German companies have managed to timidly reduce their dependence on imported products from China. The Ifo Institute for Economic Studies conducted a survey in February 2022 with 4,000 companies and repeated it this year. During this time, deliveries of goods from China fell by 9 percentage points. Specifically, they went from 46% before the outbreak of the war in Ukraine to 37% in February of this year. The survey was conducted on manufacturing and trade companies.
The Ifo Institute states that in the manufacturing sector, the most affected in Europe by the increase in inflation due to rising energy prices and supply chain tensions, is explained “almost entirely” by the fact that “fewer industrial companies depend on inputs from Chinese manufacturers.” Specifically, the share fell from 43% to 33%. On the other hand, the proportion of companies that obtain imported inputs from their own production facilities in China “has hardly changed.” Specifically, the February 2024 survey determines that it is 11.2%, compared to 10.9% in 2022.
“It is clear that, in many cases, a company’s import strategy is closely related to its decisions for foreign investment,” they ensure.
This means that companies oriented towards export with high sales shares abroad are the ones that depend, in many cases, on inputs from China. Specifically, while only around 22% of companies that do not generate more than 10% of their sales abroad depend on Chinese inputs, the corresponding proportion for companies with a large market share abroad (over 40%) is just under 50%.
Furthermore, the proportion of German companies that purchase inputs from their own facilities in China is very high, exceeding 20%, according to the Ifo survey.
Companies dedicated to data processing and electronic products (65%), manufacturers of electrical equipment (60%), and companies in the automotive industry (59%) claim to frequently depend on inputs from the giant Asian country. On the other hand, the food and final goods sectors only import around 10% of their inputs from China.
“Compared to the 2022 survey, the proportion of companies that purchase important intermediate products from China has decreased in all industrial sectors, except for the chemical industry,” state the Ifo experts.
In the future, industrial dependence will not decrease
Looking ahead, 38% of German industrial companies surveyed by Ifo want to reduce their dependence on Chinese inputs in the future, compared to 45% of surveyed companies in 2022, indicating a drop of around 6 points.
On the other hand, the number of companies willing to significantly increase imports of Chinese intermediate goods has increased. In February 2022, 4% of surveyed industrial companies planned to import their products from China in the future, while the current survey shows almost 10%. However, the proportion of companies that do not plan to increase or decrease imports has hardly changed.
The same goes for retailers. The number of companies that want to import fewer goods from China has also decreased, specifically by 16 percentage points, from 55% in 2022 to 39% last year. In the wholesale sector, the drop was half, reaching 36% (from 44% in 2022).
But the dilemma arises again for companies that have their facilities in China compared to those that buy their primary products externally. Thus, the study reveals that more than 40% of companies that purchase their primary products externally want to stop relying on their distributors in the Asian giant, while 31% of companies with factories in China plan to make such cutbacks.
Purchases outside of Europe
The big question now is where will the companies that want to reduce their dependence on China now acquire their products? Two out of three surveyed manufacturing companies that want to reduce their imports claim they will purchase inputs from non-European countries. “In 2022, not even half of the companies did this. The proportion of companies increasingly dependent on inputs from other European countries as a result of decreased dependency on China has dropped by around 13 points,” they report at the Ifo.
But not in Europe or Germany, as the companies opting for German products over Chinese ones also dropped by more than 10 percentage points, to around 31%. Only 6% of companies with reduction plans rely solely on German products.
It is clear that the German industry is losing all the momentum it had and dragging down the rest of the secondary sector in Europe. The German PMI index closed February at 41.9 points, meaning it is in contraction territory.
The Ifo Institute itself stated that the German economy is “ailing.” In their spring forecasts, they made a significant downward revision to the growth of Europe’s locomotive, specifically to 0.1%. The federal government of Olaf Scholz also revised down, but to 0.2%. The Minister of Economy, Robert Habeck, stated that the outlook is “terribly bad.”
But Germany’s recovery largely depends on how the geopolitical situation evolves and the tension in supply chains. Experts expect this to happen in the second half of the year, all depending on the country also achieving a tax reform to make its industry more competitive.
At the same time, Europe’s powerhouse’s strong dependence on China, to the point that the German financial sector is highly exposed to a crisis in the Asian giant. Sources from the Bundesbank confirmed to elEconomista.es that banks are very vigilant because they lent huge amounts of money to companies in key sectors of the German economy that rely on Chinese suppliers for their inputs. For this reason, a widespread breakdown of German-Chinese relations “would increase the likelihood of loan defaults,” causing serious problems in the financial system.
It is true that they have also said that an economic crisis in the Asian country “would be much more manageable” in the short term.
