China’s industrial strategy on 'collision course' with top German export industries

Subsidised Chinese exports are increasingly threatening the viability of Germany’s top exporters in the global markets, putting the two countries on a “collision course”, experts told Euractiv.

Chinese industrial “overcapacity” has been the issue of contention in multiple recent disputes with the EU, most notably the EU’s anti-subsidy probe into electric vehicles, which could see additional tariffs being officially imposed from October.

Sander Tordoir, chief economist at the Centre for European Reform, however, told Euractiv the issue goes beyond cars, and it is increasingly threatening Europe’s top exporting economy.

“The two countries, and in particular [their] car and machine industries, are on a collision course,” he said, due in large part to “massive, industry-wide subsidisation” in China.

“China’s overproduction is quite staggering at this point,” said Tordoir, pointing to the country’s high industrial output in the face of persistently low domestic demand.

“The number of loss-making industrial firms in China reached a peak of almost 180,000 in March 2024, much higher than at any point in the last 25 years,” said Tordoir, arguing these companies would have been kept afloat by the Chinese government by propping up exports.

State funding would have particularly targeted “‘new quality productive forces” in recent months, said the analyst, in particular “the higher end of the [industrial] value chain” – such as cars, machines, chemicals, and computer chips.

This would mean that China’s industrial subsidies and overall industrial strategy have focused “precisely on the sectors where Germany tends to be strongest, both as a producer and as an exporter,” he pointed out.

The automotive industry represents Germany’s largest export sector, accounting for 17% of its aggregate exports in 2023 – followed by machinery (14%), and chemicals (9%).

German export model at a crossroads?

Germany itself has been criticised for its trade imbalances, which have seen the country export more goods than it imported every single year since 2000.

“Both China and Germany are economies that under-consume, to an extent, and that also drives some of the excess production,” said Tordoir.

By producing more than it consumes through comparably low wages and low public expenditure, Germany would have also “imposed costs on others”, the analyst argued, as this resulted in other countries running trade deficits “to soak up [German] production,” he said, pointing out that China has also pursued a similar strategy.

He added, “It becomes very hard to keep that German model afloat,” especially due to the aggravating factor that, in Germany, “there’s not the kind of massive industry-wide subsidisation that we have in China.”

According to the expert, “At some point, Germany has to make a big choice: [Is it going] to double-down on the ‘beggar thy neighbour’ model, or [is it] turning towards a more balanced economic model,” and in turn reduce some of Germany’s historic surplus, he asked.

VDMA sees heightened ‘overcapacity’ risk

The Chinese “overcapacity” hypothesis is not, however, uncontested – with some critics questioning its theoretical premises. Chinese stakeholders have also raised doubts over the validity of the argument, with Parker Shi, head of Chinese carmaker Great Wall Motor International, going as far as calling it a “fake concept”.

For Ulrich Ackermann, managing director for foreign trade at German machinery maker association VDMA, however, the issue is real.

“China produces as many machines as the next four countries combined,” Ackermann said, noting that despite domestic demand weakening over the last few years, “production continues as usual.”

Ackermann believed the Chinese government maintains “factories that are not viable, creating huge over-capacities that are now increasingly pushing onto the export markets.”

“Every province, every city and in some cases even every district is trying to keep people in work and subsidise everything they can at all levels,” he said.

“The urge to enter export markets has risen sharply, and the Chinese government is also promoting this,” Ackermann said. For instance, the state would be creating stockpiles to meet “the global [annual] demand for excavators,” he said.

According to a recent VDMA analysis, Chinese exports in machinery have grown their market share from around 3% in 2001 to 18% in 2022 globally, overtaking Germany as the world’s largest machinery exporter in 2020.

Ackermann believed the main difference between China and Germany was that German products would still be in global demand without being subsidised.

“It’s not a market economy if I have 300 factories for electric vehicles in China that are not even 50% utilised – and not even temporarily, but over a longer period of time – and I keep the whole thing running,” he argues.

In its investigation into the Chinese electric vehicle sector published earlier this year, the European Commission noted that the plant utilisation rate of Chinese car factories stood at 54.5% in 2022, with a total capacity to produce 43 million cars, both electric and with an internal combustion engine.

By comparison, according to ifo Institute, in July this year the utilisation rate in the German car industry stood at 79%.

García-Herrero: headwinds from cheap Chinese imports significantly outweigh benefits

Alicia García-Herrero, a senior fellow at Brussels-based think tank Bruegel and chief economist for the Asia-Pacific region at French investment bank Natixis, also supported the overcapacity theory –  highlighting that, so far, Chinese overcapacity has been particularly high in cement, steel, and solar panels.

García-Herrero said the chemical sector would have experienced overcapacity since 2016 – while she expected overcapacity to worsen for the machinery sector, which at present didn’t have a comparably sizeable problem, she said.

“Is this a problem for Germany? Obviously,” she told Euractiv – arguing that, while the EU also benefits from cheap Chinese imports in segments such as solar panels, for a net exporter like Germany subsidised Chinese competition would be particularly problematic.

“I would certainly recommend Europe to continue to put pressure on China’s dumping and subsidy policies,” she said.

“Because even if [it] may benefit in some cases because [it] imports those products, China is so big that it can continue to do this for very long, given its size and economies of scale,” García-Herrero said, warning this would risk, “destroying  [European] industry.”

[Edited by Anna Brunetti/Rajnish Singh]