies to invest abroad and Germany is a favored destination.

Compared to other European countries, Chinese investors find in Germany a high degree of innovation, stable economic growth and a high level of quality of life. There are also plenty of well-regarded international schools, which are important for employees who bring their families with them. The investors spread news of their experiences quickly in their home country, drawing further companies to Germany.

Frankfurt is becoming much more popular than the old favorite Düsseldorf, because more and more Chinese banks are coming to Europe and want to be near other European financial institutions.

The Bank of China first opened its subsidiary in Frankfurt in 1989 to process transactions in the yuan quicker and more cost-effectively. When both countries later intensified their level of trade, four other large Chinese state banks moved to Frankfurt.

The greater Frankfurt area, which includes the administrative district of Darmstadt, drew 27 direct investments from China last year – the same as London. Both of them replaced Düsseldorf, which fell to third place in Europe with 15 projects, but in 2013 had been far out front with 32 investments.

Of all the large German companies in China, VW is especially under pressure now because one-third of its total sales come from the country.

In addition to the banks, investment companies are also settling down in Europe, and are choosing Frankfurt as a central location. They are not only investing there, but are buying, too. The investment fund Fosun, backed by a Chinese billionaire who calls himself a devotee of US investment guru Warren Buffett, has carried out six takeovers in Germany.

Fosun first went for the traditional private bank Hauck & Aufhäuser, and now has its sights set on the BHF Bank. The Chinese want to takeover at least 51 percent of the parent company BHF Kleinwort Benson, which would put a second venerable bank in Chinese hands.

Meanwhile, German firms doing business in China are adapting to a new norm there. Volkswagen and BMW are selling fewer cars in China, Continental is registering weak sales for its electronic parts, as is Infineon Technologies for its semiconductors.

Siemens saw a 16 percent drop in incoming orders in the first half of the year in the country, and BASF CEO Kurt Bock lamented an “unfavorable development” in the emerging countries. In addition to crisis-ridden Russia, he was primarily talking about China.

There is no doubt that German industry is being hit by the sluggish growth in China. German industry bet on China early and has long been successful in that. Overall, German companies have generated a total of 7 percent of their sales in China, and for the 30 corporations on the DAX, 13 percent of their sales have come from the country.

But despite all of the difficulties, German companies are united on one thing: No one believes there will be an end to the growth in China; at most there will be an end to the country’s abundant boom.

“China will progress with reduced growth rates compared to last year. However they will be considerably more positive than many established western markets,” said Matthias Zachert, chief executive of Lanxessa, a Cologne-based speciality chemicals company. “Due to the increasing urbanization and the growing consumer needs, China also remains an important market for us also over the medium term.”

Lanxessa does about €1 billion in sales in the Greater China Region, and its products are predominantly exported there. Mr. Zachert wants to invest further in the area, “participating in the qualitative growth in China,” through the construction of new facilities.

Joe Kaeser, chief executive of Siemens, said “it is important not to fall into a panic” over China. The Munich-based company sells primarily industrial equipment to China. Sales there sank by 8 percent in the second quarter.

Volkswagen has spoken of a “new normalcy” in China. Of all the large German companies in the country, VW is especially under pressure now because one-third of its total sales come from the country. In June, the core brand VW sold about one-fifth fewer cars in China than in that month the year before.

But the group is counting on sales figures in China being as high this year as they were in 2014, in which VW sold 3.7 million cars there. VW wants to defend its 20 percent market share with new models, especially the new low-cost models planned for China in 2018.

Companies see further major growth opportunities in China over the medium and long terms. One should not start to panic, warned Guido Kerkhoff, chief financial officer of Thyssen-Krupp at the presentation of the company’s third quarter results two weeks ago.

The Essen-based industrial group generates about 6 percent of its sales in China. The elevator business there is stagnating, but business is still strong. Thyssen-Krupp is adjusting for weaker growth in the automotive parts business.

Unlisted companies are also continuing to bet on China. The automotive supplier Bosch invested more than €300 million there last year.

The world’s leader in automobile locking systems, Kiekert, from the town of Heiligenhaus bei Essen, bought a production plant in Zhengzhou, a city that has nine million people. The goal is “to continue to support new capacities, our customers and growth in China as well as Asia,” said Kiekert’s chief executive Karl Krause about the takeover. With that recent acquisition, Kiekert increased its market share in Asia to now almost 20 percent.

 

Ulf Sommer reports for Handelsblatt on companies and financial markets. To contact the author: sommer@handelsblatt.com

We hope you enjoyed this article

Make sure to sign up for our free newsletters too!