Germany downsizing its Corporations driving them away to China

Germany’s domestic energy policies and economic environment are driving its biggest industrial players away from home and toward more favorable conditions in China.

Escalating energy costs, massive subsidies for renewable energy and stringent regulations have created an environment in Germany that is increasingly hostile to industrial growth.

As a result, many of Germany’s most established companies are downsizing at home, shedding thousands of jobs, while investing heavily in China.

This shift underlines the profound impact of current policies on Germany’s industrial landscape, with long-term implications for the local economy and employment.

Germany’s energy policies have driven industrial electricity prices to levels that are among the highest in the world, second only to Great Britain.

By 2023, the average price for industrial users will have reached almost US$250 per MWh; even this cost level is unsustainable without substantial government subsidies, which have now reached unprecedented levels.

Germany’s reliance on renewable energy sources such as wind and solar, combined with the phasing out of nuclear power, has increased the country’s reliance on imports and caused severe price volatility, ultimately putting pressure on both industry and taxpayers.

These high prices have forced many companies to consider scaling back operations in Germany in favor of expanding abroad, particularly in China.

In 2024 alone, Germany will provide 20 billion euros in subsidies to renewable energy producers. These payments ensure that renewable energy suppliers receive guaranteed minimum prices, despite sharply falling market prices.

The cessation of Russian gas imports has had a profound impact on Germany’s energy landscape, disrupting its industrial base and driving up energy costs.

Russian natural gas was a cornerstone of Germany’s energy supply, providing reliable and affordable energy for decades.

However, the geopolitical fallout from the war in Ukraine and the sabotage of the Nord Stream pipelines in September 2022 severed this critical energy link.

The abrupt loss of Russian gas forced Germany to replace it with much more expensive liquefied natural gas (LNG) imports, mainly from the United States. These inflated costs have undermined Germany’s global industrial competitiveness.

The situation is even worse for industrial production: Since 2021, Germany’s production level has fallen by more than 9%. The decline has been even sharper in energy-intensive industries.

There, production levels have fallen by more than 18% in less than two years, pointing to significant problems in sectors heavily dependent on affordable energy.

• Volkswagen: Facing potential job cuts of up to 30,000 in Germany, Volkswagen has made significant investments in China, including 2.5 billion euros ($2.6 billion) to expand EV production in Hefei and a further 700 million euros in EV technology partnership with Xpeng.

• BASF: The chemical giant is cutting 2,600 jobs, mainly in Germany, while investing 10 billion euros in a new chemical complex in Guangdong, China.

• Bosch: Announced plans to cut 7,000 jobs in Germany as it increases investment in China’s e-mobility and automated driving sectors.

• BMW: Expanded production in Shenyang, China, with a 2.5 billion euro investment, allowing the company to move production closer to its target markets.

• SAP:  Plans to cut 9,000 to 10,000 jobs in Germany while reallocating resources to high-growth markets abroad.

Hildegard Müller, president of the German Association of the Automotive Industry (VDA), warns that up to 190,000 jobs across the sector could be at risk by 2035, reflecting the risks associated with Germany’s de-industrialization.

Despite calls from German policymakers and the EU to reduce dependence on China, German companies continue to set record levels of investment in the country.

German investment in China has reached unprecedented levels in recent years, driven mainly by the automotive and chemicals sectors.

Amid rising energy prices and regulatory uncertainties, German companies are also restructuring their supply chains to mitigate risks.

Events such as the Covid-19 pandemic and the Suez Canal disruption have highlighted the vulnerability of global supply chains, prompting companies to localize their operations within key markets.

German companies are responding by increasing direct production in China, which offers both cost advantages and reduced exposure to global supply chain disruptions.

While the German government and the European Commission advocate diversification away from China, alternative markets lack China’s infrastructure, market scale and cost efficiency.

Countries such as Vietnam and Thailand, while considered as diversification options, cannot match China’s industrial networks, skilled workforce and market size.

The decision by German companies to limit investment at home and expand in China reflects the profound impact of Germany’s current energy policy and regulatory pressures.

High costs, variable energy supply and regulatory challenges have made Germany a difficult environment for large-scale industrial investment, while China offers stability, cost-efficiency and market growth potential.

As Germany seeks to maintain its industrial base, these trends suggest the need to address domestic structural issues.

Without reforms to lower energy costs and reduce regulatory burdens, the shift of German investment to China is likely to continue, with long-term implications for Germany’s trade balance, industrial output and economic resilience. Not even EU tariffs will play a major role.

Asia Times / ABC Flash Point News 2024.