Germany’s New Imperative Doing Business with China: De-Risking

July 21, 2023

With contributions from Maximilian Rau

In mid-July, the German government unveiled its inaugural China strategy paper, outlining its approach to China and China’s evolving role in the world and in geopolitics. The strategy aims to strike a delicate balance between necessary commercial engagement with China and reducing critical dependencies on China, with the ultimate goal of safeguarding Germany’s economic and national security.

Some of the key takeaways and implications for multinational corporations include:

  • Balancing Collaboration with Concerns: Germany’s strategy regarding China encompasses a nuanced perspective that acknowledges the achievements and ambitions of the country. It acknowledges China’s significant economic, technological, military and political power while recognizing emerging elements of rivalry and competition. It acknowledges China’s assertiveness and the resulting implications for global security dynamics. The strategy highlights the limited “political and social openness” in China. Nevertheless, Germany sees collaboration with China as crucial, considering China as an essential partner in addressing global challenges such as climate change, biodiversity conservation, renewable energy production and sustainable development.
  • Imperative for De-Risking: The strategy employs the term “de-risking” — an increasingly popular term among Western government leaders — to frame its approach. It offers guidelines and tools aimed at rebalancing Germany’s relationship with China, suggesting companies consider geopolitical risks, while stating the government is seeking to incentivize the removal of unilateral dependencies through market and economic instruments. It underscores the responsibility of companies to comply with human rights guidelines across their supply chains. Stringent scrutiny and sustainability standards will be applied to investment guarantees and export credit guarantees. The stated objective is also to tackle “market-distorting practices” in China and mitigate excessive risks associated with overreliance on the Chinese market.
  • Reducing Critical Dependencies: One other key aspect is the recognition of the need to reduce critical dependencies on China in economic relations. Reducing the country’s reliance in critical areas, particularly in areas such as health, energy transition and technological innovation, is a priority. It also emphasizes the protection of critical infrastructure, the strengthening of digital sovereignty and the avoidance of dependencies on technologies from third countries that do not align with Germany’s “fundamental values.” Furthermore, Germany aims to prevent the misuse of cutting-edge technologies that could potentially threaten international peace and security.
  • EU Alignment and Taiwan Policy: Throughout the strategy, Germany emphasizes the importance of aligning its China policy with that of the European Union (EU) and strengthening cooperation within the EU framework. It supports the establishment of a new summit format involving heads of state and government officials from both China and European nations. The strategy also highlights Germany’s intentions to expand relations with Taiwan while maintaining adherence to the “One China policy” and enhancing its military presence in the Indo-Pacific region. Germany considers the openness and stability of the Taiwan Strait as an integral component of its national security considerations.
  • Further Insights: During the press conference, Germany´s Minister of Foreign Affairs Annalena Baerbock highlighted the significance of investing in global partnerships to reduce Germany’s critical reliance on China, particularly in areas such as rare earth minerals, and the importance of building partnership with countries in Latin America, as outlined in the strategy. Currently, negotiations are underway for a trade agreement between the EU and the Mercosur bloc.

Implications for Multinational Corporations

While the strategy sets the overall tone for future interactions with China, it does not contain specific guidelines for multinational companies to de-risk their business operations in the country. German industry associations and multinational corporations (MNCs) with a significant presence in China, as well as the SMEs, have closely monitored these developments.  Baerbock’s announcement during the presentation of the strategy indicates that the German government’s next step is to listen and engage with multiple stakeholders from various backgrounds and functions to develop tailored and actionable solutions to implement the strategy.  This has largely been welcomed by major German industrial stakeholders.

In Europe, the strategy has gained significant traction, not only due to its emphasis on EU alignment but also because its concerns and goals resonate with other members states that have fundamental interests in China. The implications and guiding effect of this strategy extend to policy stakeholders worldwide, highlighting its relevance for MNCs beyond European borders.

Potential Actions for Multinational Corporations

  • Understanding Local Dynamics: Stakeholder increasingly expect companies to take a clear position on critical issues like human rights violations, and so justifying their actions to the general public and stakeholders, both in China and their home countries, is crucial. Successfully managing this balancing act, while protecting core interests and competitiveness, requires a deep understanding of local markets and stakeholders. Speaking the local “language” and grasping local sentiment and mindsets are vital for engaging in the Chinese market. Instances of MNCs encountering misunderstandings and unintended misinterpretations are on the rise, with a slew of cases where MNCs are caught off guard, resulting in significant harm as a result of seemingly minor incidents and mistakes. Developing local expertise is vital to navigate these challenges effectively.
  • Navigating De-risking Strategies: The term “de-risk” has gained widespread recognition in political discussions and forms the core element of various strategies echoed in Germany and across Europe. However, its interpretation for MNCs can vary significantly depending on their unique circumstances. Factors such as the structure of their Chinese entity, their operational functions, market share in China compared to the global market and the feasibility of supply chain diversification all come into play. These considerations raise a series of questions, leading to a wide range of potential actions for MNCs, from complete withdrawal and spinning off their local entities to reengagement and increased investment. It is important to note that business decisions related to the Chinese market cannot be made in isolation. They are influenced by policies and dynamics in other core markets, requiring joined-up evaluations of risks and policies across key locations worldwide. The challenges faced by many MNCs lie in consolidating effective information, forecasting different scenarios and preparing for potential changes. This requires effective and timely cross-regional and interdepartmental communication within different branches, as well as the core competence at the headquarters to interpret and utilize information with a comprehensive understanding of the overall situation. MNCs must develop their own de-risking plans based on these factors.
  • Challenges for Chinese Companies: Chinese companies are facing increasing scrutiny and risks as they become potential targets of regulatory instruments influenced by geopolitical imbalances and tensions. Therefore, it is paramount for these companies to identify local networks, understand key processes and grasp the dynamics between various agencies and stakeholders within the markets they aim to enter. To navigate these challenges, Chinese MNCs must develop a compelling narrative tailored to the concerns of local stakeholders. They must explore opportunities to build mutually beneficial relationships with stakeholders at different levels and be ready to offer transparency about their business operations in-market and in China. Establishing a coherent and clear set of values, as well as operating principles, including a code of conduct, fosters accountability and reliability. By committing to and incorporating internationally recognized standards and rules, Chinese companies can bolster their credibility and build trust with local partners. Effective communication and engagement strategies will not only help address potential misunderstandings but also strengthen their positions within the international business community.

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