"It's the wrong visit at the wrong time"

When Olaf Scholz travels to China on Thursday to pay his respects to President Xi Jinping, who has just been confirmed in office, he will also take a dozen company representatives with him. "It is important that we maintain and further develop our international relations," said the Chancellor recently. That sounds like business as usual. But for the managers in the Scholz entourage it is a delicate undertaking.

It is true that large corporations such as Siemens and BASF continue to rely on China as a sales market and production location and are investing billions in the country. However, many medium-sized companies are now much more skeptical about getting involved in China than they were a few years ago. Where it used to be concerns about protecting intellectual property and fears of technological know-how being stolen, it is now increasing political reprisals that are making business leaders more cautious when it comes to China.

“We see that China is willing to put pressure on Western companies to assert their own interests. This also applies to German companies,” says Katharina Viklenko from the German foreign trade promotion agency Germany Trade

There are enough examples: The sporting goods manufacturers Adidas, Puma and Nike, but also the high-end clothing brand Hugo Boss, became the target of large-scale boycott campaigns in spring 2021, which were apparently state-controlled. The companies had announced that they would no longer buy cotton from the region because of the human rights situation in the Chinese province of Xinjiang. There, the government barracks Muslim Uyghurs in forced camps, and there are also reports of forced labor.

A study by the Mercator Institute for China Studies (MERICS) in Berlin examined how Beijing uses economic coercion to achieve strategic goals. Between February 2010 and March 2022, there were 123 cases. The authors estimate that the number of unreported cases could be much higher. Affected companies would not make incidents public for fear of further reprisals.

Economic pressure has increased in recent years. Since 2018, the authors have counted an average of 20 cases per year in which the government takes action against unacceptable behavior by companies. Previously, there had only been around four cases per year.

"Beijing is pushing foreign companies to avoid sensitive issues by giving the impression that their business interests depend on correct behavior," says MERICS chief economist Max Zenglein, describing the tactics of the Chinese leadership. What is new is that Beijing is now reacting with intimidation in many more areas than before.

Traditionally, the Chinese leadership has been particularly sensitive to security issues and dealings with Taiwan. One of the most recent examples: After the US politician Nancy Pelosi traveled to Taiwan in early 2022, Beijing reacted with partial import and export restrictions. China reacted to Lithuania's friendly course towards Taiwan with import bans, which also hit the German automotive supplier Continental, which produces in Lithuania.

"Even before 2018, it was known that the Chinese leadership reacted very sensitively when it came to Taiwan and what they saw as China's territorial integrity," says GTAI expert Viklenko. “What is new, however, is an increasing politicization of all areas of life. German companies also report on this.”

These include public criticism of China abroad, dealings with Chinese companies outside of their own country and anti-China policies by other countries. Shortly before the boycotts against fashion companies such as Puma and Hugo Boss, for example, the EU imposed sanctions on Chinese people for human rights violations in Xinjiang.

And Beijing responded to criticism from the Australian government of China's handling of the corona pandemic with sanctions. Australian wine producers were affected, as were Australian exporters of coal and copper.

The European Chamber of Commerce in China (EUCCC) also complains about increasing economic nationalism. In fact, German companies have so far been less affected by the reprisals than those from the USA or neighboring Asian countries. However, the EU's more robust stance towards China may change that. “But German managers should learn from the experiences of others, because they can become the target of Chinese campaigns at any time,” says GTAI expert Viklenko. "That makes dealing with China so difficult for companies involved there."

Managers should regularly review and reassess risk in the Chinese market and certainly not bet solely on China. Supply chains should be diversified and companies should develop alternative sales markets.

MEP Reinhard Bütikofer (Greens) demands that politicians must help companies to do this. "Most of the German economy has a realistic image of China and knows that China's economic policy is not based on a lasting partnership," says the chairman of the parliamentary delegation for relations with China. “It is above all a few large corporations, such as VW, that have made themselves dependent on China and are now focusing on an even greater concentration on China. The middle class is more prudent and has already started to diversify. Instead of primarily chasing after the CEOs of large corporations, German politics should help SMEs on their smarter path by promoting diversification, as Japan is doing, for example.”

The China expert also criticizes Scholz's visit to Beijing. "The chancellor is acting out Merkel's script. Apparently he didn't understand the seriousness of the situation," says Bütikofer. “The good times when you could happily earn money in China without worrying about dependencies are long gone. Does Scholz really want to be the first to pay his respects to the newly enthroned party emperor in China? It's the wrong visit at the wrong time.”

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