Chinese Companies Get Tech-Savvy Gobbling Up Germany's Factories

For decades, the label "Made in Germany" has stood for quality and a guarantee of expensive, precision engineering. Conversely, "Made in China" has long been a marker of substandard, cheap, knockoff products. But this is changing.

Beijing's "Made in China 2025" policy aims to transform its manufacturing sector into an excellence-driven, global leader in high-end technology. While Germany still has the edge in engineering expertise, a steady increase in the number of Chinese firms buying up key German tech firms has triggered angst in Berlin.

The city of Duisburg, a former steel and coal town in Germany's western Ruhr valley rust belt, is well-known in China. A map of Europe hangs at Shanghai's Pudong airport, according to Erich Staake, and on it, Duisburg is printed in larger letters than Berlin, Paris or London.

Duisburg is home to the world's largest inland port, and Staake is the port's CEO. Now Duisburg is also the destination for trains traveling all the way from China's vast factory cities, which carry Chinese goods to be distributed all over Europe.

Staake says 25 to 30 trains arrive in Duisburg each week from China. "This is the terminal for the new 'silk railroad,' " he adds proudly, referring to one of China's ambitious, intercontinental infrastructural plans. Although a ship can carry 170 times more containers than a train, the journey by rail is four times quicker and, as Staake points out, the silk railroad lends itself to the transportation of perishable goods.

According to the federal office of statistics in Berlin, German exports to China have increased by 10 percent this year. Nevertheless, the trains are only a third full when they leave Duisburg on the 6,000-mile return trip to China.

Like other foreign firms, European companies still struggle to access the Chinese market; they have to enter into joint ventures with Chinese firms to do so. Meanwhile, Chinese investors have free rein in Europe and in recent years they've been on a shopping spree in Germany.

The year 2016 was especially busy: Chinese companies invested a total of 11 billion euros in Germany (worth about $12.6 billion that year) — which was more than the previous 10 years combined, according to the European Council on Foreign Relations.

In 2016, 68 German companies were bought by Chinese operations; in 2017, it was 57, mainly in Germany's mighty engineering sector, according to investment firms tracking the activities.

This year, multimillionaire Li Shufu became the biggest shareholder of Daimler, acquiring 10 percent of the automaker.

The medieval city of Augsburg in Bavaria has seen its share of Chinese takeovers. The city is home to hundreds of well-established Mittelstand firms, the small to midsize, mostly family run mechanical engineering and automotive supply companies that form the backbone of Germany's economy.

Michael Leppek, who heads up the Augsburg division of IG Metall, the metalworkers' union, says he has his work cut out. "We've got to be very careful because if we lose our technical know-how, then we'll lose our jobs," Leppek says. "Perhaps not in the next three to five years, but in 10 or 20 years, it could be game over."

Leppek oversaw union negotiations with the Chinese household electronics firm Medea, following its takeover last year of German robotics giant Kuka, a company founded 120 years ago in Augsburg. They secured a deal to safeguard jobs for the next seven years.

Workers down the road at lightbulb manufacturer Ledvance have not been as lucky. Its new Chinese investor, MLS, is shutting down the plant, meaning a likely loss of 650 jobs.

One of the factory workers, who asked not to be identified for fear it could jeopardize his severance package, says they were aware they had lost their competitive edge but had high hopes for the new investor.

"We thought the Chinese investors wanted to change things. We saw it as an opportunity," the worker says. "The least they could have done was to have come and seen what we can do here."

"Now they're shutting us down and frankly, I feel let down. This place is my home. I've worked here 23 years," he adds.

Union leader Leppek says the closure is really the fault of the previous owners who failed to futureproof the business for the LED market. But, he says, as far as the workers are concerned, it's the Chinese who are letting them go.

While Chinese investment is not enough to save Ledvance from shutting factories, on the whole it is being greeted with open arms in Germany.

"Foreign direct investment creates jobs," says Cora Jungbluth, an economist with the Bertelsmann Foundation, a think tank. She says this is particularly the case with Chinese financers, who "pursue long-term strategic goals and invest heavily."

But Jungbluth recently published a study of Chinese mergers and acquisitions in Germany in which she recommends the German government consider lowering the threshold for investment screening. Currently, ministers can veto foreign bids with a proposed share of 25 percent or more. Jungbluth says 10 percent would be a more prudent minimum.

Lawmaker Dagmar Schmidt, who chairs the German-Chinese parliamentary committee in the Bundestag, says the government is listening to such advice. "It took us a while to recognize this flip side of Chinese investment, and so now we're more cautious of [mergers and acquisitions] in sensitive sectors, especially investments from Chinese state companies," Schmidt says.

The Economy Ministry is currently considering lowering the veto threshold to bids of 15 percent or more. But for all the worry about losing technological know-how to China, Schmidt cautions against protectionism: "Let's not forget that Germany is a market economy and we profit from free trade," he says. "So we welcome direct foreign investment from China; many German companies have been saved from bankruptcy because of it."

Jürgen Pieper, CEO of the pharmaceutical tech company Romaco, agrees. He says the current discourse about Chinese investment is dominated by fear: "Many Germans still have a kind of view about China from 25 years ago."

Pieper admits that Chinese investors used to close European companies as soon as they got their hands on the technical knowledge, but "you don't see that anymore because China has matured to a very large extent," he adds.

Romaco makes machines used by pharmaceutical companies to manufacture pills and pill packaging. With its headquarters in Karlsruhe, in southwest Germany, it has four factories in Europe. Yet it's now a Chinese firm. The pharma company Truking bought 75 percent of Romaco in 2017 and will take over the remaining 25 percent in 2020.

Pieper is not at all worried that Truking would try to dismantle Romaco and take it to China. On the contrary, he says Romaco is growing. "We're making use of existing Truking capabilities in terms of supply chain market access," he says.

Jack Cheung, a partner at accounting firm KPMG who heads the audit division for Chinese investment in Germany, says German firms should stop worrying about what the Chinese might take away from them and focus on what they can learn from China.

Cheung says Germany may still lead in the mechanical engineering and automotive sectors, but "in other industries, German companies have already been outpaced by Chinese players, such as digitalization or the electrification of public transportation." He stresses it is paramount that German politicians develop new, innovative strategies instead of focusing on protective measures.

During her most recent trip to China, Chancellor Angela Merkel spent a day at the Shenzhen tech hub, where she saw the fruits of the huge resources Beijing is pouring into artificial intelligence. On her return, Merkel signaled her concern about Germany being left behind, warning that "China aims to be the global leader in artificial intelligence by 2030. That's a challenge for us and we need to think hard about how we're going to keep up."

Merkel, at least, has heard the message loud and clear. Whether German industry has remains to be seen.

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