Don’t go protectionist! Chinese direct investment in Germany
In mid-July, Chinese consumer goods manufacturer Midea took control of German robot manufacturer KUKA. The new owner has pledged to keep the company’s headquarters in Augsburg until 2023 and also to safeguard the employees’ jobs.
However, the discussions surrounding this acquisition have once again shown that Germany has mixed feelings when it comes to Chinese investment. Due to the significant role KUKA plays in the fourth industrial revolution, i.e. the digitization of industry (Industry 4.0), the German Federal Government decided to step in and become involved. For example, Sigmar Gabriel, the German Federal Minister for Economic Affairs and Energy, who back in 2014 explicitly welcomed Chinese investors to Germany, is said to have tried to persuade German and European companies to invest in KUKA in a bid to prevent the Chinese investment plans. In an open letter entitled “Victim of Open Markets”, Mr. Gabriel even went so far as to plead for stronger control mechanisms in Germany and Europe to halt takeover bids by companies from certain countries if state funding is suspected.
The planned acquisition was also a topic of discussion at the EU level: Günther Öttinger, the European Commissioner for Digital Economy and Society, is reported to have underlined the strategic importance of KUKA and pleaded for European investment. These trends are a true reflection of the current times, in which global protectionism – which the World Trade Organization has explicitly warned against recently – is increasingly gaining a foothold.
Germany has benefited greatly from open markets
For years prior to this, Germany actively advocated open market principles and benefited from global economic integration more than almost any other country: the 2014 Globalization Report by the Bertelsmann Stiftung and Prognos AG concludes that the German real GDP per capita between 1990 and 2011 would be lower on average by around EUR 1,240 if globalization had not progressed further in that time period. Mutual trade and investment flows are therefore essential to Germany’s economic success. In this context, China has a crucial role to play for Germany – with a bilateral trading volume of EUR 163.1 billion, China is Germany’s largest trading partner in Asia and the fourth-largest in the world. Germany, on the other hand, is China’s sixth-largest trading partner and the largest in Europe.
Up to this point China has been on the receiving end of foreign direct investment (FDI) from Germany to a far greater degree than vice versa. According to the German Federal Bank, Germany had invested about EUR 60 billion in China by 2014 – a figure which places China in fourth position worldwide. According to the Chinese Ministry of Commerce (MOFCOM), Germany was the seventh-largest country of origin of FDI in China, as well as the largest European investor, in 2015.
By contrast, Chinese FDI in Germany, particularly in the form of mergers and acquisitions (M&As), is a comparatively new phenomenon that continues to give rise to controversy. On the one hand, reports in recent years indicate that Chinese investment has yielded positive experiences; in the case of acquisitions, old jobs have been retained and new ones created. On the other hand, however – as the KUKA case shows – there are fears that Germany will be “sold off” and that a “Chinese invasion” is likely.
Chinese FDI in Germany: low initial base line – positive economic impact
A cursory look at the figures for Chinese FDI shows that the aforementioned misgivings are not justified. Although Chinese and German FDI statistics indicate that Germany has been gaining in importance as a target country for Chinese FDI in recent years, there can be no talk of an invasion. For example, Chinese FDI stocks in Germany have increased more than eightfold since 2004 (EUR 191 million or 0.05 %), but the current figure of EUR 1.6 billion still only accounts for 0.3 % of all FDI, thus putting the country in 17th place on the global ranking list. Even if Hong Kong’s share of FDI, which amounts to EUR 477 million, is included, the aggregate share just about reaches 0.4%.
The situation is similar when it comes to FDI stocks which China has thus far accumulated abroad: with USD 5.8 billion, which equates to a 0.7% share, Germany occupies the 15th place in the rankings. According to Chinese statistical data, the growth rates are reported as being higher than the corresponding German data, stating that China’s FDI stocks in Germany have risen by a factor of 45 since 2004. As Chinese FDI in general increased considerably in that period, the actual percentage share for Germany did not change significantly. It should also be noted that Chinese investment has increased from a low initial baseline, meaning that the high growth rates are not unusual.
In addition, increasing Chinese FDI has a positive impact on employment in Germany. According to the German Federal Bank, 82 Chinese companies with a balance sheet total of at least EUR 3 million were based in the country in 2014. They employed approximately 8,000 people and generated a turnover of EUR 2.9 billion. Compared with 2004, both the number of Chinese companies operating in Germany and their turnover have almost increased fivefold. The number of staff they employ is more than eight times greater. According to Germany Trade and Invest (GTAI), whose data includes smaller companies, there are as many as 1,300 Chinese companies in the country, employing roughly 16,000 people. According to GTAI, most investments by Chinese companies are made in the context of greenfield projects to Germany and not, contrary to reports in the media, M&A transactions, which American and UK companies still remain at the forefront of. Chinese companies thus bring new capital into the country and help to boost tax revenues. They also tighten the bonds between the German and Chinese national economies, and reduce the asymmetry in the investment relations between the two countries. There is therefore little economic justification for any misgivings with regard to such investment; instead they are rooted mainly in media and political assessments.
State-aided FDI may be challenging but it’s no reason for protectionism
It is no secret that the Chinese Central Government has been actively supporting Chinese companies ever since it introduced the Going Global Strategy back in 2000 – even to the point where it provides favorable loans. Although questions are seldom asked as to the origin of imported capital when Chinese companies conduct greenfield investment in Germany, they reach the top of the agenda when it comes to M&A transactions. This is because there is a danger that interested buyers from the EU will be placed at a competitive disadvantage if Chinese bidders can place bids that are subsidized by the Chinese state. There is a general suspicion surrounding Chinese companies when it comes to state aid, regardless of their ownership – private enterprises such as Midea are no exception. This situation presents a challenge for both sides which must be addressed.
But to consider placing selective restrictions on certain foreign investment in Germany and the EU, as was proposed by the German Federal Minister for the Economy, is not the solution. This is all the more pertinent at a time when the EU – and therefore Germany too – are standing at a crossroads: the threat of Brexit, the discussion about other EU countries potential “exits” and the collapse of the Schengen Agreement all represent a real risk not only to Europe’s internal integration, but to its integration into the global economy too. If in those circumstances a decision advocated by Germany to impose stricter investment controls in the EU was taken, this would – although not quite to the same extent as protectionism – further assist the tendencies towards economic disintegration which are currently prevalent throughout the entire world. This could, despite assertions to the contrary, culminate in a trade and investment war characterized by protectionism on both sides.
Germany should therefore continue to play its part in advocating convergence – both at EU level and with regard to China. If China wants to be seen as a market economy, it must comply with the relevant criteria, i.e. lend to businesses based on market conditions and ensure greater transparency with regard to business ownership structures and sources of funding. The EU should ensure that the rules concerning state aid, which apart from a few specific exceptions prohibit member states from providing state support for economic activities, do not place EU companies at a disadvantage compared to foreign investors. For that purpose, the EU could consider adopting a similar regulation for FDI funding, and in particular M&A transactions, from third countries in the EU. However, the rules concerned must not be selectively applied to certain countries of origin only. As this is being addressed, the EU should also push to advance negotiations related to the Bilateral Investment Treaty between the EU and China since it has the potential to establish fair competition conditions and increased transparency in investment relations between the two sides. It is therefore a welcome development that the new EU strategy on China, which was announced in June 2016, places particular emphasis on this Treaty. To date Germany has, with regard to China, relied precisely on such bilateral agreements to create a level playing field and more open markets for both sides. Although such an approach is more cumbersome than resorting to unilateral protective measures, it is fairer and more sustainable and efficient in the long term.