German government wants companies to ‘de-risk’ from China, but business is

GÜNZBURG, Germany — The glowing finger at the end of a robotic arm blazes across a ribbon of aluminum, welding holes in one of 2,000 ladder parts that will be constructed at an assembly line run by the Munk Group in southern Germany.

Factories like this one dot the landscape in rural Bavaria, home to hundreds of Mittelstand companies: private, family-owned enterprises that make up the backbone of Europe’s largest economy. Ferdinand Munk’s family has built ladders here for 120 years, long enough to understand who’s worth doing business with.

“We started doing business with China two decades ago,” Munk says. “The German government encouraged us to cooperate with Chinese firms. They told us it would be a win-win scenario.”

Twenty years later, the German government has changed its tune on China.

“The German government is not in any position to bail out German companies invested in China,” warned Foreign Minister Annalena Baerbock at a national security strategy meeting in June. That echoed new language employed by the European Union, which labeled China “an economic competitor and a systemic rival.”

Baerbock’s comments signaled a new strategy toward China that the government calls “de-risking.”

The then-foreign minister of China quickly shot back, warning his German counterparts that “de-risking” could mean “de-opportunity,” “de-cooperation,” “destabilizing” and “de-development.”

But for CEO Munk, doing business with China became de-pressing.

“One day, we placed a big order, paid for it upfront, and they didn’t deliver it,” Munk says. “We called them, no answer. We flew to China and when we got to the factory, everybody was gone. There was just a single guard at the gate. The company disappeared and we never saw our money again.”

Munk now pays more for the peace of mind that comes with European suppliers he trusts.

Trust — whether it’s over parts for a ladder factory or around national security — is at the heart of why CEOs and Western governments have distanced themselves, or “de-risked,” from China.

Much of German industry remains reluctant to leave the world’s largest market behind

An hour’s drive south of the ladder factory, workers on another factory floor make steel cable. This plant is in the medieval town of Memmingen, and the company that makes these cables began making rope hundreds of years ago.

“Four hundred and forty-four years,” says Gerhard Pfeifer, CEO of Pfeifer Group. “We are among the oldest companies in Germany.”

Pfeifer traces his family’s business back to 1579, when his ancestors made rope. After World War II, the company switched to steel cable. Now Pfeifer’s cables help hold up SoFi Stadium in Inglewood, Calif.; they’re used to pull elevators to the top of the Burj Khalifa building in Dubai; and they’re inside thousands of buildings in China, where Pfeifer began doing business in 2004.

Those visits to China in the early 2000s convinced Pfeifer the country was key to his company’s future.

“And, until today, I’m convinced that avoiding contact with China is impossible,” he says.

Pfeifer considers China far too large to ignore, and he thinks most Western politicians misunderstand the country. He’s learned that China has a different approach to the world than many in the West.

“Chinese behavior is much more linked to interests without a moral link,” he says. “And this is necessary to understand. When we talk to the Chinese, we need to have a very clear understanding of our interests.”

Pfeifer says the lack of mutual understanding is most obvious when German officials visit China. While the Chinese carefully lay out their interests to their German counterparts, says Pfeifer, German representatives often, in his eyes, appear more eager to voice their Western-shaped moral judgments of the Chinese.

“We, with our foreign minister, we are going to China and we want to hold onto a flag of [Western] morality, which is just crazy,” says Pfeifer, “because they do not have a sense for this kind of morality because it’s not part of their culture.”

Pfeifer says it doesn’t help that, unlike the Chinese, Germany’s government, made up of three political parties, doesn’t agree internally on its own country’s interests. And that’s why he thinks German businesses are largely ignoring the official call to de-risk.

Numbers seem to back Pfeifer up: In 2022, Chinese imports to Germany grew by 34%, and Germany’s three largest automakers — Mercedes-Benz, BMW and Volkswagen — continue to…