China is planning huge investments to improve its competitiveness and decrease its dependency on foreign technologies. For the German engineering sector this may mean new opportunities, but also new risks.
To German companies, the term "planned economy" may sound like a swearword. It smacks of inflexibility and remoteness from market realities and brings up memories of what it was like in former Communist East Germany and the Soviet Union. But when internationally successful German engineering firms take a look at China's five-year plan as adopted last year, they are unlikely to make fun of it - far from it.
"The Chinese five-year plan is a huge investment scheme, a tremendous technology plan," says Thomas Lindner, president of the German Engineering Association (VDMA). "And the Chinese tend to be very pragmatic. If they notice that a plan doesn't come off, they just adapt it. They don't just stick to it, come what may."
China is by far the largest producer of machinery in the world. Last year, the People's Republic made machines worth 560 billion euros ($683 billion) - the same as the combined output of Japan and the United States. Germany took fourth place, but is the world leader in engineering sector exports, with China being its main customer. German companies, therefore, have a vested interest in knowing what the Chinese leadership is planning.
Big opportunities, big risks
"German engineering firms can expect to profit from the 12th five-year plan in China, because many investments may require the involvement of German machinery," says Jörg Nürnberg, who works for the Droege Consulting Company and has studied the plan on VDMA's behalf.
The five-year plan lists seven strategic sectors which are most critical to the Chinese economy. Among them are new sources of energy, energy efficiency, environmentally friendly vehicles and top-notch engineering equipment. China plans to pump 1.2 trillion euros into those key sectors over the next couple of years. This will be done with the aim of doubling the output from strategically important sectors in relation to the country's overall economic performance.
Nürnberg claims German firms can profit from this development as China will be dependent on modern technology to meet its targets. "But German engineering companies will have to brace themselves for tougher competition, too," he warns.
And China's drive to innovation is big. Domestic engineering companies are told to raise spending for research and development and obtain state subsidies to do so. By 2015, China wants to channel 2 percent of its gross domestic product annually into research and development, which would equal 215 billion euros. For its part, Germany already invests 2.8 percent of GDP into research and development, but in absolute figures that's only 70 billion euros.
The message of the Chinese five-year plan couldn't be any clearer. The country wants to move away from cheap products towards state-of-the-art technology, also in the engineering sector. "Companies worldwide have been singled out, and Chinese firms have been advised to model themselves on these companies," says Nürnberg. "But the plan also says that if that approach doesn't suffice to meet its targets, China will have to invest abroad and buy companies there."
In 2011, Chinese firms already acquired SaarGummi and Preh, two long-standing German automobile suppliers. Earlier this year, Chinese building machinery giant Sany took over Germany's Putzmeister Group, a maker of pumps.
Such takeovers are bound to increase. Chinese investment authorities are expected to assume an even more active role in assisting with such acquisitions abroad. And Chinese lenders have been called upon to provide enough resources for local companies to meet this goal.
VDMA's Lindner is not afraid of a little competition. But he calls for a fair competition, saying it was not OK for the Chinese government to subsidize local firms' investments abroad while simultaneously limiting market access for German companies operating in China.
There's also the danger of Beijing simply closing selected segments of the domestic markets to foreign competitors. This has happened in the field of wind power installations with a view to protecting local operators.
"You cannot say it won't happen again," says Lindner. "But the best remedy against it is to be ahead of China technologically, so that the Asian country would lose more than it could gain by shutting down markets."
Lindner therefore advises German companies to expand their production, development and service units in China and facilitate bilateral cooperation on the ground. But heightened innovation remains the key to success, he argues. It's the only way to keep Chinese competitors at bay.