On 13 July 2023, the German government released its China strategy. In the 64-page document, policymakers emphasised the urgent need to reduce economic dependencies in critical sectors. A year later, there have been some successes in mitigating risks. For instance, Chinese technology will be phased out from critical components of the German mobile network by 2029. Security considerations are paramount in this decision. However, more broadly implementing the de-risking strategy has proven to be very challenging.

Siemens Energy experienced this firsthand in its wind energy division, where dependency on Chinese materials is particularly acute. Following the Russian invasion of Ukraine, and China's alignment with Moscow, Siemens Energy's CEO Christian Bruch warned that 60% of materials crucial for the energy transition currently come from China. Chinese companies supply nearly 100% of rare earths and permanent magnets used in wind turbines.

Siemens Energy concluded that customers should have the option to continue sourcing from China or diversify to other countries like Australia. While Siemens Energy has established alternative supply sources, Bruch acknowledged that this approach would lead to higher costs.

A year later, the result is sobering. While establishing diversified supply chains remains a priority, a spokesperson for Siemens Energy highlights that the company continues to pursue alternative partnerships with resource producers, such as those in Australia. Nonetheless, he adds: „The fact remains that cost is a major focus in the wind industry, and such alternatives are not yet competitive.“ Currently, wind farm operators find it challenging to pass on these costs to electricity consumers.

In short, price remains the deciding factor, and customers sometimes prefer to forego de-risking measures. This concern is echoed in the study „Resilience of the German and Bavarian Economy“ by Prognos AG, which was published in early July.

Although the pandemic prompted reconsideration of supply chains, and moves to reduce import dependence through diversification, these efforts have been less extensive than anticipated, states the study. „During economic downturns, efficiency takes precedence for companies“, commented Bertram Brossardt, Managing Director of the Association of Bavarian Business, which commissioned the paper.

Nevertheless, Brossardt remains convinced of the mid-term necessity of further diversification. But the right path still needs to be found. He suggests that policymakers support companies through free trade agreements and raw materials partnerships.

Despite some adjustments in 2023, import dependencies on China have remained largely unchanged from the previous year, notes the German Economic Institute (IW) in its study „Import-side De-risking China in 2023“. The report underscores a fundamental issue: the lack of comprehensive external trade analyses to measure de-risking efforts, and calls on the German government to substantiate its China strategy with extensive research.

For companies aiming to serve the Chinese market extensively with their products, another question arises: how can they maximize profitability without becoming overly dependent on the market? This market is especially relevant for German firms, with the research of Deutsche Bank's „Made in Germany. The sore athlete of Europe“ study showing that Dax 40 companies generate approximately 15% of their revenues in China, only slightly less than in their home market of Germany (18%).

Investors repeatedly highlight this dependence, as seen at Siemens. Deka Investment representative Ingo Speich pointed out its high reliance on China in the Digital Industries sector during this year's annual general meeting. He suggested acquiring a US company to achieve a more balanced market presence.

Efficiency and cost considerations also play a role in deciding where to establish production capacities. Companies have greater autonomy in this regard. For example, Einhell. The company sells construction and gardening tools for DIY enthusiasts and has been manufacturing a significant portion of its products in China. However, CEO Andreas Kroiss aims to change course. He explained to Börsen-Zeitung that China's Zero-Covid policy has shown it is too risky to rely exclusively on that country.

In addition to production in Kunshan, China, the company has therefore started its own battery production in eastern Europe this year. For Kroiss, this is not the end of the story. The aim is to relocate parts of production to Vietnam, or back to Europe, he stated last year.

Part of the German economy follows similar approaches to Einhell, but avoids drawing attention to itself. After all, it's important not to alienate the Chinese. The automotive industry and sports goods companies can attest to this.

Nonetheless, the problem remains: remaining factories could face significant depreciation in the event of state level confrontation. Large companies mitigate this risk by using Chinese locations solely as suppliers for their own production facilities or as product suppliers to customers outside the country.

Siemens CEO Roland Busch emphasizes that Siemens produces 85% of its products in China for the local market.

Companies not yet heavily present in China must also consider geopolitical tensions. Scaling internationally inevitably involves China. For example, Krones currently generates only 7% of its revenue in that country. The manufacturer of beverage filling and packaging systems plans to double its capacities there, as announced by Christoph Klenk in early July at the Capital Markets Day.

The problem: the initial phase requires substantial investments. Especially medium-sized companies cannot afford a complete loss. Krones CFO Uta Anders also stresses that "it is important for us to be independent and flexible there.“

The solution: a new manufacturing facility will be built. But: „It's not us doing this“, explains Anders. Instead, a regional development corporation will construct the buildings, with the area expected to be ready by mid-2026. Initially, Krones will move in as a tenant. After five years, the machinery manufacturer will have a right of first refusal, with the rent applied toward purchasing the property. This approach prepares Krones for potential geopolitical tensions.

Decoupling from China or reducing critical import dependencies poses another challenge. Companies from the Asia-Pacific region increasingly compete outside their home markets. The auto industry, for instance, faces competition from BYD etc. Similarly, the railway industry has long feared that China's CRRC, the world's largest train manufacturer, could establish a foothold in Europe. So far, success has been limited, such as in North Macedonia following the acquisition of Vossloh's locomotive division in May 2020.

Krones also anticipates such developments. Klenk explains that he expects a tougher competitive situation with Chinese companies. His conclusion: „We must move first in China to combat the Chinese competition.“