The Business Foundation of German Industry (II)

Among the Bertelsmann Foundation’s three scenarios for the development of US-China relations, deemed considerably more likely than even a partial striving for cooperation, (german-foreign-policy.com reported [1]), the most favorable would be the scenario based on a continuation of the current (“Cold Peace”) status quo. According to this scenario, tensions between the West and China would persist, with the USA asserting itself as the “leading power” of the West; while the EU is only a “junior partner.” All are heavily investing in armaments, seeking independence from one another – the West, not only from Chinese high-tech products, but also from Russian natural gas, since Russia and China are cooperating – while trying “to advance their own narratives through the use of traditional and social media and by influencing elites.”[2] This leads to a situation in which “large segments of the public are distrustful of the other camp,” and European firms are pressured “to choose a side.” However, “companies still have more leeway than in a scenario involving confrontation and conflict.”

“World with Multiple Blocs”

The first of these “scenarios involving confrontation and conflict” assumes that “the world is divided into multiple dominant blocs;” and that the EU has managed to establish itself as a “meaningful player between both superpowers, the USA and China.” “By closing ranks politically, the EU has gained relevance globally.” The global power blocs are “clearly demarcated for each other” and “compete aggressively against each other over which form of governance is more effective.” Global institutions, such as the United Nations (UN) and the World Trade Organization (WTO), “have become pawns caught up in geopolitical conflicts and have thus lost influence and meaning.” Military conflicts are still “carried out regionally.” The EU is “mostly insulated from the US-Chinese conflict in the Pacific, but must assume greater responsibility for disputes in its own neighborhood.” For companies, the EU’s internal market plays a prominent role in this scenario as a “robust home base where they consolidate key parts of their value chain and where they generate an important, if not necessarily the largest, part of their sales.” At the same time they are now actually compelled to choose between the USA and China.

“World in Permanent Crisis”

The scenario “World in Permanent Crisis” offers the dreariest perspective. The USA and China openly view each other as “an adversary” and compete, “using any available means to draw third states closer.” “International politics is characterized by clearly demarcated camps of friends and foes.” Massive sums are invested in defense – particularly in cyber warfare – along with an industrial policy driven by “security concerns,” characterizing global relations. Sanctions, export controls and investment bans for foreign firms prevail. The EU did not succeed in establishing itself as a global power. The EU’s economy is not capable of producing “European champions.” Now the cartel of states, which has had to accept more withdrawals after Brexit is even threatened with “disintegration.” This has dramatic consequences for the economy: “as the EU fragments, it becomes clear that many individual states are too small to generate profits.” As a result, a “decline in economic output” can be expected, “which leads to reduced purchasing power in Europe.” “This, then, has a negative impact on consumption and sales.” “The European market shrinks and becomes less relevant.”

Leaving their Home Market

In light of the current debate within Germany’s business community, the Bertelsmann Foundation, to whose current paper numerous German companies had contributed, reports “no company is seriously planning to leave China or the US.” Currently, they are looking instead for strategies that will enable them to remain active “in both markets.” “Many companies” are “prepared” that “under certain conditions, they will have to shift at least part of their business operations from Germany to other world regions:” “breaking up their companies into different units,” one “for doing business with China” and the other “with the rest of the world.” “Should it come to the formation of contentious blocs,” it is possible that “some companies would have to seriously consider exiting the US market.” “In a world in permanent crisis, some firms would even have to consider leaving their home market in Europe.” As important as “tradition and personal ties to the company’s original location might be,” writes the foundation, “they can only play a subordinate role when such existential threats loom.”

On Par with the Home Base

Initial signs of a reorientation can already be noticed in recent corporate decisions. This month, it was reported that the Daimler Group intends to open a new Tech Center China in Beijing. The facility, which will employ 1,000 engineers, will be the first outside Germany that can test “everything,” it is reported, putting it more “on par” technically with the far bigger research and development headquarters near Stuttgart.[3] It was explicitly stated that Daimler seeks to create a “second home” focused on the Chinese market, and be able to operate more autonomously. This is not without reason: Daimler’s car sales in China jumped 12 percent last year to a record 774,000, far ahead of Germany with 286,000 and the U.S. with 275,000. Of course, one must make a great effort to be able to keep up in the People’s Republic, which is also one of the consequences accompanying rivalry between Washington and Beijing. One adapts, with the establishment of a new center in China, which is more independent from the German home base than any other comparable facility in the company.

[1] See also The Business Foundation of German Industry (I).

[2] These quotes and those that follow are from: the Bertelsmann Foundation’s “Globalization Scenarios: Challenges and responses from the perspective of German business” Gütersloh 2021.

[3] Mercedes doubles down on China with R&D push. europe.autonews.com 11.10.2021.