After I assumed the role of Siemens One President in China in 2004, Siemens embarkedon a groundbreaking collaboration with the newly established branch of the Chinese Central Party School (CCPS) in Pudong, Shanghai. This branch, christened the China Executive Leadership Academy Pudong (CELAP), aimed to foster an exchange of Best Practices and knowledge with multinational companies (MNCs) to nurture top-tier talent. Siemens recognized that over 60% of its business in China was entwined with state-owned enterprises and their decision-makers. In light of this, Siemens made a strategic decision to forge a joint program with CELAP as part of its global cross-selling initiative. The momentous occasion occurred on September 16, 2005, when Siemens’ global CEO, Klaus Kleinfeld, joined the team in Shanghai to formalize the partnership with CELAP. The audience included high-ranking cadre members from CELAP, comprised of two classes of provincial and ministerial officials, as well as CEOs of state-owned enterprises. Siemens’ leadership unanimously selected me as the sole Siemens management representative to deliver a substantive presentation, following our CEO’s ceremonial address.
Siemens Sparks Sustainable Growth in China
Assuming the role of General Manager in Shanghai, representing Siemens across all business units, I recognized the opportunity to utilize my speech to promote Siemens’ major products and services relevant to addressing the challenges of mega-cities: Transportation, Energy, and Public Services. At the time, China’s per unit GDP consumed five times the energy of the United States and twelve times that of Japan. Without leveraging technology and innovation Made in Germany (including Siemens’ contributions), China’s rapid development and economic success risked precipitating an environmental catastrophe of global proportions.
As a consultant to Shanghai’s municipal leaders, I gained insights into the city’s predicament. Shanghai faced a threefold increase in transportation demand for people and goods, with limited physical space to expand transport infrastructure as needed for the World Expo in 2010. The only viable path forward was to develop an integrated public transport network. In 2005, underground rail usage accounted for a mere 8% of all public traffic in Shanghai, significantly lower than the 40% seen in similarly sized developed cities worldwide. Achieving this would not only result in substantial energy savings but also substantial reductions in CO2 emissions, estimated at over €1.5 billion according to our team’s analysis. In 2005, China had less than 418 kilometers of underground rail tracks, a staggering 17 kilometers less than the city of London.
The potential for improvement extended to China’s energy supply. Over 50% of China’s coal-fired power plants were antiquated, with extremely low energy efficiency levels ranging from 27% to 29%, far below the typical 38% seen in Western Europe. This represented an immediate opportunity for a 30% improvement, translating to over €15 billion in savings and reduced coal consumption. As Western Europe had already traversed this path of technological advancement, China had the potential for rapid gains.
The impact of my presentation was profound, leading Shanghai’s municipal management team to embrace an ambitious plan to construct over 20 Metro lines, totaling 821 kilometers of rail tracks by 2023, establishing the world’s largest underground rail network. Under my leadership, Siemens’ business in Shanghai burgeoned, growing from less than €300 million in 2005/2006 to over €900 million in 2007/2008.
However, amidst this breathtaking growth, Siemens faced a significant challenge—the annual budget procedures of its relevant business units. Headquarters traditionally planned for a global revenue increase between 3% to 5%. Anticipating growth beyond 50% in China or Shanghai would disrupt budget and investment allocations. Consequently, local management had to compromise their insights and adhere to budget plans dictated by global superiors, limiting growth to under 30%. This arrangement resulted in substantial incentive and bonus payments, as conservative growth targets were consistently surpassed. Virtually without exception, German management expatriates in China during this period achieved stellar success in their respective business units and were promoted upon their return to headquarters, transferring Chinese competencies effectively to the global management team, primarily based in Germany. Among the standout talents was Mr. Roland Busch, who is now the CEO of Siemens Group. As the senior Siemens representative in Shanghai, I hosted an exclusive farewell dinner for him and his wife, featuring the finest Japanese cuisine, before his return to Munich to assume the role of Global Head of Strategy for the entire group.
The opportunity cost of not fully embracing the Chinese market’s potential, or even withdrawing from China, has become a looming threat to Germany’s economy
However, this approach also had a downside for MNCs like Siemens: the opportunity cost of extremely high growth. If Siemens had the resources and sufficient investment to fully capitalize on the Chinese market’s opportunities without the constraints of budget plans, its international and local competitors wouldn’t have grown as rapidly. This phenomenon was evident in various sectors, including gas turbines, healthcare, industrial automation, PLM solutions, mobile phones (Apple, Samsung), and mobile networks (Huawei). The opportunity cost of not fully embracing the Chinese market’s potential, or even withdrawing from China, has become a looming threat to Germany’s economy and its major exporting companies. The ongoing conflict in Ukraine further underscores the potential for substantial opportunity costs, following the same growth logic for MNCs in China.
China: The Crucible for Global Leadership
In the 1980s, when China made the strategic decision to establish a robust local value chain within its automotive industry, it sought out the expertise of General Motors (GM), widely recognized as the global leader at the time. GM was basking in record-breaking profits in the United States but wasn’t inclined to enter the Chinese market with significant manufacturing investments. Similarly, Toyota, the next company on Beijing’s contact list, hesitated. Even industrialized nations like Germany displayed a general reluctance during the late ’70s and early ’80s to engage extensively in the Middle Kingdom’s industrial landscape. Forecasts at the time painted a grim picture of growth prospects in the Chinese automobile market. Consequently, the response to China’s overtures was lukewarm.
Turning their attention to European Original Equipment Manufacturers (OEMs), China found a willing partner in Volkswagen (VW). Chinese employees at VW provided invaluable operational insights and expertise, enabling the company’s strategic leadership to make intelligent decisions. What followed was a remarkable market entry that established VW as a global leader in the automotive sector over the next four decades.
Dr. Hahn, CEO of the VW Group in the 1980s, articulated the vision succinctly, stating, “We saw in China a national market that would develop into the largest in the world in the long term, far exceeding American orders of magnitude.” His foresight was based on staggering projections. If China were to achieve the car density of Portugal in 1980, the country would require approximately 130 million passenger cars. However, when based on Portugal’s present vehicle density per capita, China’s potential car ownership would surpass a staggering 500 million cars. The cost advantages stemming from China’s sheer size would inevitably position it as the most crucial VW production site, strategically catering to exports not only within the Asia-Pacific region but even to the United States. (Source)
Volkswagen’s journey in China began with a 1983 revenue of Euro 20.5 billion (DM 40.1 billion) and a total sale of 2.1 million units. (Source) Fast forward four decades, and thanks to significant manufacturing investments from Germany and China into China, its revenue had soared to Euro 279.2 billion with a total sale of 8.5 million units. It now sits firmly as the second-largest player, just behind Toyota, which recorded 8.8 million units in sales for the fiscal year spanning April 2022 to March 2023. (Source)
The Asia-Pacific market, with China as its crown jewel, currently reigns as the world’s largest car market, contributing more than 3.6 million units to VW Group’s sales volume, accounting for over 40% of its total volume. This remarkable net sales volume growth, reaching 6.35 million units, owes much of its success to the 3.2 million units sold in China alone, representing over 50% growth over the last four decades. (Source)
The pivotal role of visionary investments in China becomes evident when we examine VW Group’s transformation from a net loss of 1983 to over Euro 22 billion in profits and the creation of jobs, which skyrocketed from 232,000 in 1983 to over 676,000 in 2022. In stark contrast, global OEM leader GM, which declined China’s advances, saw its revenue increase from USD 75 billion in 1983, a figure 200% higher than VW’s, to USD 157 billion in 2022—50% less than VW—thus relinquishing its market leadership position. (Source)
This example of successful market entry has been replicated by numerous German industry stalwarts, including SAP, BASF, Bosch, and Trumpf, who have outperformed their global rivals. They harnessed the vast Chinese market’s economy of scale while blending Germany’s technology leadership with localization cost advantages. Even the darlings of Wall Street, Apple and Tesla, have recently demonstrated their prowess in achieving global market leadership through their endeavors in China, emphasizing the significance of this market.
However, concerns loom large over a brewing “chip war” initiated in Washington. Industry leaders like Nvidia’s Chief Executive, Jensen Huang, have voiced apprehension about the potential “enormous damage” to U.S. companies if this conflict escalates. He cautioned that losing access to the Chinese market would result in a surplus of chip manufacturing capacity in the U.S., ultimately harming the tech industry. Nvidia’s Chief Financial Officer, Colette Kress, echoed these concerns, highlighting the long-term implications of restrictions on exports of AI chips to China, which could permanently hinder the U.S. industry’s competitiveness. (Source)
What’s at stake goes beyond individual companies; it threatens to undermine President Joe Biden’s broader vision of fostering domestic chip manufacturing. Intel’s Pat Gelsinger recently conveyed to U.S. officials that without orders from Chinese customers, significant projects such as Intel’s planned factory complex in Ohio might be shelved. These concerns have prompted calls for a reevaluation of the restrictions on exports to China by leaders of the largest U.S. chipmakers in meetings held in Washington.
The importance of maintaining access to the vast and dynamic Chinese market cannot be overstated.
China’s transformation into a global leader in various industries, notably the automotive sector, stands as a testament to the power of strategic investments and partnerships. As the world grapples with the intricacies of international trade and geopolitical tensions, the importance of maintaining access to the vast and dynamic Chinese market cannot be overstated. (Source)
China’s Investments in Europe: Divergent Perspectives from Germany and Greece
In Germany, a fierce debate has been underway regarding the Chinese state shipping company Cosco’s acquisition of a minority stake in a container terminal at the Hamburg port. The deal faced uncertainty when it was revealed that German security authorities had classified the facility as “critical infrastructure,” potentially subjecting the acquisition to increased restrictions. Last October, Chancellor Olaf Scholz pushed through the deal, allowing the shipping giant Cosco to acquire a 24.99 percent stake in the Hamburg Tollerort terminal, despite objections from several Cabinet members. This move drew criticism from his coalition partners, the environmentalist Green and business-friendly Free Democrat parties, who called for a re-evaluation of the deal and a potential reduction in Cosco’s shares in the terminal. Why, then, did the SPD Chancellor champion this Chinese investment in the German economy?
Greece, meanwhile, seems unfazed by such concerns. In 2010, Greece faced a sovereign debt crisis, and one of the conditions imposed by the Troika was the sale of public assets. This led to Cosco acquiring a majority stake in the port of Piraeus, as they were the sole willing investor at the time. Piraeus, situated on the Saronic Gulf in the Aegean Sea, is Greece’s largest port and one of the largest in Europe. Under pressure from the debt crisis and the Troika (comprising the European Commission, the European Central Bank, and the International Monetary Fund), the Greek government sold nearly all of the country’s vital ports and airports to foreign companies. China’s leading maritime freight company now holds a 67 percent stake in the port, following the acceptance of Cosco’s binding offer of 368.5 million euros (then US$418.8 million) for a controlling stake in 2016—51 percent of which was acquired in 2016, with an additional 16 percent of escrow shares transferred in 2021. As part of the deal, Cosco pledged to invest an additional 350 million euros in port infrastructure over the next decade, a promise they have kept.
The Greek government appears content with Cosco’s performance at Piraeus. Prime Minister Kyriakos Mitsotakis stated in February 2021 that “Chinese investment in Piraeus is beneficial for both countries.” Chinese President Xi Jinping has also lauded Cosco’s investment in Piraeus as an “exemplary project.” Xi personally inspected the port in 2019, viewing Piraeus as a crucial hub for China’s land-sea link with Europe and for bridging Asia and Europe. Under Chinese ownership, Piraeus has undergone significant modernization and now stands as the largest port in the eastern Mediterranean and the seventh-largest in Europe. Jobs are secure, and working conditions are on par with those elsewhere in Greece. In 2021, the Piraeus Port Authority reported an annual turnover of 154.2 million euros (US$165.40 million), a historical high for the port under Cosco’s management.
Since collaborating with the Chinese, Piraeus port has seen remarkable growth in container throughput, maintaining an annual operating container throughput of over 5 million twenty-foot equivalent units (TEUs) in recent years, compared to just 0.88 million TEUs in 2010. The port’s global container volume ranking also surged from 93rd in 2010 to 26th in 2020, making it one of the world’s fastest-growing container ports and the Mediterranean’s top port. From 2012 to 2014, COSCO Shipping invested 553 million euros to complete two terminals and renovation projects, accomplishing this two years ahead of schedule. The company also made efforts to create local jobs, with nearly all of the port’s approximately 2,000 employees being Greek, including construction workers. The investment additionally resulted in nearly 2,000 direct jobs in various port services such as stevedoring, storage, and logistics.
According to studies by the Foundation for Economic and Industrial Research, a prominent Greek think tank, and other experts, COSCO’s development plan for the port is expected to contribute 5.1 billion euros annually to Greece’s economy in the long term, along with creating 125,000 jobs until the new concession agreement expires in 2052. By 2021, Cosco’s investment had already generated over 3,000 direct jobs and more than 10,000 indirect jobs in Greece, providing a cumulative direct social contribution of more than 1.4 billion euros to the local area. In 2020, it also contributed 0.78 percent of Greek GDP. The Chinese ambassador to Greece emphasized Piraeus as a crucial component of the Belt and Road Initiative and recognized Greece’s potential to become a transportation hub in the Mediterranean. (Source)
In contrast, Germany is considering tightening scrutiny of Chinese investments due to increased geopolitical risks associated with its largest trading partner. Deputy Chancellor Robert Habeck, a Green Party member serving as the economy minister, has proposed measures to strengthen restrictions on foreign direct investment in critical sectors like semiconductors and artificial intelligence. These proposals come on the heels of Berlin’s warning that Beijing is becoming “more repressive internally and more aggressive externally.” These discussions occur amidst broader debates in Europe and the US about economic relations with China, potentially sparking tensions within Chancellor Olaf Scholz’s coalition and with business groups. (Source)
For example, Germany’s Viessmann, a heating manufacturer, recently sold its air conditioning division, including lucrative heat pumps, to US competitor Carrier Global for 12 billion euros, shifting Germany’s future hopes in the heat pump industry to America. Viessmann Climate Solutions, with a legacy of innovation spanning 106 years, provides Carrier with a premier brand in the high-growth global heat pump and energy transition markets. This acquisition aligns with Carrier’s ambitions in light of climate change and the energy transition, particularly in Europe. The deal is expected to capitalize on government regulations and incentives driving energy transition, transforming Carrier into a global leader in intelligent climate and energy solutions. (Source)
The implications for the German economy differ from the Chinese investment in Greece. While the Viessmann deal doesn’t immediately create high-value jobs and market growth in Germany, it contributes to the shareholder value of Carrier, potentially leading to the relocation of corporate functions to the US over the long term. This shift mirrors a pattern seen in previous American industrial M&As in Europe, such as GM’s acquisition of Opel in Germany, Ford’s acquisition of Volvo in Sweden, and GE’s acquisition of Alstom in France, where capacity and competency were acquired for European market expansion, followed by downsizings for synergy and economies of scale. The ongoing war in Ukraine also enables such American investments, aligning with geopolitical considerations in Washington and potentially sidelining future growth opportunities and markets in partnership with China for leading German technologies and innovations. Vice Chancellor Robert Habeck, however, seems to only partially grasp these business dynamics. As the German Federal Minister of Economics, he raised no objections to a US company taking over Viessmann’s heat pump business, relying on assurances of job security. The ministry approved the deal on June 23, 2023, with the condition that “Viessmann and Carrier strictly adhere to their agreed clauses to secure the location.” Failure to do so may lead to the ministry withdrawing its consent. (Source)
The contrasting approaches of Germany and Greece towards Chinese investments reflect the complexities of balancing economic interests with geopolitical concerns. While Germany contemplates tighter restrictions on foreign investments, Greece has embraced Chinese capital and witnessed substantial economic benefits. The recent Viessmann-Carrier deal in Germany underscores the potential for foreign acquisitions to reshape corporate landscapes and influence economic dynamics within German economy.
Germany’s Post-Ukraine Opportunities: Energy, Exports, and EVs
In the wake of the Ukraine conflict, the German export economy stands at the cusp of three significant opportunities that could reshape its future trajectory. These opportunities revolve around the resumption of cost-effective energy supplies, expanding market growth within the BRICS nations, and leveraging China’s industrial prowess to regain competitiveness.
1. Affordable Energy Supply
The aftermath of the Ukraine crisis, coupled with sanctions imposed by the EU and the United States on Russia, has triggered a surge in energy costs, particularly for Germany. As of July 2023, the average wholesale electricity price in Germany skyrocketed to approximately 77.5 Euros per megawatt-hour, marking a staggering 257% increase compared to pre-war levels in July 2020. In August 2022, this figure reached an all-time high of over 469 Euros per megawatt-hour. (Source)
Consequently, by December 2022, the cost of electricity for German businesses had reached a staggering 0.907 U.S. Dollars, dwarfing the American price of 0.146 U.S. Dollars, which is 85% cheaper, and the Chinese price of 0.087 U.S. Dollars, a mere 10% of the German rate (Source). Germany, which once relied on cost-effective Russian gas payments in euros, now finds itself dependent on costly LNG imports from the Middle East and the U.S., transactions conducted exclusively in U.S. dollars. This newfound reliance underscores the importance of securing affordable Chinese energy supplies, driven by their robust renewable energy supply chain—a necessity not only for Germany’s economic interests but also for reversing the ecological damage that has plagued the global economy.
Germany, which once relied on cost-effective Russian gas payments in euros, now finds itself dependent on costly LNG imports from the Middle East and the U.S., transactions conducted exclusively in U.S. dollars.
China’s dominant position in the solar PV manufacturing landscape is testament to its capability. Boasting over $50 billion in investments in PV capacity—ten times more than Europe—and the creation of over 300,000 manufacturing jobs in the solar PV value chain since 2011, China is the undisputed leader in solar manufacturing. Its costs are 10% lower than India, 20% lower than the United States, and a substantial 35% lower than Europe, thanks to various factors such as energy, labor, and overhead costs (Source). China’s role extends to more than 80% share in all stages of solar panel production, from polysilicon to modules, and it’s home to the world’s top 10 suppliers of solar PV manufacturing equipment. (Source)
Experts agree that China’s success in low-cost solar manufacturing stems from its unique supply chain and vast manufacturing capacity. Gener Miao of Jinko Solar succinctly sums it up, “We build solar all over the world, but China is the only place where every component we need is available just a few kilometers away. If we need something, we can get it in an hour. No shipping. No contracts. It just shows up in a pickup truck”. (Source)
China’s dominance isn’t limited to solar; it also holds the title of the world’s largest wind power capacity since 2010, with over one-third of global wind power capacity residing within its borders. In 2021 and 2022, China’s cumulative growth in wind capacity outpaced the United States by 3.6 times and Europe by 7.3 times. The cost advantage of Chinese wind turbines is stark, with their products often priced at less than half—and sometimes even a quarter—of their Western counterparts (Source). As the EU strives to achieve 43% of Europe’s electricity consumption from wind by 2030, China’s role in supplying vital components like offshore foundations, power cables, gearboxes, and steel towers has become indispensable to Europe’s renewable energy expansion (Source).
2. Export Growth in BRICS
Germany’s economic health is intrinsically tied to international trade, with 27% of jobs linked directly or indirectly to exports—a figure that soars to over 56% in manufacturing (Source). In 2022, German exports to BRICS countries surpassed those to the G7, amounting to USD 509.3 billion (Source). The impressive GDP growth in BRICS nations from 2012 to 2022, totaling USD 12.3 trillion, far surpasses the USD 4.1 trillion growth in the EU and the U.S. combined. As the IMF predicts a global growth surge in emerging markets and developing economies, Germany’s economic policymakers must prioritize fostering ties with BRICS nations, especially China, the linchpin of this growth (Source).
Notably, Germany’s export pillars—vehicles and vehicle parts, machinery, chemical products, and computer/electrical and optical equipment—are grappling with competitiveness challenges, primarily due to the energy cost surge and the shift towards electric mobility (Source). For Germany to maintain its export competitiveness, a successful transition to electric vehicles (EVs) is imperative, leveraging its established position in China’s automotive market, which is the world’s largest and fastest-growing. This move allows Germany to enjoy the benefits of China’s cost-effective energy advantage over American-made EVs.
3rd Opportunity: German EVs Made in China
China’s remarkable ascent to leadership in the EV market has been nothing short of astonishing. In just two years, annual EV sales in China surged from 1.3 million to an astounding 6.8 million in 2022, solidifying its status as the world’s largest EV market for the eighth consecutive year. By comparison, the U.S. recorded approximately 800,000 EV sales in the same year. The key to China’s EV dominance lies in its battery technology, specifically LFP (lithium iron phosphate) batteries. Initially overlooked for their lower energy density and poor low-temperature performance, Chinese companies, like Contemporary Amperex Technology Co. Limited (CATL), invested a decade in LFP research to bridge these gaps. As of September 2022, LFP batteries accounted for one-third of all EV batteries, largely attributed to Chinese innovation.
China’s stranglehold on critical battery materials, such as cobalt, nickel sulfate, lithium hydroxide, and graphite, further cements its dominance in EV battery manufacturing. García-Herrero aptly describes this control as “the ultimate control of the sector,” a strategic pursuit that long predates Western recognition of its significance (Source).
One glaring cost advantage for Chinese automakers lies in their ability to produce EVs at a staggering €10,000 ($10,618) less than their European counterparts. This pricing disparity poses a significant threat to European manufacturers, especially in their home market. As European consumers seek affordable EV options, China’s prowess in producing high-quality yet cost-effective vehicles has become a pressing concern for European automakers (Source).
German original equipment manufacturers (OEMs) hold a distinct competitive edge, thanks to their well-established manufacturing bases in China, global brand recognition, economies of scale, and competitive distribution networks, which outshine their Asian rivals, including Chinese manufacturers. These factors position German OEMs to thrive in the evolving EV landscape.
In conclusion, Germany’s path forward is rife with opportunities that have the potential to invigorate its export economy. By capitalizing on affordable energy supplies, expanding its footprint in BRICS nations, and embracing the EV revolution through strategic collaborations with China, Germany can secure its position as a formidable player in the global economic arena.
Kearney, the American consulting powerhouse, initiated the development of industry ecosystems in Shanghai during my tenure, and over the past decade, governmental leaders and business owners successfully replicated this model throughout China. As the senior representative based in Shanghai for Siemens, I had the privilege of witnessing the transformation of this German industrial giant into a high-value contributor within numerous global best-practice industry ecosystems in China. These included sectors such as high-speed trains, electric vehicles (PLMs), gas turbine power plants, industrial automation, energy transmission, and healthcare equipment, among others.
In the midst of the ongoing conflict in Ukraine, the German economy stands at a critical juncture. Washington is reshoring manufacturing activities away from China, potentially at the expense of “Made in Germany.” This shift is underpinned by ideological sympathies and can be likened to historical moments, such as the defense of the Roman Empire against Lutherstadt Witthenberg in 1483. Geopolitically speaking, this situation presents Berlin with a unique opportunity to mediate peace between its two most vital trading partners—America and China. Simultaneously, it positions Germany to harness the growth potential within BRICS nations, where China holds economic dominance, enabling cost competitiveness and economies of scale that outshine rivals from G7 nations.
However, an alternative path, similar to Ukraine aligning itself with the United States in the fight against Russia, involving the labeling or demonization of its most promising suppliers and customers in China as “dependency risks,” could spell economic suicide for Germany. It is crucial to recognize that both the global and German economies can only thrive sustainably if BRICS, particularly China, are embraced as economic and ecological partners, rather than being portrayed as systemic and environmental adversaries. This shift in perspective is essential for the prosperity and long-term success of both Germany and the global economy.