The derisking dilemma: how German companies are tackling China risk

By Christoph Steitz, Sarah Marsh and Maria Martinez

FRANKFURT/BERLIN (Reuters) – Thomas Nuernberger is preparing for tougher times.

For the past seven years, the 55-year-old has run the Chinese unit of fan and motor maker ebm-papst, and business has been good.

But, as tensions simmer between Berlin and Beijing, ebm-papst is one of many medium-sized German companies starting to address their reliance on China, concerned at how possible Western sanctions or a future conflict over Taiwan might disrupt trade.

Last year, ebm-papst launched a programme called ‘Decoupling China’ to ensure its Chinese division – which has around 1,900 staff – can operate if cut off from the rest of the company. Now it’s planning a new plant in India, at a cost of up to 30 million euros ($31.7 million), to supply clients in the rest of Asia and to help reduce the flow of goods to and from China.

“Not putting all our eggs in one basket is always at the back of our minds,” said Nuernberger, who also serves as ebm-papst’s chief sales officer.

German Chancellor Olaf Scholz’s coalition unveiled in July a strategy toward de-risking Germany’s economic relationship with China, calling Beijing a “partner, competitor and systemic rival”. The 61-page document urged German firms to reduce their dependence on China – the country’s most important trade partner – but was light on any binding targets and requirements.

Some of Germany’s biggest blue chips have continued to bet heavily on China, raising doubts over how serious Germany is about “de-risking”.

Reuters interviewed more than a dozen executives and business leaders in the Mittelstand – the medium-sized companies that account for almost one-third of Germany’s corporate sales – who said that their businesses have started reducing their reliance on China in a variety of ways.

Some larger firms, like ebm-papst, are pursuing a localisation strategy, where each business region becomes self-sustainable in sourcing and production.

Indeed, Ebm-papst still regards China as a key market: it may greenlight another 25-million-euro investment soon to expand its presence there, Nuernberger said.

Volker Treier, chief of foreign trade at the German chamber of Commerce and Industry, said Mittelstand companies don’t have the resources to respond in real time to geopolitical shocks, so they need to prepare carefully in advance.

Munk, a German family-owned maker of ladders, scaffoldings and rescue equipment, started to cut reliance on China after a supply chain problem halted its production five years ago. Since 2021, it has been fully independent of China, sourcing components from within Europe instead.

For managing director Ferdinand Munk, the government’s push comes too late: “You can’t rely on the government. They are always five years behind.”

Germany’s economy ministry said it wants to support companies to diversify their markets.

“The aim is to intensify Germany’s bilateral relations with countries like India, Vietnam, South Korea and Indonesia,” the ministry said in a statement.


China became Germany’s single biggest trade partner in 2016, and bilateral trade stands at nearly 300 billion euros. It’s a core market for some of Germany’s largest companies, including carmakers Volkswagen and Mercedes-Benz, as well as chemicals company BASF.

Since taking office in late 2021, however, Social Democrat Scholz has taken a harder line on China, distancing himself from his predecessor Angela Merkel’s embrace of Beijing.

Concern has also grown in other Western capitals about China’s increasingly assertive attitude toward Taiwan and in the South China seas, as well as its tightening grip over its domestic economy.

China’s foreign ministry said in a statement that Berlin and Beijing should encourage bilateral trade, which was beneficial for both sides. “Politicizing economic and trade issues will only harm others and not benefit ourselves, and will not contribute to world economic growth,” it said.

In the first half of the year, German investment in China increased as a share of overall investments, reaching 10.3 billion euros, according to official data analysed by the IW Institute, as some companies invested more to ringfence their China operations.

Big German corporates like BASF, meanwhile, regularly point out the relevance of the Chinese market, indicating there is no substitute for its massive potential. A BASF spokesperson referred to recent comments by CEO Martin Brudermueller, who said most growth in the chemicals market will come from China – not Europe or the Americas – until 2030.

“It’s a lazy argument because 20, 30 years ago there was also no China,” said Max Zenglein, chief economist at the Berlin-based Mercator Institute for China Studies, a leading European think tank on China.

“We’re at the very beginning of this diversification: it’s going to be up to the governments to steer.”

As part of its de-risking plan, Germany’s economy ministry, which uses tools like trade and investment guarantees to promote trade, has introduced caps on the size that can be given to investors in a single country.

Only 51.9 million euros ($56.26 million) in investment guarantees for China were issued by the government in the first eight months of this year, less than a tenth of the 745.9 million euros issued over the whole of 2022.

And Scholz’s administration is sponsoring fewer trade fairs in China than before – just 30 in 2024 compared to 44 in 2023.

These tools have more of an impact on small- and medium-sized companies than on big corporates which have better access to private insurance services and greater capacity to analyse market opportunities, said Juergen Matthes at the IW Economic Institute, an economic think tank.

There are signs that some firms are diversifying. German investment in Asia excluding China is rising as a share of overall investment.

Horn Group, a maker of precision tools that makes around 5% of its sales in China, opened a sales company in Thailand earlier this year that will be gradually scaled up, managing director Markus Horn said.

Mittelstand companies are often more risk-averse than large corporations, economists say. Many are still family run and their owners want to safeguard the business from generation to generation, rather than bet big on short-term profit.

“The Mittelstand has a high need for security which plays a big role in a country like China where such a lot can change in such a short period of time,” said Matthias Bianchi of the German Association of the Mittelstand, which represents some 25,000 firms with more than 500,000 employees.


The United States is one country seen as a growth opportunity by German companies due to green subsidies enacted under President Joe Biden, as is Mexico, thanks to a trend of near-shoring by the world’s largest economy, said Wolfgang Niedermark of Germany’s key industry association BDI.

So is Asia, ex-China. There was already a first wave of diversification towards Vietnam, a location close to China that offers low labour costs, said Jan Roennfeld, of the German-Indonesian Chamber of Commerce, as some companies pursued a so-called China plus One strategy to mitigate risks.

Vietnam had close ties with Eastern Germany and there are still German speakers there, Roennfeld said, adding there was now a second wave of diversification in other South Asian countries, such as Thailand, Malaysia and Indonesia.

“No company is going to say that it will leave China,” said Sandra Ebner, senior economist at Union Investment, Germany’s second-largest fund manager. “But what companies are increasingly doing is to produce in China for China and to position themselves around China for the remaining Asian or global market.”

BDI’s Niedermark said many companies had wanted to do business in the past with India – estimated to have overtaken China as the world’s most populous country this year – but had found it too complex. Now, business conditions were improving, he said.

In July, German Economy Minister Robert Habeck travelled to India with a delegation of executives to discuss opportunities for German companies. German trade with India hit a record high of 30 billion euros last year – up by 73% from its levels of 2015 – albeit still only a tenth of German-China trade, according to statistics office data.

Direct investment in India by German corporations, too, rose to 1.52 billion euros in 2022, from 1.13 billion euros in 2019, according to statistics from the Bundesbank.

Nuernberger said that ebm-papst’s Indian business was still in part being supplied out of China and Germany, something the new plant will change.

“It’s much better if it comes from within India.”

($1 = 0.9455 euros)

(Reporting by Christoph Steitz in Frankfurt and Sarah Marsh and Maria Martinez in Berlin; Additional reporting by Aditya Kalra and Sarita Chaganti Singh in New Delhi, Xinghui Kok in Singapore, Orathai Sriring in Bangkok and Brenda Goh in Shanghai; Editing by Daniel Flynn)