Last week Olaf Scholz took center stage in global politics, making a state visit to China. Inevitably the escalating geopolitical tensions cast a shadow over the discussions between the German Chancellor and Chinese leader Xi Jinping- but economic issues still dominated. China is Germany's most important trading partner, surpassing even the United States.

This importance of China for the largest economy in the EU is reflected in the automotive industry. For BMW, Mercedes-Benz, and Volkswagen, it is their single largest market. However, cracks are beginning to show. The three manufacturers face ever-increasing competition from Chinese rivals. In the competition for tomorrow's global marketshare, China is poised to flood the West with domestically produced cars. In electric vehicles, it already leads the way, having pulled ahead of many Western countries in key areas such as batteries and connectivity (software).

In the European auto industry, fears are growing that China's lead may become insurmountable. Renault CEO Luca de Meo, in his role as President of the European Automobile Manufacturer's Association (ACEA), has warned in a letter of the consequences of the EU's misguided industrial policy regarding electromobility. He argues that while China plans consistently, the EU hinders itself with excessive regulation.

While understandable, this criticism represents only half the truth. It is undisputed that China is advancing in terms of electric cars. This challenge should be embraced by Europe, as BMW & Co. are experienced enough to handle it. One can recall the wave of Japanese car imports in the 1980s. In the long run, it did not harm the German auto industry. On the contrary, it helped strengthen the established players. Similarly, the West's dependence on China is not as one-sided as it initially seems. Upon closer inspection, it becomes apparent that the success of Chinese firms would not be possible without Western components.

This is evident in semiconductors. In this field, the EU has the upper hand. Chip manufacturers from Europe (Infineon, NXP, STMicro), the US (Texas Instruments, Microchip), and Japan (Renesas, Toshiba) dominate. These seven companies divide the pie in the automotive microcontroller segment among themselves, with the three European firms together commanding over 60% of the market. China plays no role in this area. Automotive microcontrollers are used in power systems and sensors. This means that without these products, companies like BYD would be unable to function.

Given this weak spot, Beijing is pushing for BYD etc to use domestically produced chips. This is wishful thinking. China's dependence in this area is too great for any significant change in the foreseeable future. The dominance of Infineon etc is strong, and China's technological gap is extensive. Beijing cannot close this gap on its own.

To catch up, the Chinese might be tempted to try to copy these components. Industrial espionage carries conflict potential, as more established semiconductor manufacturers would be forced to take legal action to protect their intellectual property. Infineon's actions indicate the direction things might take. The Dax member sued the Chinese chip manufacturer Innoscience in the US in March, for alleged patent infringements.

Extensive legal disputes could exacerbate trade conflicts. However, mutual dependency in a globalized world necessitates moderation. Dialogue between Washington, Brussels, Tokyo, and Beijing is always beneficial in averting escalation