German Firms Defy Pressure to Limit China Exposure.

"BERLIN -- The German government and European politicians in Brussels are leaning on Germany's largest companies to reduce their exposure to China. The companies are instead doubling down.

As government pressure intensifies, German companies with sizable Chinese operations in recent months have been scrambling to insulate those businesses from possible Western sanctions.

They are seeking to boost local production to rely less on imports from Germany, striking deals with Chinese suppliers to make their supply chains more local and building alliances with Chinese companies. The efforts aim to protect these businesses' market shares, shield their profits and ride out a worsening of the political tension between China and the West -- especially the U.S.

In the latest sign of such tension, the European Commission, last week announced a probe into alleged unfair subsidies of China's auto industry. China has become one of the world's largest car exporters and a credible competitor to German carmakers, especially in the electric-vehicle segment. Still, German carmakers have criticized the EU probe, which they fear could open them to retributions by Beijing.

Earlier this year, the German government told German companies they should reduce their exposure to China to diminish the German economy's reliance on exports to the country. Germany is heavily dependent on international trade, which has weakened as global tension has risen, bringing growth in Europe's largest economy to a halt this year.

On Tuesday, the Bundesbank, Germany's central bank, warned against the significant economic risks of German industry's exposure to China, saying that more than 40% of German companies that rely on critical materials from China have done nothing to reduce their dependence on materials and components so critical to production at home that factories would stand still if their supply were interrupted.

Instead of pulling back, however, German companies with the most to lose from Western efforts to isolate Beijing have doubled down on their involvement, trying to insulate their Chinese factories so they can keep churning out products regardless of the global political climate.

BASF, the big German chemicals company, is investing up to 10 billion euros (equivalent to about $10.7 billion) in China through 2030. As part of the push, it recently broke ground on a plant in Zhanjiang, China, to make synthetic gas and hydrogen for local use. The plant is expected to go online in 2025. BASF said the facility is part of its Verbund site in Nanjing, China, a large chemical production site with interlinked product chains from basic chemicals to consumer products. The expansion ensures that BASF can produce in China what it needs to continue to grow in the Chinese market.

The main ringfencing effort has come from automakers such as Volkswagen, BMW and Mercedes-Benz.

Thanks to their local-for-local strategy -- which gives priority to local production for foreign markets -- German automakers exported 254,607 vehicles to China in 2022, a fraction of the volume of vehicles they produced there, according to the German Association of the Automotive Industry. VW alone produced 3.2 million vehicles in China, as many as it made in Europe.

In July, VW said it would invest $700 million in Chinese EV maker XPeng, taking a nearly 5% stake in the company, to jointly develop and build EVs. Ralf Brandstatter, CEO of VW's China business, said such partnerships "are an important building block in the Volkswagen Group's 'in China for China' strategy."

VW said that, over the past few years, it has built up local sourcing to well over 90% of the components and materials used to manufacture its vehicles made in China.

BMW, the German luxury automaker, celebrated the 20th anniversary of its Chinese joint venture, BMW Brilliance Automotive, earlier this year with the announcement that its next-generation electric car, the Neue Klasse, or New Class, would be produced beginning in 2026 in China for Chinese customers, rather than exported from Germany. The joint venture sources components and materials for local production from around 430 local suppliers, BMW said." [1]

1. Banking & Finance: German Firms Defy Pressure to Limit China Exposure. Boston, William. 
Wall Street Journal, Eastern edition; New York, N.Y.. 21 Sep 2023: B.10.