Will Germany Inc, Bearish On China, Turn Bullish on India?

Source: The post is based on the article “Will Germany Inc, Bearish On China, Turn Bullish on India?” published in The Times of India on 13th April 2023.

Syllabus: GS – 2: Effect of policies and politics of developed and developing countries on India’s interests.

Relevance: About German investments in China and India.

News: World’s biggest economies are changing their views about China. This includes the US, Japan and Germany. This is because their investments in China are facing a combination of local competition, state policies favouring local businesses and geo-political tension calls.  This forced countries like Germany to critically rethink the future of German industry in China.

What is the present state of German investments in China?

A report from Rhodium Group shows that

German giants are investing: German Industry is heavily invested in China. After 2018, more than 80% of new European FDI has come from just the top 10 companies. This includes the three German automakers – Volkswagen, Daimler and BMW.

Declining investments from smaller companies: Additionally, cutting-edge technology investments from smaller companies are also declining. For example, the share of mid-sized companies from the EU has declined from 51% in the 10 years before 2018 to about 20% between 2018 and 2021.

Low service sector investment: There are relatively small European investments in the services sector.

Reasons for the declining investments: a) German investors’ declining interest in investing in mergers and acquisitions of Chinese companies is due to high valuations and nontransparent financials, b) China has created regulations that benefit local companies in terms of market access.

What are the other reasons for revisiting Germany’s Chinese diplomacy?

Raw material dependency: Excessive dependency on China for critical raw materials such as rare earth. This forced German industries to the diversification of critical raw materials, markets and investments. The German government has enacted the Critical Raw Materials Act, practising Foreign Direct Investment screening, and anti-coercion mechanisms.

The factor of Tik Tok: Germany is debating on banning TikTok like India. This is because of Tik Tok’s potential for misuse and manipulation of personal information.

Note: India’s banned a few Chinese apps that have the potential to gather personal data in an opaque and state-run Chinese way.

Why India is a perfect place for German investments?

India is not the default option. But India’s significant potential for fast growth and expanding domestic consumer market are significant attractions of German investments.

Recently, India’s physical infrastructure and laws & regulations have been changed to attract global businesses. But, local bureaucracy is still a matter of concern.

What India should do to attract German investments?

-India needs to make a sustained outreach to business associations in Germany that India is not a difficult place to do business.

-Both India and Germany have to work on a consensus to finalise the long pending negotiations on Broad-based Trade and Investment Agreement. This will further create a robust economic relationship in a qualitatively new track.