Leaving China? Scholz and Germany's flagship industry agree

Karl Haeusgen swims against the tide. "Change through trade works," says the President of the Association of German Mechanical and Plant Engineering (VDMA). In doing so, he contradicts numerous politicians and scientists who have recently declared this principle to have failed in view of the developments in China and Russia, for example.

"The fact that 'change through trade' is not currently taking place in China does not refute the principle per se," defended Haeusgen at the mechanical engineering summit in Berlin. He worked in China for 40 years and lifted many people out of poverty there. "Contrary to a widespread misunderstanding, up until a few years ago, China's economic development was promoted to a greater extent by globalization and the market economy than by authoritarian structures."

The German machine builders therefore want to hold on to the brisk trade with China, the second most important foreign market for the domestic model industry after the USA. And they are now receiving prominent support for this: Both Chancellor Olaf Scholz (SPD) and EU Trade Commissioner Valdis Dombrovskis spoke out at the mechanical engineering congress against decoupling German and European companies from the Chinese market.

“Decoupling would be completely the wrong way,” emphasizes Scholz. "The order of the day - or rather the order of the turning point - is rather: not decoupling, but clever political and economic diversification." Germany and the EU must set up their trade relations more broadly and more robustly. "We have to trade with many, including China - but also with the newly emerging countries in Asia, Africa and Latin America."

And Scholz wants to use free trade agreements for this. However, a debacle like that of the TTIP transatlantic agreement should be avoided. That is why the Federal Chancellor is suggesting a modified approval procedure for such EU treaties.

"We have to think again whether EU-only isn't a better concept for such free trade agreements." After all, the EU is responsible for trade policy anyway. "This raises the question of whether national or even regional approval really makes sense," says Scholz, referring to the years of delays in agreed trade agreements by individual EU countries.

With the machine builders, the Chancellor is running into open doors. Especially since the industry is dependent on open markets like few others, and the export share is almost 80 percent. And even in the current crisis, foreign business is proving to be comparatively stable.

"We don't see any reluctance to invest there," reports Ralph Wiechers, chief economist at the VDMA. In August, for example, foreign orders increased by two percent, while domestic customers received six percent fewer orders.

It might take a while before current orders are delivered. Because the industry, which is predominantly characterized by medium-sized companies, is currently putting off an order backlog for around twelve months. A range of six to eight months is usual.

In view of this cushion, the VDMA economists are sticking to their current production forecast: business is expected to grow by one percent in 2022. Mechanical engineering is still down 0.8 percent in the period from January to August, as the latest figures from the Federal Statistical Office show.

"A slight easing of the material bottlenecks could still lead to the production growth we estimate," hopes Association President Haeusgen. But even if it ends up being zero, it is not a crash or a crisis in the end, because then the high level of 2021 could have been maintained.

The entrepreneur also draws confidence from the personnel plans of the machine and plant manufacturers. According to a current VDMA survey with 640 participants, despite the general mood of crisis and fears of recession, every second company wants to hire additional staff in the coming year. 30 percent plan to increase the workforce by up to five percent, and one in five companies even more.

According to Haeusgen, employees of all qualification levels are wanted. "Good people are scarce and will remain so," the VDMA boss explains the search for personnel, in which the companies are already keeping an eye on the demographic development of the coming years.

Because the age pyramid in mechanical engineering has shifted significantly in recent years. In 2005, only 15.6 percent of employees were older than 55 years, in 2020 this number was already 23 percent. “The baby boomers are retiring,” describes Haeusgen. As a result, the demand will increase significantly in the coming years. "So, as a precautionary measure, it will now be discontinued."

Especially since the sharp rise in energy prices is a burden for mechanical engineering, but does not have as much of an impact there as in other branches of industry. The VDMA estimates the share of electricity and gas in the operating costs at one to two percent.

However, the industry could have a problem if there are no preliminary products because suppliers can no longer cope with the energy price increases. Association leader Haeusgen therefore calls for changes in the electricity market in addition to the planned gas price brake. "With the gas price brake, we now have a blueprint that will hopefully make work on the electricity price brake easier and faster," says Haeusgen.

He also calls for rapid structural reforms from the federal government and the EU Commission. “The electricity market design must be adapted to the new reality. And that cannot be postponed. Not even the double boom will be enough if the merit order system is not reformed in such a way that there is an appropriate connection between production costs and the market price for electricity.”

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