The West wants to make the supply chains independent of China. But that is often window dressing.

"Hardly any paper is awaited by the German economy with such excitement as the final version of the German government's China strategy. The future handling of the Middle Kingdom not only splits the coalition, but also separates two Green-led ministries. Many managers are counting on Economics Minister Robert Habeck to take a more pragmatic approach to prevailing against value-driven Foreign Minister Annalena Baerbock. There is a lot at stake: last year, Germany and China exchanged goods worth around 300 billion euros.

The concerns in the manufacturing industry are great, as the pandemic and Beijing's rigid corona management have brutally demonstrated to the western world how much dependence on China has become. Last week, two dozen companies from the German solar industry therefore made an urgent appeal to Habeck. After all, last year 87 percent of the imported photovoltaic systems came from China. If their suppliers fail tomorrow, Germany could forget its solar turnaround. The federal government then agreed on a strategy to build up its own capacities and diversify supply chains.

Not just rare earths

But problems can no longer be solved with the stroke of a pen. It is window dressing when it is suggested that Germany, which is poor in raw materials, could quickly free itself from China's embrace by having a larger number of suppliers. 

 

In recent decades, the Middle Kingdom has put itself in a position in the processing of strategic raw materials in which it can only be substituted at an extremely high price. The industrial world is thus dependent on China's raw material drip.

 

Example of rare earths: China has not only secured enormous mining rights in Africa and Latin America over the past decades. Above all, the country has around 80 percent of global refinery capacities. This separation of the ores into individual materials, which is necessary for further processing, is a low-margin, energy-intensive and dirty process. 

 

Today, Western managers admit that they were once glad that Chinese companies took on these tasks, which could hardly be conveyed to the citizens of the industrialized countries. 

 

The Chinese Baogang Group, for example, is the world's largest player in the market, processing most of the metal neodymium. The material is required to produce so-called permanent magnets, which do not require a power supply. Such magnets are essential for the construction of many new wind turbines. As a reminder: The federal government wants to build many thousands more wind turbines in Germany by 2030.

 

Example electric cars: A lithium-ion battery consists of up to 20 percent of the particularly expensive nickel. One of the most important prospecting groups is Nornickel, one of the few Russian groups not to be found on Western sanctions lists. One of the most important processors is the Tsingshan Group from China, which cooperates with many Western corporations. A year ago, Volkswagen secured its nickel supplies with her. The Tsingshan boss gambled heavily on short selling after Russia's operation in Ukraine started. Nickel prices shot through the roof, and the LME – owned by the Hong Kong Stock Exchange – not only suspended trading, but reversed it. Beijing pulled off a bailout to save the company of paramount importance.

 

China is also the key state for the supply of copper, for the construction of electric motors and for the manufacture of cables. Other examples can be found.

 

The inconvenient truth is that the industrialized world cannot simply cut ties with unwelcome suppliers from China on its current path of development. The resource-poor continent of Europe is hit far harder than North America, which can replace some, but not everything.

 

The West has long clung to the illusion that unattractive processing steps at the beginning of the production chain are outsourced to countries where this can be done without major protests, while the high-value processing steps are carried out in-house. Of course, politicians have to repeatedly raise the issue of grievances such as human rights violations against Uighurs. But anyone who consequently demands that the economy completely cut their ropes to China must also honestly name the price.”