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Olaf Scholz sparks a China crisis for Volkswagen

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VW
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“We must orient our China policy toward the China that we find in reality,” Olaf Scholz said in his inaugural address to the Bundestag on Wednesday.

“This also means not closing our eyes to the critical human rights situation, and calling violations of universal norms by their name.”

But Germany’s new Chancellor added: “That doesn't change the fact that a country of the size and history of China has a central place.”

As Berlin shifts to the left under the Social Democrat, Scholz faces a tough balancing act. While seemingly set on taking a stronger stance than predecessor Angela Merkel against the repression of Uyghurs in Xinjiang province, Germany also relies on China as its largest trading partner.

As the new coalition of Social Democrats, Greens and Free Democrats carve out their approach towards the world’s second-largest economy, it could spell pain for Volkswagen.

Volkswagen relies on China as its biggest market, while Chinese consumers buy more of its cars than any other brand. That partnership has been forged over the past four decades as China sought Germany’s industrial expertise and Volkswagen tapped into the world’s largest customer base, which was steadily growing in wealth.

“Germany had what China needed and wanted when they started industrialisation in the ’80s,” says Hanns-Günther Hilpert, head of Asia research at the German Institute for International and Security Affairs.

“Germany was quite open with technology, much more than the United States or Japan - that was what the Chinese got. The Germans got from China big markets, and a huge economic boom for German industry.”

Now, Volkswagen’s foothold could be at risk. It comes as the automaker ploughs €35bn (£30bn) into its electrification strategy with key factories in China - the world’s largest automotive market and the country driving the electric race.

The parent company of Audi, Bentley and Lamborghini accounted for 19pc of China’s car sales last year. Its subsidiary, Volkswagen Group China, sold 3.8m vehicles in 2020, including 3.6m made domestically, with profits of €3.6bn.

For the world’s second largest car maker, China boasts an attractive and fast-moving market where the government has previously cut taxes if demand slows, says Shanghai-based Min Chun of Daxue Consulting.

In April the company announced its third electric vehicle (EV) factory in China with production set to begin in late 2023. The plant in eastern Anhui province was pledged as a “cornerstone of Volkswagen’s global e-mobility push”.

According to Min, “this battery plant will become an important backbone to their global battery strategy and EV market”.

Last year Volkswagen expanded its shareholding in its joint venture with China’s State-owned JAC Motors and bought more of Chinese battery maker Gotion.

Deliveries of its battery-powered electric vehicles in China, meanwhile, more than tripled in the first nine months of this year, just two months after saying it needed to change its EV strategy. It aims to deliver up to 1.5m new energy vehicles a year, by 2025.

But, according to Min, the company’s dominance is being challenged by fast-growing Chinese electric vehicle makers such as Geely.

“VW has fallen behind in this sector and China is no longer dependent on the German manufacturers that are known to have the cutting-edge for fuel vehicles.”

Still, the firm remains reliant on China for about 40pc of its overall sales and profits. The group made more than €9.7bn in profit in 2020, and delivered more than 9m cars.

A spokesman said: "The Volkswagen Group takes its responsibility as a company in the field of human rights around the world very seriously – also in China.

“This concerns such aspects as the protection of minorities, the entitlement to employee representation or permanent social and labour standards. We also expect our local Chinese business partners to especially observe these principles.”

As Germany’s new coalition gets to work, the prospect of it ramping up pressure against Beijing could be all the more likely with the Greens - a party known for taking a tougher line on China than the outgoing Christian Democratic Union. Critics blamed Merkel for continuing to allow investment to flood into Europe’s largest economy from Beijing, without sufficiently fighting against accusations of more than one million Uyghurs being detained in re-education camps.

German Chancellor Olaf Scholz and German Foreign Minister Annalena Baerbock - REUTERS/Michele Tantussi
German Chancellor Olaf Scholz and German Foreign Minister Annalena Baerbock - REUTERS/Michele Tantussi

Greens co-leader Annalena Baerbock, Scholz’s foreign minister, has urged the EU to ensure products of forced labour are not allowed to enter Germany and to consider banning telecoms giant Huawei, as countries including the UK have done.

According to Dr Hilpert, the new government creates a complex and delicate power dynamic.

“There's this hotly debated question in Germany: is the German economy dependent on China? Some people say yes.”

But Berlin may be cautious of dampening relations with Volkswagen, which employs almost 300,000 staff in Germany and supports several more from suppliers.

Its size and political power is significant. German politicians lean on the support and success of companies such as Volkswagen for votes. Other influential employers are also under threat including Adidas, Daimler and Siemens that all count on China for more than 10pc of sales, according to Dr Hilbert.

Meanwhile, selling high-margin products overseas has helped protect jobs and shield Germany’s economy, while facing up to the Asian giant can lead to damaging trade wars as relations unravel.

And missteps are easy. JPMorgan boss Jamie Dimon was forced to apologise recently after saying his bank would outlast the Chinese Communist Party, while consumer brands such as H&M that raised concerns about the oppression of Uyghurs have faced boycotts by Chinese consumers.

How things will play out politically remains to be seen. While Volkswagen bosses may be nervous about what Baerbock might say, at least they know what she thinks - but Scholz has made himself more of an imperceptible character, argues Dr Hilpert.

If China were to clamp down hard on German imports, “it would be bad for the German economy, but we would survive it,” he says, highlighting that other companies are less dependent on China than Volkswagen.

But for Volkswagen, a crackdown could imperil what chief executive Herbert Diess calls the company’s “40-year success story.”

If Germany chooses policy over car sales, Volkswagen will not have much time to shift gear.

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