German business eyes India to reduce Chinese dependence
October 26, 2024
Top German business leaders and politicians went on a visit to India last week for a major gathering seeking ways to further strengthen economic ties between Germany and the Asia-Pacific region.
"The region is becoming increasingly important for Germany and the EU due to geopolitical shifts and increasing desire to diversify," Friedolin Strack, head of International Markets at the Federation of German Industries (BDI), told DW.
"The increasing importance is evident in the value of exports from Germany to the Asia-Pacific, which totaled €214.6 billion ($231.9 billion) in 2023," he said.
The Asia-Pacific Conference of German Business in New Delhi , coincided with the intergovernmental consultations between Germany and India, which were co-chaired by German Chancellor Olaf Scholz and Indian Prime Minister Narendra Modi.
Growing focus on India
Highlighting India's growing importance for Germany, Scholz's government adopted a paper earlier this month, called "Focus on India," aiming to further bolster the strategic partnership between the two sides spanning all areas of ties, including trade, migration, climate and foreign policy.
Berlin also passed a raft of 30 measures designed to foster immigration from India in an effort to attract skilled workers to fill gaps in Germany's labor market.
The biennial gathering came at a time when the German economy is in a downswing amid stagnant growth, rising structural challenges and worsening business sentiment. Surveys conducted by industry bodies show companies are growing increasingly pessimistic about business climate at home.
However, German firms remain optimistic about their prospects in the Asia-Pacific region.
A recent study conducted by the German Chambers of Commerce Abroad (AHK) and the German Chamber of Commerce and Industry (DIHK) showed the positive mood among German firms operating in the region, even though optimism remains subdued in China.
Dependence and 'de-risking' from China
China has long been the key focus of German firms in Asia.
German industrial companies, especially in the automotive, machinery and chemical sectors, have relied on orders from the Asian giant to keep factories humming and create thousands of well-paid jobs.
The slowdown in China's economy, however, has hit these businesses hard, forcing them to restructure and cut costs.
Growing geopolitical tensions between Beijing and the West have also increased calls for them to reduce exposure to China, so-called de-risking, and diversify away from the Asian behemoth. In response, many German firms in the Asia-Pacific have begun efforts to tap into new markets, even though they say that diversification remains a challenge.
"Over the last 40 years, the German economy has established itself on the Chinese market and built up a complex, well-functioning network of supply chains, production paths and distribution channels," Volker Treier, head of foreign trade at DIHK, told DW.
"This network cannot be easily transferred to other markets. It is also important that around 90% of German companies in China produce for the Chinese market — so there is a close link with the Chinese domestic market," he added.
India presents opportunities and challenges
India, however, is becoming increasingly important for German firms, as the South Asian nation's economy records rapid growth and trade between both sides surges, hitting a record high of €30.8 billion in 2023.
"German companies are planning to expand their investments in India in the coming years, attracted by the country's low labor costs, political stability and availability of skilled workers," according to a study titled the German-Indian Business Outlook 2024, conducted by consultancy KPMG and AHK.
But they also face challenges on the Indian market, the report noted, pointing to bureaucratic hurdles, corruption and a complex tax system, among other issues.
"Despite these challenges, German companies are confident about their long-term prospects in India. The Indian economy is expected to grow strongly in the coming years, and German companies are well-positioned to capitalize on the growth," it underlined.
BDI's Friedolin Strack also thinks India is an "enormously important growth market for German industry." Investment conditions there have improved significantly in recent years, he said, due to the expansion of infrastructure, availability of skilled labor and the rapid adoption of digital technologies, among other developments. "German companies are very interested in deepening their involvement there."
DIHK's Treier said India nevertheless does not have to become "the new China" for German business.
"It is never either/or — global trade is not a zero-sum game," he said, adding that his business association is committed to promoting strong economic ties between Germany, China and India.
He said that surveys among German companies carried out by DIHK show that the firms are aware of the risks and rewards associated with their business activities in both China and India.
"But — at least for now — the risks do not appear to outweigh the rewards," Treier noted.
Other attractive locations in Asia-Pacific
Most German companies that are looking to diversify away from China are choosing to relocate their activities to other Asia-Pacific countries, according to a Business Confidence Survey by the AHK Greater China.
"India, Japan and South Korea in particular are benefiting from this trend. In Southeast Asia, it is Thailand, Singapore and Vietnam," said Treier.
"However, a real relocation of production has not yet taken place," he added, pointing to obstacles for diversification, such as regulatory requirements, high costs and difficulties finding suitable suppliers and business partners.
Strack said market size matters for German companies when they look for additional markets, in addition to their growth potential. "Looking at these factors, Japan, South Korea and the ASEAN countries are especially attractive for German companies."
Edited by: Uwe Hessler