Disruption (Page 2)

Germany’s biggest technological people are moving away from home to more positive circumstances in China as a result of its domestic energy guidelines and economic environment. Germany’s environment is increasingly hostile to business growth due to rising energy costs, high green energy subsidies, and strict regulations.

As a result, some of Germany’s most established companies are downsizing at house, shedding tens of work, while investing heavily in China. This change underlines the tremendous impact of existing policies on Germany’s professional scenery, with long-term implications for the local market and employment.

Here, Asia Times examines the main aspects and the businesses that are changing their business models worldwide.

Higher energy costs in Germany: The result of ideological laws

Germany’s energy policies have caused business energy prices to rise to amounts that are among the highest in the world, behind only the UK and the UK. Actually this high cost level, which has already reached unparalleled levels, cannot be sustained because the average cost for industrial users may have reached about US$ 250 per MWh by 2023.

Germany’s rely on renewable energy sources such as wind and solar, combined with the pulling out of nuclear energy, has increased the government’s reliance on imports and caused significant price fluctuation, eventually putting stress on both business and citizens. Due to rising costs, some businesses are considering reducing their businesses in Germany and starting new ones, especially in China.

Consumption of industrial strength has decreased by more than 16 % in the last two decades.

In 2023, power consumption in Germany’s business sector fell to 3, 282 petajoules, a decrease of 7.8 % compared to 2022. This drop followed an already significant reduction in 2022, when industrial energy use fell by 9.1 % year-on-year to 3, 558 petajoules. Taken together, these cuts represent an overall increases in industrial energy usage of about 16.3 % over the two-year time.

Energy source in Germany: Increased trade dependence

German domestic energy production has also changed, with renewable energy sources generating a record 61 % of the country’s energy mix in the first half of 2024. In the first quarter of 2024, Germany’s reliance on foreign energy sources to complement its varying renewable production has increased by 23 % in this period.

Businesses that require steady, affordable electricity are at risk because of the variability of the supply of renewable energy, combined with rising home prices. Germany’s continued emphasis on solar is also expected to increase buy dependency, more discouraging companies from expanding internally.

Large subsidies for solar

In 2024 only, Germany will deliver 20 billion dollars in subsidies to alternative energy producers. Despite quickly falling market prices, these payments guarantee that solar energy suppliers receive set-assigned minimum prices.

The state budget has been burdened greatly by this centrally planned program, which allows the government to pay clean energy suppliers when wholesale prices drop.

In fact, the original budget for subsidies in 2024 was 10.6 billion euros ( US$ 21 billion ), but as energy prices have fallen, the projected need has doubled. Given the government’s commitment to follow the debt brake, these increasing subsidies are putting more pressure on the budget and making negotiations more difficult.

The Nord Stream pipelines and lost Russian gas played a significant role in Germany’s professional decrease.

Germany’s power landscape has been severely affected by the withdrawal of Russian gas imports, which has severely impacted its industrial base and increased energy costs. Russian natural gas was a core of Germany’s power source, providing reliable and affordable energy for years. However, this crucial strength link was cut short by the political effects of the Ukraine war and the Nord Stream pipeline sabotage in September 2022.

The problems rendered Nord Stream 1 entirely useless, and one of the two pipes of Nord Stream 2 was even damaged. Just one part of Nord Stream 2 is still in use and functional. If Germany was willing to engage with Russia politically and economically, President Vladimir Putin just reaffirmed that this operational pipeline was resume sales right away.

Putin and German Chancellor Olaf Scholz recently spoke in conversation, emphasizing that restarting oil travels through Nord Stream 2 was” a matter of pressing a box,” indicating that Russia was willing to provide fuel if Germany cooperated.

German gas had to be replaced by much more expensive liquefied natural gas ( LNG ) imports, primarily from the United States, after Russia’s abrupt loss of oil. These raised prices have undermined Germany’s international business competitiveness.

Putin’s suggestion to restart the last Nord Stream 2 pipeline highlights the corporate sway Russia also has over Europe’s energy source. By offering a possible crutch to Germany’s ailing business, Putin aims to control Germany’s social position on the Ukraine conflict. Germany has abstained from responding to the proposal despite the potential economic benefits of a resumed gas imports.

Falling domestic investment in Germany

Domestic investment has decreased significantly as a result of rising energy costs and regulatory challenges. Private gross fixed capital formation is about 10 % below pre-covid levels.

The situation is even worse for industrial production: Since 2021, Germany’s production level has fallen by more than 9 %. The decline has been even sharper in energy-intensive industries. In those areas, production levels have fallen by more than 18 % in less than two years, which indicates serious issues in industries that are heavily reliant on affordable energy.

This decline may have had an impact on the cost structure of these industries because of rising energy costs and the ongoing shift toward renewable energy sources. The trend suggests potential deindustrialization pressures, particularly in sectors that are unable to adjust to rising operating costs.

Many businesses are cutting jobs at home while expanding in China as a result of Germany’s unsustainable cost environment.

The biggest German businesses are investing in China instead of reducing their workforce there.

Volkswagen: Facing potential job cuts of up to 30, 000 in Germany, Volkswagen has made significant investments in China, including 2.5 billion euros ($ 2.6 billion ) to expand EV production in Hefei and a further 700 million euros in EV technology partnership with Xpeng.

• Bosch: Announced plans to cut 7, 000 jobs in Germany as it increases investment in China’s e-mobility and automated driving sectors.

• SAP: &nbsp, Plans to cut 9, 000 to 10, 000 jobs in Germany while reallocating resources to high-growth markets abroad.

As German businesses are putting more and more money under the belt, these cuts are a part of a wider trend. The Association of the Bavarian Economy (vbw ) estimates that the automotive sector in Bavaria alone could lose 106, 000 jobs by 2040, highlighting the far-reaching consequences of Germany’s industrial challenges.

Hildegard Müller, president of the German Association of the Automotive Industry (VDA ), warns that up to 190, 000 jobs across the sector could be at risk by 2035, reflecting the risks associated with Germany’s deindustrialization.

In response to these developments, Scholz’s government has initiated urgent talks with industry leaders. Industry experts contend that these discussions lack the long-term strategic vision required to address fundamental issues like high costs, regulatory pressures, and labor costs. Without significant structural reforms, the German automotive sector risks a further decline in global competitiveness.

Soaring German investment in China: Record levels

German companies continue to place record levels of investment in the nation despite pressure from German government officials and the EU to reduce their dependence on China. In recent years, German investment in China has increased to unheard levels, primarily in the chemicals and automotive industries.

In the first half of 2024 alone, German foreign direct investment ( FDI) in China reached 7.3 billion euros, surpassing the 6.5 billion euro total for the whole of 2023. German automakers and Germany are increasingly influencing Chinese foreign direct investment, accounting for 57 % of total EU investment in China in the first half of 2024, 62 % in 2023, and a record 71 % in 2022.

Key investment projects:

• Volkswagen: In addition to its 2.5 billion euro investment in Hefei, Volkswagen has increased its joint venture stake in JAC Motor from 50 % to 75 %. This move underlines Volkswagen’s long-term commitment to local vehicle production in China, a market crucial to its growth in electric vehicles.

• BMW: BMW’s investment in Shenyang not only expands its production, but also its research and development capabilities, aligning with local demand and avoiding the high energy costs in Germany.

• BASF: The chemical company’s 10 billion euro plant in Guangdong is another example of large-scale localization. By operating in China, BASF lowers German regulations and energy costs while satisfying China’s growing demand for advanced chemical products, particularly in the automotive industry.

These initiatives are based on a localized production approach that helps businesses avoid the difficulties and costs of exporting from Germany and meet Chinese market demands.

Germany’s lead in expanding greenfield investments in the EU

The second quarter of 2024 saw the highest quarterly level to date for greenfield investment by the EU reach a record 3. 6 billion euros. German automakers have been a significant contributor to this growth, accounting for roughly half of all EU investments in China since 2022.

While average quarterly M&amp, A activity declines by 30 % between 2022 and the first half of 2024, greenfield investments by EU firms have steadily increased, with Germany’s automotive and chemicals sectors leading this trend.

Between 2022 and the first half of 2024, 65 % of all EU FDI in China will come from Germany, up from 48 % between 2019 and 2021. The top five European investors in China in 2023 were German companies, underlining Germany’s key role in EU-China investment.

Countries like France, the Netherlands, and Denmark, for example, will contribute only 7-8 % of EU FDI during this time, while the remaining 23 EU Member States will contribute only 12 % of that percentage.

Localizing supply chains and reducing geopolitical risks

German businesses are also restructuring their supply chains to reduce risk as a result of rising energy prices and regulatory uncertainty. Companies have been prompted to localize their operations in key markets as a result of events like the Covid-19 pandemic and the Suez Canal disruption, which have highlighted the fragility of global supply chains. German businesses are responding by increasing direct production in China, which reduces both the cost and the risk of global supply chain disruptions.

According to Friedolin Strack of the Federation of German Industries ( BDI), businesses in China are increasingly “reorganizing their supply chains regionally.” In a world where Chinese EV manufacturers are gaining market share, German automakers like Volkswagen and BMW are focusing on localizing their EV supply chains to stay competitive. German businesses are reducing costs by investing in localized production as well as protecting themselves from global uncertainties.

reducing German exports to China through local production

In the first seven months of 2024, Germany and China’s bilateral trade decreased by 5.7 % as a result of the transition to localized production. German exports to China fell by 11.7 % year-on-year, as companies increasingly serve Chinese consumers directly through local production.

German automakers, which are producing cars directly in China rather than exporting them, are especially attracted to this decline in exports. As less of German-made goods are exported abroad while localized production in China is growing, this could have an impact on Germany’s trade balance.

China’s unique advantages for German companies

While the German government and the European Commission advocate diversification away from China, alternative markets lack China’s infrastructure, market scale and cost efficiency. Countries such as Vietnam and Thailand, while considered as diversification options, cannot match China’s industrial networks, skilled workforce and market size.

Since 2022, more than 50 % of all EU investment in China has come from German companies, mainly in the automotive and chemical sectors. Major projects, such as Volkswagen’s partnership with Xpeng and BASF’s production facility, underline Germany’s strategic focus on China as a key market for long-term growth and competitiveness.

Domestic policy and global competition fueled a strategic reorientation

German companies ‘ decision to restrict domestic investment and expand in China is a stark reflection of Germany’s current energy policy and regulatory pressures. High costs, variable energy supply and regulatory challenges have made Germany a difficult environment for large-scale industrial investment, while China offers stability, cost-efficiency and market growth potential.

These trends suggest that domestic structural issues must be addressed as Germany attempts to maintain its industrial base. Without reforms to lower energy costs and reduce regulatory burdens, the shift of German investment to China is likely to continue, with long-term implications for Germany’s trade balance, industrial output and economic resilience. Even the EU tariffs wo n’t play a significant role.

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