Beijing (dpa) - German companies are facing more and more competition in China. According to a survey by the German Chamber of Commerce Abroad (AHK) in China, 46 percent of the companies surveyed believe it is likely or very likely that Chinese companies could take the lead in their sector in terms of innovation within five years. Five percent of respondents said this was already the case. "Competition is getting stronger. Chinese companies are getting better," said Ulf Reinhardt, AHK Chairman in China, in Beijing on Wednesday.

"Chinese competitors did not sleep during Covid," said Jens Hildebrandt, Managing Director of the AHK. According to AHK data, even before the pandemic, German companies did not expect their Chinese competitors to be innovation leaders in their industry any time soon.

More research for competitiveness

The Germans must therefore make an effort in the market of the world's second largest economy. "Germany and German companies are ready for more competition with China and its companies, as long as this competition takes place according to fair rules, enables transparent market access and is not based on distorting subsidies," said Stephan Grabherr, Germany's deputy ambassador to China.

Almost half (46 percent) of the 566 companies surveyed stated that they would cooperate with Chinese partners or customers in order to remain competitive. 42 percent want to invest in their research and development. As a rule, this means developing and producing products in China for Chinese customers, said Reinhardt.

China is also struggling

But China is also struggling. The economy of the country with a population of around 1.4 billion is no longer growing as it used to. In 2023, economic growth of 5.2 percent exceeded the government's target of 5.0 percent. However, according to the World Bank, growth could be lower this year at 4.5 percent. The Chinese are consuming less at home and the export-driven economy is selling fewer products with traditionally strong trading partners abroad.

This is also reflected in the expectations of German companies. According to the AHK survey, 83% believe that the economic trend in China is pointing downwards, with 64% expecting a recovery in one to three years. More than half (54%) believe that China is becoming less attractive as an investment location. Nevertheless, just as many want to continue to invest money in their China business. The majority of those willing to invest are doing so in order to remain competitive.

German companies feel disadvantaged

Around 5000 German companies work in China, of which 2100 are AHK members. Around a third of those who took part in the survey between September 5 and October 6, 2023, came from the mechanical engineering and industrial machinery sector. Around one in five (21 percent) operate in the automotive sector. 69 percent of the companies have fewer than 250 employees.

According to the survey, however, German companies feel disadvantaged. Around one in three companies surveyed felt hindered by legal uncertainties. For example, the opaque regulations for the transfer of personal data across the border abroad are a frequently cited problem. If more investments are to be made in China, legal transparency is needed to build trust among investors, said Hildebrandt.

Invest more for less risk

Just over one in five stated that they were treated unequally compared to their Chinese competitors. Public tenders appear to be a problem here: 53% of the companies that took part felt that they were hindered by a lack of transparency or preferential treatment of Chinese applicants.

In addition, global conflicts and the weak economic development in China are causing some companies to hedge their bets. 44 percent of respondents stated that their headquarters are already trying to reduce the risk of doing business in China. Most of them are building up supply chains independent of China or an additional business outside China. Other companies, on the other hand, want to reduce their risk by doing more research and development in China.

Bundesbank also sees risks in ties with China

According to the Bundesbank, an economic crisis in China would be manageable for the German economy, but a decoupling from China would not. "An abrupt decoupling, for example as a result of a geopolitical crisis, would have a significant impact on German industry in particular," according to an essay from the Bundesbank's monthly report published in advance on Wednesday. Large companies in particular, which are directly involved in China, could "lose a substantial part of their sales and profit base" in such an extreme scenario.

In addition to large companies, small and medium-sized German firms that depend directly or indirectly on intermediate goods from China would also be affected by a break in trade relations. According to the Bundesbank experts, a lack of deliveries could result in serious production losses, at least in the short term. "Overall, the macroeconomic losses would probably clearly dwarf the costs of the far-reaching decoupling from Russia."

In addition to the risks, the Bundesbank experts also emphasized the advantages of the German export industry's close ties in their analysis. According to the analysis, German industrial companies have benefited greatly from export earnings in recent years. "In addition, there were high sales and profits from production in China," the analysis continues. The extensive imports from China are also beneficial for Germany.