Trade nations set for digital era

Germany positions itself as China's 'partner in change'

Germany's Chancellor Angela Merkel arrives in China this week for her ninth visit, with innovation and strategic partnership high on the agenda. Both countries are seeking to nab first-mover advantage in what is now universally regarded as the fourth industrial revolution (after steam, electricity and information): the digitization of industry.

After a successful CeBIT exhibition this year in Hanover, at which China was the official partner country, the two countries have pressed ahead with their strategies towards industrial digitization, which are set to overlap and cross-pollinate significantly. Coming as it does shortly before the party leaders get together to set China's 13th five-year plan, it is clear how important the visit and ensuing trade and investment relations between the two countries are.

China's strategy, known as Made in China 2025, was launched with much fanfare in May this year, with the Ministry of Industry and Telecommunication Technology saying it would give China an edge in innovation, green development and quality goods, all areas in which Germany's expertise is globally renowned. The bilateral investment opportunities here are obvious and wished for.

In an era where global productivity and growth are stalling while China's internal labor costs are climbing, the world's largest manufacturer and a modern economy built on the strength of a solid and generally low-tech manufacturing sector is thus taking on a fundamental realignment of strategy from a volume and cost leadership focus to a more specific high-tech one. It is an ambitious goal, which requires strategic partners. Germany is at the top of the list.

In Germany, Industry 4.0, as it has been known since its inception in 2012, has focused particularly on smart manufacturing, connecting machines to a network where production processes and speeds are automatically adjusted to minimize problems and costs. The country's extensive R&D network has been working furiously on the concept for some time now, with a number of innovations - from projects both publicly and privately funded - emerging. As China shifts from being a commodity-swallowing, low value/labor intense industrial behemoth to becoming a shrewder, more value-adding production society, one seeking to pioneer the world rather than produce for it, Germany's capacity for innovation and the huge number of investor-friendly SMEs driving it will be of great interest to Chinese investors.

The two countries are already critical trade partners for each other. According to data from Germany Trade & Invest, Germany's FDI and trade advisory agency, China had the most investment projects in Germany in 2014 with 190, a 37 percent increase from 2013. In 2013, Chinese companies had FDI stocks in Germany amounting to some 1.2 billion euros ($1.3 billion) according to Germany's Bundesbank, a 118 percent increase from the 2010 level. Meanwhile, in the other direction, Germans had total investment stocks of about 47.8 billion euros in China in 2013 and added a further 5.1 billion euros to that in 2014. China is Germany's second-most important import market, while Germany is China's most important trade partner within the EU.

Germany is the number one location for Chinese greenfield investments. China is the world's largest market for industrial automation and robots. Given the similarities in strategy going forward and the heavy links in related markets - 30 percent of Chinese investment in Germany is in electronics, semi-conductors and machine and factory construction - these overall figures are likely only to improve as Industry 4.0 and Made in China 2025 are pursued.

Aside from the strategic synergies, there are three more general reasons why China is evolving such a good investment relationship with Germany. The first is simply the size and strength of the German economy. Europe's largest, most stable and most centrally located, it is a gateway to the huge EU market. It is worth noting that Chinese FDI in Germany is not just restricted to engineering or production in the chosen industries, but that sales, marketing, services, R&D and support actually constitute most of the activities.

Secondly, while China's strategy may carry the legend "Made in China", there is no doubting the current boost to a product that the "Made in Germany" label can give. Implicit in much of China's strategic direction is an attempt to harmonize the two slogans so that they create the same aura, as "Made in China", while celebrated as having come from the "world's factory", has also acquired negative connotations for a low-cost, low quality ethic.

Hence current investment creates the value-added type of product Chinese companies are looking for by adding this "Made in Germany" boost to current Chinese company products. The benefit to German companies is the ability to continue pursuing the innovations they are rapidly becoming famed for. Indeed, as Germany seeks to add "Innovated in Germany" to its brand, the complementing principles are such that "Made in China" and "Innovated in Germany" could one day be virtually synonymous. Equally feasible is that, certainly in the short-to-medium term, "Made in China" may be subtly adjusted to "Made by China."

Thirdly, Germany's investment conditions are, to put it bluntly, really good. An education system widely regarded as among the world's very best has created a diverse and skilled workforce across the country, while continued public investment, especially in the former Eastern states, has returned an ultra-modern infrastructure. Extensive public support funding means SMEs can invest heavily in R&D, creating a fertile investment landscape of global niche leaders (known as Hidden Champions) in all sorts of products. The upgrades in infrastructure and cheaply available land, along with initiatives such as the Leading Edge Cluster Competition, have tightened the links between R&D and production (or theory and practice if you prefer), meaning more efficient processes and causing more innovations to see the light of day suitably quickly. Huawei's 400-million-euro investment in 2015 is a good example; the Chinese company set up a European R&D headquarters in Munich, a center that continues to be at the core of its strategic focus in Germany.

For all these reasons, Chinese investment in Germany is set to continue its upward spiral. The Mercator Institute for China, a think tank, is reckoning with a tripling of Chinese investment in Germany by 2020 - by the time this five-year plan is due to be renewed. Thereafter it will be interesting to see how far the Made in China 2025 - Industry 4.0 partnership will have evolved.

(China Daily 10/29/2015 page12)