Interventionist German policy proposed to thwart China
As the call for a level playing field grows louder, a recent German industrial strategy that proposes a far greater role for the state has drawn praise and criticism in equal measure
13 Feb 2019 | Michael Marray

German economics minister Peter Altmaier has unveiled his plans for a more effective industrial policy, a strategy that envisages an interventionist role for the state, including taking stakes in companies in order to block foreign takeovers.

Though not mentioning China by name, the proposed policy is viewed as an answer to the challenges posed by Chinese companies in areas such as hi-tech, auto battery production and artificial intelligence (AI).

Altmaier launched his paper titled "National Industrial Strategy 2030" in Berlin on 5 February. He said that the state should play a bigger strategic role in encouraging the emergence of "national and European champions", companies which are needed to compete against players from Asia and the USA.

He added that the federal government could prevent hostile takeovers of large companies in the future, if necessary, via an investment fund. However, he explained that "only in very important cases should the state itself be able to act as the acquirer of company shares for a limited period of time".

In response to criticism of excessive state influence, Altmaier said he was clearly committed to the social market economy. However, one must not stand idly by if the country's prosperity is jeopardized, he maintains.

Altmaier now wants to discuss the strategy with politicians, companies, associations and trade unions.

His plans have met with considerable criticism from within Germany, where state participation in industry is associated with discredited economic policies - including the failed central planning model in the former East Germany.

The leader of the economically liberal Free Democratic Party (FDP), Christian Lindner, even went so far as to say that fear of competition from China was resulting in Altmaier borrowing a Chinese approach to state intervention in the economy. Instead Lindner would like to see lower taxes and less bureaucracy for business - and let the private sector find its own way to compete with China.

The influential Federation of German Industries (BDI) welcomed certain aspects of the plan, but remains cautious about the idea of the state taking stakes in companies in order to block takeovers.

BDI managing director Joachim Lang said that the paper contains a number of proposals worth discussing, which should be substantiated in dialogue. The industry was ready for this, he added.

The BDI notes that the paper focuses on the German and European response to market distortions in technology competition by state actors. To this end, the paper contains a series of proposals worthy of discussion. But it adds that the enormous industrial policy challenges in climate and energy policy measures, compounded by a high-tax policy, are increasingly causing problems for German companies, and these concerns must not be neglected.

Unlike the German government, which generally avoids directly naming China as a threat to German industry, the BDI addresses the issue head on. Already in January the BDI published a list of measures that could be taken to strengthen the European Union to better compete with China.

In an open letter, BDI president Dieter Kempf called on the German Federal Government and the European Commission to strengthen the European Union in the face of competition with China. The BDI outlined 54 recommendations to better meet the growing challenges posed by the state-dominated Chinese economy.

These were summarized in a new policy paper which the BDI published on 10 January in Berlin, titled "Partner and systemic competitor - How do we deal with China's state-controlled economy?"

The paper argues that, contrary to what was previously expected, China will not develop into a market economy or embrace liberalism in the foreseeable future. "The People's Republic is establishing its own political, economic and social model," Kempf wrote. The country has entered into systemic competition with liberal market economies such as Germany. This development must be assessed realistically to develop a response.

Kempf made it clear that China remains the driving force of the global economy and an important sales and procurement market for German industry. As such, German industry wants to continue to use the opportunities of economic exchange with China. "However, no one should simply ignore the challenges China poses to the EU and Germany."

In the policy paper, the BDI calls for a strengthened economic policy framework for the European single market. This should ensure that companies from non-market economy countries are bound to the liberal market economy regulations of the EU if they want to be active in Europe. It is more important than ever for the EU to not only point out the significance and binding force of its order and values internally, but also to more forcefully advocate them externally.

"It is essential that the German government once again becomes the standard bearer for a stronger EU," the BDI president said. At the same time, Germany and the EU must invest significantly more in research, development, education, infrastructure and future technologies. "The EU needs an ambitious industrial policy for its leading companies that focusses on innovation, intelligent regulation, social partnership, infrastructure and free trade."

The Federation of German Industries proposes sharpening EU state aid legislation and anti-subsidy instruments. Europe must take effective action against companies that do not produce in the EU and receive state subsidies. Therefore, the BDI advocates introducing a new type of subsidy control for foreign investments. This should help control state-financed takeovers of European technology companies and prevent them if necessary. High quality standards should become a must in public procurement. Dumping prices offered by foreign suppliers must be investigated for potential subsidies. The 54 demands should be a compass in the political debate.

"The German industry measures the Chinese government by its own internationally announced obligations. It is in Beijing's own interest to open up its domestic market further and to vigorously implement long-announced economic reforms," explained Kempf. The faster China creates competitive equality between Chinese and EU companies on the world market through economic reforms and market openings, the fewer new control instruments will need to be used.

According to BDI figures, German-Chinese trade volume last reached 187 billion euros, almost 30% of the total trade between the EU and the People's Republic (2017). China is Germany's most important trading partner outside the EU. German exports to and imports from China amounted to 86 billion and 101 billion euros respectively. According to the latest official figures, German direct investment in China totalled 76 billion euros (2016). About 5,200 German companies with over one million employees were active in China. The BDI estimates the stock of Chinese investments in Germany at the end of 2017 to be 13 billion euros.

The takeover that is often cited by analysts as a turning point for Germany's attitude towards Chinese inward investment involves industrial robot maker Kuka, which was acquired by Midea in 2016.

The German government did not intervene, but the deal was controversial within industry, where Kuka was viewed as exactly the kind of "national Champion" that should not be simply handed over to a competing country. Kuka was back in the news in November 2018, when Till Reuter, who had been CEO for a decade, resigned, casting doubt on assurances from Midea on an independent role for Kuka within the group.

Germany subsequently tightened up its rules on reviewing foreign takeovers in hi-tech, and other sectors such as critical infrastructure.

Last year there was an attempt by a unit of China State Grid to buy a 20% stake in 50Hertz, one of Germany's major electricity transmission companies. But the German government intervened to buy this stake itself, which is currently held by development bank Kreditanstalt fur Wiederaufbau (KfW).

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