Germany Faces Existential Second China Shock as Manufacturing Sector Falters Amidst Rising Chinese Competition

In the heart of Berlin on a drizzly autumn day, I met Oliver Richtberg, a representative of the VDMA – an influential industry association representing thousands of German companies specializing in industrial machinery and equipment. This sector is integral to Germany’s “Mittelstand,” the small-to-medium-sized manufacturers that underpin the nation’s economy.

However, these businesses are currently facing a significant challenge: increasing competition from Chinese manufacturers. In recent years, Richtberg noted, German executives and workers have noticed a marked improvement in the quality and affordability of machine products coming from China, posing a threat to domestic manufacturers who struggle to compete on price and innovation.

China’s rapid advancement in various sectors, including smartphones, lithium-ion batteries, solar panels, artificial intelligence, robotics, aircraft manufacturing, ships, electric vehicles, and industrial machinery, has been fueled by long-term strategic planning and substantial investments in research and development. The country has made significant strides towards achieving its ten-year plan “Made in China 2025,” which aims to make China a global leader in advanced manufacturing.

This shift in the business landscape has left German manufacturers grappling with several concerns. Richtberg points out that Chinese competitors often circumvent regulations, use deceptive labeling practices, and benefit from subsidies provided by their government. These factors contribute to an uneven playing field and make it challenging for German companies to compete on a global scale.

To address these issues, the VDMA has called upon the German government to take action. This includes lowering taxes, reducing regulations, and implementing countervailing tariffs when foreign products are found to be made with government subsidies – a departure from previous policy. The VDMA also advocates for increasing domestic demand within the European Union as a means of boosting the competitiveness of German manufacturers.

However, this shift in strategy is critical for Germany, as the country has historically relied heavily on exports. According to World Bank data from 2024, German exports accounted for over 42% of its GDP – a figure significantly higher than that of the United States. As China’s exports are being redirected due to high U.S. tariffs, European markets become increasingly attractive to Chinese exporters, further intensifying competition for German manufacturers in these regions.

To overcome this challenge, some experts suggest learning from China’s own industrial policies and strategic investments in key sectors. It may be difficult to replicate this approach within the diverse EU context, but collaboration between member states could potentially lead to the development of EU-wide industrial policies aimed at boosting strategic sectors and promoting “Buy European” incentives for consumers.

Additionally, there are concerns that Germany has lagged behind in crucial technological sectors, such as electric vehicles and batteries. Some experts argue that emulating China’s approach to forming joint ventures with foreign companies could help German manufacturers advance technologically by leveraging knowledge and expertise from partners around the world.