(For an optimal reading experience on your smartphone, please turn your phone sideways)
We need to have something, we need to be able to do something that China needs.
– Martin Brudermüller, CEO of BASF
This quotation from Brudermüller puts it in a nutshell. No nation and no company can afford to ignore business in the world’s biggest single market with 1.4 billion consumers in the long term.
The Middle Kingdom has been Germany’s largest trading partner for three years, and vice versa, Germany has been the most important trading partner for China in Europe for 43 years.
German companies in particular, which export strong brands and products, have benefited from Chinese economic growth for years. There are now more than 5,000 German companies in China. They have – depending on the angle of view – fallen into a dangerous dependency or have positioned themselves well in the Middle Kingdom.
Often illustrated symbol of this situation is the German automotive industry – the heart of the domestic industry. Daimler sells 28% of all vehicles in China, 25% at BMW and nearly half of all vehicles at the world’s largest manufacturer Volkswagen. Wolfsburg’s win over the race to the top of the automotive industry is largely thanks to the Chinese market.
Due to the participation of the Chinese automaker Geely in the long-established company Daimler, dependency was only intensified for the Stuttgart. The Chinese invested $ 9 billion to secure a 10% equity stake. If the owner families Quandt / Klatten and Porsche / Piech with their majority of voting rights were not standing behind BMW and Volkswagen, then something similar would probably have happened to them.
There was a public outcry for the first time in 2016, when the Chinese group Midea took over the Augsburg robot manufacturer KUKA. The fear of technology loss made the rounds.
American companies are also dependent on Chinese consumers. The iPhone maker Apple has to contend due to new competitors such as Huawei, Vivo, Oppo or Xiaomi with declining market share in China. Following the announcement of this information in the fall of 2018, the share price was severely penalized. The shares have long since recovered, but it is still an example of how sensitively investors react to bad numbers from the Middle Kingdom.
On the other hand, the companies benefit from the new opening measures. For example, BMW and BASF have announced their intention to increase their ownership interests in China. Allianz becomes the first foreign insurance company that does not have a Chinese partner, and Deutsche Bank is the first foreign bank in Hong Kong to be able to handle the foreign exchange business with the Chinese banknotes.
The Chinese economy has developed rapidly since its opening under President Deng Xiaoping in 1978. Since then, growth has averaged 10% per year, reaching a record level of $ 13,400 billion in 2018. This makes China the second largest economy in the world after the United States ($ 20,500 billion). Over the past 8 years, Chinese economic growth has accounted for 30% of global economic growth. From 1980, the average income of a Chinese has increased from $ 200 to $ 8,000. For Americans, it’s $ 60,000. The Middle Kingdom now has the largest social security system in the world and is the largest investor in renewable energy.
If China is coughing, the rest of the world has the flu. One must also be aware of this fact as a shareholder.
The enormous growth is also a successful poverty reduction program – about 850 million people were released from precarious conditions. These people are also the consumers of tomorrow.
Despite all success, President Xi Jinping still calls his country “the world’s largest developing country.” After all, some 370 million Chinese have less than $ 5.50 a day available and thus fall under the international definition of the poverty line. Those who want to achieve social advancement are looking for jobs in the cities.
Anyone who has ever been to the Chinese east coast in the megacities of Beijing, Tianjin, Hangzhou, Nanjing or Shanghai will inevitably notice the enormous construction activity. A Chinese man told me that every fourth crane in the world is in China. I could not validate this information, but a train ride from Shanghai to Beijing, the so-called Capital Area, made me think he might be right.
Pudong – skyline of the business metropolis Shanghai. The metropolis has almost 30 million inhabitants, making it the most populous city in China. The Shanghai Tower (on the right in the picture) is the second highest tower in the world with 650m after the Burj Khalifa in Dubai (900m).
The Chinese are traditionally property owners. In some cases, China even goes so far that the young women expect the men to own a condominium – they do not marry in advance. That is why many young Chinese are in debt or depend on the support of their families. The steady demand for housing is causing real estate prices in cities to explode. The price per square meter in Beijing or Shanghai is around $ 11,000, while in New York it’s only about $ 9,900. The fear of a real estate and credit bubble lurks like a ghost over the mega-cities.
The young people are pushing into the big cities, as they also have the headquarters of the big companies and thus well-paid jobs and career opportunities. Most Chinese companies are based in Beijing, Shenzhen or Shanghai. In Beijing, for example, Sinopec, Baidu, ICBC, China Mobile, China Railway Construction and JD.com. The engineering capital of Shenzhen is home to Ping An Insurance, Tencent and BYD. Shanghai is home to SAIC Motors, Fosun and Greenland Holding. Although 115 companies are now on the Fortune500 list of the world’s largest companies, it’s not just the big corporations that create jobs. About 80% of Chinese industrial workers are employed by medium-sized companies.
Financial District of Beijing. Construction cranes are the order of the day here. The capital is the headquarters of many Chinese companies, including search engine provider Baidu.
When I was in Shanghai, I heard that the nearby town of Suzhou – also known as the “Venice of China” by tourists because of its waterways – is turning into a new technology hub, a new Shenzhen.
Shenzhen is on the way to becoming a new Silicon Valley. The metropolis in southern China attracts numerous software developers and engineers. Allegedly, AI specialists with starting salaries of up to USD 1 million are specifically hired from the USA.
The Chinese government has proclaimed Artificial Intelligence as one of the most important national projects. Unlike in Germany, where digitization is a sub-division of the Chancellery, the Chinese State Council (the highest executive government body in China) launched an artificial intelligence development plan in May 2017. By the year 2030, a $ 150 billion AI industry will be built and lead the country in the field of artificial intelligence. How serious it means Beijing, clarify the numbers. Already in 2014, approximately $ 130 million was invested in AI, today it is more than $ 500 billion!
Germany also wants to be a leader – the government wants to invest EUR 3 billion by 2025. However, I would like to say here that there is not only lack of political will. In my opinion, it would not be up to the German population to invest a hundred billion euros in taxpayer money in AI. As shown by the low shareholder ratio in this country, the majority of Germans are more security-loving and suspicious.
If we are amazed at Chinese growth, we must also realize that people in China are simply working harder. In China, there are about 11 holidays and 10 days off. In Germany there are about 20 days off and 9 holidays. In addition, although the 40h week in China, but without trade union representation most work mostly 70h a week. Alibaba CEO Jack Ma is publicly calling for the introduction of the 72h week. More about that in my post about Jack Ma.
Many workers are not even secured during construction. I saw this myself in Shanghai, where construction workers do their day’s work at a hundred meters without safety.
Worker without protection on a scaffolding in Shanghai.
I do not want such conditions in Germany. The rapid growth of China also has its downsides.
However, I would like to mention that the retirement age in China in heavy work, e.g. in a factory, 60 years for men and 50 years for women. The government seems to want to compensate for the hard working life. However, given the long-standing one-child policy, it is doubtful that this level can be maintained.
The Chinese are catching up in almost all areas of technology. The government supports the national founding scene. As early as 2016, more than 90,000 start-ups were supported and spun off in the country’s 8,000 business incubators. According to the Chinese Ministry of Research and Development, in 2017 there were 164 Chinese companies valued at more than $ 1 billion – so-called unicorns.
These often spring from the busy research drive of the population. The prejudice that Chinese could only copy is a thing of the past. Of course you have benefited for years from the Western know-how. But meanwhile, innovations are increasingly coming from China too. The number of registered patents has exploded. According to CNIPA (Chinese Patent Office), 42.8% of all patents in the world were registered in China, followed by the USA with 19.4%, followed by Germany at 2.2%.
However, these figures should be treated with caution, since patents are granted in China even with minor evolutionary changes and can not be compared with the stricter requirements of the US or the EU.
The number of published scientific publications from China is also steadily increasing. According to the report “STM Report: An overview of scientific and scholarly publishing”, which evaluates more than 33,000 English-language journals, in which about 3 million articles appear annually, in 2018 almost 19% went back to Chinese research, 18% to US American and Germany account for about 4%.
But you also have to classify these numbers. The sheer number of Chinese students who have to write a thesis in their respective degree programs is causing the number of publications to skyrocket. Therefore, a purely quantitative approach does not have that much significance in my opinion. Rather, the content, or the resulting research result, would have to be evaluated.
Another huge market that has spawned countless business models and companies in China is the use of the Internet. Baidu, Alibaba and Tencent – known everywhere as “BAT” – are among the most successful companies in the Middle Kingdom with their search engine business, online trading and social media services.
More than 800 million Chinese are online regularly, especially on smartphones. This number is really impressive, but conversely it means that there are still around 700 million people left in China – a huge growth potential. Admittedly, this is already recognized by most analysts, published and priced into stock prices. So the three mentioned companies come together already to almost 1.000 billion USD market capitalization.
While Europeans have strong concerns about intensive data processing and storage of their personal information, the Chinese are less worried. They seem to focus more on the daily benefits than on the associated risk. They are used to monitoring and recording their activities by the state anyway.
Personally, I have a bipartite opinion on this. At first, I found it really surprising in Beijing that video cameras were everywhere, except for the public restroom. In Shanghai, I saw state security forces at the Bund, watching screens in their offices and evaluating the records. However, this also made me feel very safe.
Chinese have a sober, unideological attitude to the state and market. You see the relationship between the two as that between the bird and the cage. If this is too small, the bird’s flying power diminishes over time. If the cage is too big, the control of its inhabitants disappears. Without a cage, she is completely lost.
– Stefan Baron, Guangyan Yin-Baron in the book “The Chinese”
What surely surprises you as a German when visiting China is the spread of mobile payment. Every shop, even the small dumpling booth on the street side, accepts mobile payments via Alipay or WeChat Pay. They manage with a simple QR code, which is scanned, zack – ready. If I wanted to pay with my yuan banknotes, I always earned uncomprehending, slightly annoyed looks.
The Chinese market is now responsible for 61% of all global mobile payment transactions. The number of transactions increased from USD 3.8 billion in 2013 to USD 97 billion in 2016. The aforementioned Alipay or WeChat Pay applications together account for 93% of transactions in China.
Anyone who wants to set the trend of mobile payment as a China investor can not ignore Tencent and Alibaba.
Meanwhile, the Chinese are also venturing into biotechnology (not least due to ChemChina’s billion dollar purchase of ChemChina) or quantum computing, and are aiming for space with their rocket “Langer-Marsch-5”. With almost 300 satellites and the Beidou navigation system, they have made themselves independent of the American GPS.
They are also leading the world market in e-mobility, putting the German top dogs under pressure. State minimum quotas are intended to steadily increase the share of electric vehicles. As a result, CATL and BYD are home to two of China’s top three battery manufacturers. Today, more than half of all lithium-ion batteries come from the Middle Kingdom. Advances in storage technology are also likely to boost the photovoltaic market and solve the problem of energy storage.
In Beijing, I already noticed the trend towards e-mobility. Many brands unknown to me drove purely electric on the street. However, the proportion of VWs, BMWs and Mercedes was surprisingly high and in the streetscape an integral part.
The enormous economic growth has at least one other negative side besides the working conditions – the smog. As more than 70% of the energy produced is still generated from fossil fuels, mostly coal, the energy hunger of the country has led to a very poor air quality. When I was in Beijing with my wife in September, we had an AQI (Air Quality Index) of 165 – for comparison, Berlin has an AQI of less than 10.
AQI in September 2019 in Beijing.
The government therefore wants to improve air quality as quickly as possible – including through the construction of nuclear power plants. These should make up an increasing share of the country’s energy mix. At present, China already operates 45 nuclear reactors and 15 more are under construction. In particular, they receive support from France, with Chinese engineers increasingly replacing foreign skilled workers. While Germany announces the phase-out of nuclear power after the Fukushima meltdown, the Chinese have a very long-term strategy. By the year 2100 (!), 1,400 GW of energy will be generated by nuclear power plants.
When the Chinese state is involved in construction, it is usually drummed properly. Then the new capital airport Daixing will be built in record time, which will handle up to 100 million passengers. More about this in my article about Daixing.
That’s where the Three Gorges Dam comes into being. At 85 meters high and over 2309 meters long, it is one of the largest structures in the world. After 17 years of construction and $ 20 billion in investment, the dam was opened, which dammed the Yangtse River into a 600-kilometer-long lake. Hydropower is so powerful that the dam generates as much energy as 18 nuclear power plants.
Another mega construction site is the Chinese high-speed rail network. It is, how could it be otherwise, the largest in the world. In a decade it was expanded to about 29,000 km. This brings enormous economic benefits, as it greatly shortens the expanse of land. A ride on the bullet train from Shanghai to Beijing takes about 4.5 hours for nearly 1300 km. Already 3 billion passengers were transported in 2017, and by 2022 it is expected to reach almost 5.5 billion passengers. More than 80% of all Chinese megacities are already connected to the high-speed rail network. About two-thirds of the world’s high-speed rails were installed in China. Not surprisingly, 60% of high-speed trains worldwide are now produced in China.
From my own experience, I can report that the ride with the Bullet Train is very comfortable and quiet. Although you race through the country at 350km / h, the ride is very smooth, the space is good and the price of around 80 USD is unbeatable compared to other means of transport. I drove several times with different bullet trains and more than 3 minutes late none of them.
China has the largest train high-speed network in the world. For example, the so-called bullet trains connect Shanghai and Beijing in 4.5 hours. The route length is almost 1300km.
Let’s stay with superlatives. With the “New Silk Road” project, China has set itself the goal of connecting the Eurasian continent through an extensive rail and shipping network. The unbelievable sum of up to 1000 billion USD is to be invested for it. More than 60 countries have already pledged their support for this project and Beijing has already invested more than $ 200 billion.
70% of the world’s population lives in Eurasia and 70% of the world’s GDP is generated in this region. China plans to double the volume of trade with its partners to $ 2,500 billion through the initiative.
Critics refer to the project as a Trojan horse and as a gateway for China to Europe and the Asian countries. It was mainly Chinese companies and workers who were tasked with building and imposed high loans on countries they could not afford. So had Sri Lanka already cede a port and land to China, because the own government got into financial difficulties.
Proponents point to the economic potential of the initiative. The Chinese ambassador to Germany, Wu Ken, explains that the initiative is not a “debt trap” but helps many countries escape the “trap of non-development”. The expansion of the new Silk Road is based on principles such as “discuss together, build together and benefit together”. According to the World Bank, the initiative will reduce transport duration by 12%, increase trade by 3-10% and free almost 8 million people from extreme poverty.
In fact, looking at the map, one has to ask why the Chinese first had to come to more closely network the world’s largest contiguous land mass.
Conclusion: The development of the Chinese economy in recent decades is very impressive. The country’s government supports the private sector on its own merit and promotes founders and new technologies. The country thinks and invests long-term and has developed a good starting position in many sectors in order to become world market leader. The trade dispute with the US may slow growth in the medium term, but the conflict in China will not stop. The Middle Kingdom is expected to account for 20% of the world market in terms of purchasing power in 2022, the US 15% and Germany about 3%. However, it remains to be seen how the country will fare in a future economic crisis. Will the single market be strong enough to get out of recession? What happens if growth slows down? Should the housing market collapse, it could bring serious distress to the country and the government.
Sources and Links:
Handelsblatt: How China slows down the German carmakers.
CNBC: China’s Geely buys a $9 billion stake in Daimler.
The World Bank: About China.
Statista: China – GDP from 1980 to 2018.
Statista: USA – GDP from 2008 to 2018.
Book “Future – China?”, Frank Sieren.
Council on Foreign Relations: China’s Massive Belt and Road Initiative.
FAZ: China’s crazy home boom.
China Innovation Funding: State Council’s Plan for the Development of New Generation Artificial Intelligence.
China Power: Are patents indicative of Chinese innovation?
Forschung & Lehre: China is overtaking the US.
World Nuclear Association: Nuclear Power in China.
Diplomatisches Magazin: Interview with Chinese Ambassador Wu Ken.
Statista: Legal holiday entitlement * (in days) and number of holidays in selected countries
South China Morning Post: China pulls further ahead of US in mobile payments with record US$12.8 trillion in transactions.
Book “The Chinese – Psychogram of a World Power”, Stefan Baron, Guangyan Yin-Baron.
Welt: Largest structure in the world – China’s Three Gorges Dam.