Walking around China, the ubiquity of German cars on Chinese streets is astounding. Audi and Mercedes are everywhere in affluent cities; Volkswagens take their place in smaller municipalities. This anecdotal observation is reflected in the spectacular numbers posted by German car manufacturers over the past few years.
However, German companies’ success in the People’s Republic of China (PRC) has made them, as well as other major players in Germany’s economy, reliant on the goodwill of the world’s largest authoritarian state. Beijing seems willing to leverage this reliance to increase its influence over German decision-making on key geopolitical issues important to the PRC. For example, last December, China’s ambassador to Berlin strongly implied that excluding Chinese tech company Huawei from Germany’s 5G infrastructure would have dire consequences for German carmakers doing business in China.
German intelligence agencies’ clear warnings about Huawei and a more assertive public stance vis-à-vis Beijing from parts of German industry show a growing awareness of the risks tied to deepening economic ties with the PRC. Yet record levels of Chinese investment into Europe’s largest economy, supported by Beijing’s push for influence in German political and academic circles, are slowly constraining the measures Berlin can adopt to defend the country against the encroachment and malign influence of an authoritarian regime.
Deepening economic ties
According to the most recent statistics, the PRC was Germany’s largest trading partner in 2018, with goods worth more than $200 billion traded between both countries. The German automotive sector, which directly employs 830,000 people and supports a further two million in the wider economy, illustrates this state of affairs. In 2018, German brands produced one-quarter of the vehicles sold in the PRC. That same year, 40 percent of Volkswagen’s total car sales were made in the PRC, making it the carmaker’s largest market. By way of comparison, Volkswagen’s second largest market, Germany, accounted for only 12 percent of its total sales. In addition to issues of market access, German carmakers are becoming ever more reliant on the PRC as Beijing solidifies its already strong position in battery technology, an area on which the future of the entire automotive sector hinges.
Consistent with these numbers, a recent report finds that Germany is among the countries that are increasing their exposure to Chinese goods, technology, and investment at the same time that the PRC has been steadily reducing its own exposure to the rest of the world. However, Germany is a notable exception. Chinese entities have steadily increased their economic presence in the country. In 2018, Chinese foreign direct investment into Germany reached an all-time high of almost $13 billion.
Beijing is investing with strategic intent
Economic gain is not the only motive — or even the primary motive — behind these investments. In 2015, the PRC released “Made in China 2025,” an industrial policy plan designed to turn the country into a market leader in key sectors like the automotive industry, semiconductors, IT, and robotics. This plan has two potential consequences for a country like Germany. Firstly, Chinese investment in German companies could siphon off valuable know-how and expertise, to the detriment of Germany’s economy. According to German expert Thorsten Benner, “If ‘Made in China 2025’ succeeds, German industry might as well just pack up and go home.” Secondly, Beijing is very keen to leverage technologies and expertise acquired by the Chinese private sector to increase the country’s military capabilities. Given the high degree of control Beijing exercises over the Chinese private sector, any sensitive technology acquired by Chinese investors should be considered within the authoritarian state’s reach.
Illustrating the second consequence, in 2016, a Chinese investment fund offered to take over Aixtron, a German company working in the semiconductor industry. The offer came in the wake of a cancelled order from another Chinese company that had just made Aixtron’s stock plummet. Both Chinese outfits shared a common investor: a national semiconductor fund controlled by Beijing. Despite these highly suspicious circumstances, the German authorities initially approved the deal. That approval was only withdrawn following evidence provided by U.S intelligence agencies, which were concerned about the potential military uses of Aixtron’s technologies. In December 2016, the United States put the final nail in the deal’s coffin by blocking the sale of Aixtron’s American subsidiary, without which the Chinese investor chose not to proceed with the purchase.
It is also important to acknowledge the local support the PRC may hope to derive from its investments in Germany. In the small city of Arnstadt, with a population of 28,000 people, a Chinese investor is planning to build a factory to produce batteries for electric cars. The investment is anticipated to reach $2 billion, with residents of the city characterized as “euphoric” by The New York Times. Similarly, the Chinese state has helmed a large investment program into the city of Duisburg, the world’s largest inland port. With an unemployment rate four times the national average, the German rust-belt city has enthusiastically welcomed the 7,000 jobs created by the large infrastructure project; although, Deutsche Welle reports that “China benefits far more from the arrangement” at present. As these projects proliferate, ever larger swathes of the German electorate could grow more economically reliant on Beijing’s goodwill — and that in turn could affect the political calculus in Berlin on more sensitive political issues.
The hidden cost of doing business with Beijing
This economic reliance makes Germany vulnerable to the implied coercive threat that frequently accompanies significant Chinese investment. Many countries and companies around the world have already faced retaliatory economic measures when taking actions that displease the Chinese Communist Party (CCP). For instance, Beijing banned Chinese tourist groups from visiting South Korea following Seoul’s decision to host an American missile-defense battery in 2017. This is estimated to have cost the South Korean economy almost $7 billion. In addition, a Chinese boycott campaign drove the South Korean conglomerate that owned the land that hosted the system out of the PRC, a market in which it had invested more than $9 billion.
South Korea is by no means an isolated example. Norway was banned from exporting salmon to the PRC for almost a decade after Chinese human-rights activist Liu Xiabo received the Nobel Peace Prize in 2010. As Australia more assertively pushes back against Beijing, for instance by passing anti-foreign interference laws or by banning Huawei from its telecom infrastructure, Chinese authorities have been holding up Australian coal at customs checkpoints. The CCP has also leveraged retaliatory actions against private actors who have crossed its ideological red lines. Since October 2019, the National Basketball Association has incurred substantial losses in the PRC as a result of comments a team executive made online in support of the Hong Kong protesters. To stay in the good graces of the CCP, dozens of companies have amended their websites or even policed their employees’ speech. In Germany in 2018, carmaker Daimler felt compelled to issue a full apology after using a quote from the Dalai Lama in one of its ads. Beijing uses its investments as a sword of Damocles, constantly reminding those who depend on its largesse to tow the party line.
Berlin’s timid reaction
There is some awareness in Germany that its deepening economic ties with an authoritarian state are problematic. In early 2019, the Federation of German Industries released a policy paper, which stated that the PRC was now a systemic competitor of liberal economies such as Germany. The trade group called for Berlin and the EU to work together to better defend their interests. However, this view is far from unanimous in Germany.
Rather, it seems that the revenue generated by trade with the PRC is increasingly constraining German policymaking towards Beijing. As in other large European countries, the German government has been very cautious in criticizing Chinese authorities’ handling of the pro-democracy protests in Hong Kong. German officials have been more resolute in calling for the PRC to allow UN experts into prison camps that are estimated to hold around a million Uighurs prisoner, but Angela Merkel has steered clear from this matter in her recent China-related statements.
In a recent interview with the Financial Times, Merkel stated that the PRC was viewed as a threat “simply because it is economically successful.” Her actions have matched her words, and she has been battling voices within her own party and within German intelligence services to ensure that Huawei — which, according to researchers Christopher Balding and Donald C. Clarke, “may be deemed to be effectively state-owned” — is not excluded outright from Germany’s telecom infrastructure.
Shaping German perceptions of the PRC
Increasingly, the CCP’s influence is also being felt beyond the economic sphere in other parts of German society. A 2019 investigation by German public broadcaster ARD revealed that the authoritarian regime is exerting growing pressure on German politicians and members of parliament. The former Chinese ambassador to Germany cancelled a 2018 meeting with Free Democratic Party (FDP) politician Gyde Jensen, after the latter met with the president of the self-proclaimed Tibetan exile government. Last year, Green MP Margarete Bause had to bow out of a parliamentary delegation’s visit to China after she was denied entrance into the country because of her critical comments regarding the treatment of the Uighur minority.
The PRC’s perception-shaping does not limit itself to the narrow confines of the German Parliament. In 2018, Germany’s largest news agency announced it was going to carry content from China’s state news service, Xinhua. As many of their Western counterparts do, German newspapers Handelsblatt and Süddeutsche Zeitung regularly publish the state-tied newspaper supplement, “China Watch.” A 2018 report by GPPI and MERICS explained that these efforts aimed to “create a positive global perception of China’s political and economic system as a viable alternative to liberal democracies.”
Furthermore, researcher Didi Kirsten Tatlow estimates that as many as 190 Chinese front groups with direct ties to the United Front, a bureaucracy dedicated to promoting the ideology of the CCP globally, operate in the country. Under the guise of “friendship,” “cooperation,” and “cultural exchange,” the United Front is building a network of like-minded politicians and businessmen. This network can then organically shape German perceptions of the PRC to the CCP’s advantage.
A recent incident shines a light on the extent of the CCP’s efforts. In January, a German newspaper obtained a copy of a funding agreement signed between the Free University in Berlin and the Beijing headquarters of the Confucius Institutes. The Institutes have been accused of spreading CCP propaganda and interfering with free speech on campuses, and they have been tied to at least one spying scandal in the EU. The agreement with the Free University subjects the German institution to Chinese law in exchange for over $500,000 to train up to 20 European Chinese-language teachers a year. These revelations have rightly sparked concerns that these terms would allow the CCP to influence the university’s teaching content, for instance by airbrushing events such as the Tiananmen Square massacre or the Uighur repression in Xinjiang.
Stepping back from the brink
From the Bundestag to academia, the CCP is extending its malign influence throughout Germany. Yet the German political leadership is not united in responding to this challenge, primarily because of the perceived economic consequences for German industry. Germany’s political leadership should be viewing the Chinese footprint in its economy through a more security-oriented lens. Past experience shows that the CCP will use Chinese investments in Germany, as well as German companies’ success in the PRC, in a coercive manner should German leaders take decisions that run counter to Beijing’s interests. By better insulating the German economy from the PRC’s, Germany will preserve its ability to stand up to the world’s largest authoritarian state. In this regard, Berlin’s support for an EU-wide investment screening framework was a step in the right direction. With Germany slated to take over the presidency of the European Council in July, the country also has a unique opportunity to foster a coordinated response to the growing assertiveness of the PRC. Or Germany could continue to let Beijing’s economic heft affect its political decision-making, one deutsche qualität auto at a time.
The views expressed in GMF publications and commentary are the views of the author alone.