Germany’s Future Rising in East as Exports to China Eclipse U.S.
Germany is bettering its European rivals in the race to harness Chinese growth as exports to the Asian nation begin to outstrip those to the U.S.
With its consumers and companies sating their appetite for power turbines, cars and electronics, China became Germany’s largest non-European customer at the end of last year, helping drive up share prices from BASF SE to Bayerische Motoren Werke AG. Economists expect data tomorrow to show German exports rose the most in five months in February as China’s share of foreign sales continues to grow.
“This is a turning point in Germany’s economic history,” said Andreas Rees, chief Germany economist at UniCredit Markets and Investment in Munich. “China could become the largest export market of all by 2015.”
The U.S. has been Germany’s most important trading partner beyond European borders since the end of World War II, a relationship that helped turn the country into a pillar of economic and political stability for the west. Now, with China becoming the main impulse for world growth, Germany’s exporters of machinery, consumer goods and luxury cars are increasingly turning to the east.
“The theme for this decade is that millions of people in China want to live like Europeans,” said Herbert Perus, head of equities at Raiffeisen Capital Management in Vienna, who helps oversee about $36 billion. “The ‘Made in Germany’ brand is going to be very strong in this market.”
Germany sold goods worth 5.4 billion euros ($7.7 billion) to China including Hong Kong in December, beating the 5.3 billion euros of exports to the U.S.
While exports to the U.S. reclaimed the top non-European spot in January, Rees said that will likely be temporary. Sales to mainland China surged 44 percent last year, more than to any other destination. They have more than quadrupled in the last decade, tripling China’s share of Germany’s exports to 5.6 percent. By contrast, the U.S. share dropped to 6.9 percent in 2010 from 10.3 percent in 2000.
Societe Generale estimates that by 2020, China will account for about 15 percent of German exports. By contrast, it estimates China’s share of French and Italian foreign sales will be 7 percent and 6 percent respectively.
“If it weren’t for China, the Germans would really be feeling the pinch,” said Niall Ferguson, professor of history at Harvard University, who is currently teaching at the London School of Economics. “It helps explain why the Germans remain so callous about the difficulties of the peripheral euro-zone economies.”
The German government, which dragged its heels over European Union bailouts for debt-stricken euro-area members such as Greece, will this year elevate China to a status it has given to only seven other countries involving full cabinet-level consultations.
Chinese demand is soaring for exactly the goods German firms specialize in -- industrial machinery, cars and consumer products. The Chinese middle class could double its 2008 size to 400 million people by 2014, Societe Generale predicts, fueling growth for European firms that make the goods they want.
Company profits in Germany have jumped 129 percent in the past year, driving the benchmark DAX Index (DAX) up 15 percent. The European Stoxx 600 Index climbed 5 percent over the same period.
BMW has risen 72 percent in the past 12 months while shares in French carmaker Renault SA (RNO) gained 8 percent. Renault sold about 14,000 vehicles in China last year compared with BMW’s 58,500 sales in the first quarter of 2011 alone.
The benefit Germany gets from Chinese trade may explain why German Chancellor Angela Merkel has been quieter than U.S. President Barack Obama in lobbying China to let the yuan appreciate.
“The benefit of having a more rapid appreciation of the yuan might be outweighed for Germany by the effect of much slower Chinese growth,” said Steven Barrow, currency strategist at Standard Bank Plc in London. “A gradual adjustment would be more beneficial.”
While the dollar has dropped 4 percent against the yuan in the past 12 months, the euro has risen 2 percent against the Chinese currency. That hasn’t damped economic growth.
After contracting 4.7 percent in 2009 during the global financial crisis, the German economy expanded a record 3.6 percent in 2010 and the Bundesbank forecasts growth of 2.5 percent this year.
By contrast, the European Central Bank projects 1.7 percent growth for the 17-nation euro area as a whole. China had growth of 10.3 percent last year, helping it overtake Japan as the world’s second-biggest economy.
“If China continues to grow at this pace, then that’s a great stimulus for German exports and its economy,” said Aline Schuiling, senior economist at ABN Amro in Amsterdam. “Germany can deliver the required investment goods more competitively than anyone else in Europe.”
Ingolstadt-based Audi, a unit of Volkswagen AG that makes a range of luxury sedans, said on March 8 it aims to increase 2011 sales by more than 10 percent. In December, it predicted China will become its biggest market this year.
China’s became the world’s largest car market in 2009, and sales rose 33 percent in 2010 to 13.8 million vehicles.
The world’s largest chemicals company, Ludwigshafen-based BASF, more than doubled its fourth quarter profit to 1.1 billion euros as demand from the automotive industry increased.
Germany’s machine-tools building industry, dominated by the famed Mittelstand of small and medium-sized firms, is anticipating 30 percent growth in 2011, according to industry association VDMA.
China is by far the biggest single market for German machine tools, buying around four times as many units as second- placed U.S. firms, according to VDMA. In China, Germany is the largest foreign supplier of industrial machinery.
The risk for Germany is that it becomes overly reliant on growth in China, which is currently trying to cool its economy by raising interest rates.
“Exploding prices and an uneven distribution of wealth in the country make for a dangerous cocktail,” Anton Boerner, President of Germany’s BGA exporters’ association, said in a speech in Berlin on March 9. “We are becoming more worried about the stability of the Chinese economy.”
China is also increasingly able to produce its own industrial machinery, raising the possibility that German firms could lose market share, said Veronique Riches-Flores, head of thematic research at Societe Generale in Paris.
“The segments of production where China is making a lot of progress are precisely the segments where German performance has been very strong,” she said. “Chinese manufacturers are becoming more and more specialized.”
Still, about 60 percent of German exports go to the European Union, and as the U.S. returns to growth, sales to the world’s largest economy are likely to increase.
“We are undoubtedly seeing a shift in the centre of gravity,” said Fred Irwin, President of the American Chamber of Commerce in Frankfurt. “But with German firms opening factories both in the U.S. and in China, it’s a win-win situation for them.”
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