As Germany’s business model falters, companies are rethinking dependence on China
Amid the ruins of a World War II-devastated city, Karl Haeusgen’s grandfather invented a hydraulic pump that he was so proud of that he started a company to sell it. At the time, there were no revenue forecasts or five-year growth strategies. The plan was survival: “It was just about taking chances,” said Mr. Haeusgen.
Seven decades and three generations later, the family business, Hawe Hydraulics, ships some 2,500 parts all over the world. But instead of scrambling for sales, Mr. Haeusgen dissecting the geopolitics of an increasingly polarized world.
“A third of my business, if not more, depends on how Biden and Xi get along,” he said. “Sometimes I wish I ran a restaurant and didn’t have to worry about world politics.”
With China and North America as Hawe’s largest trading partners, Mr. Don’t have that luxury. As tensions rise between Beijing and the West, Hawe officials are working to hedge the company’s reliance on the huge Chinese market.
Germany, long a hub of China’s trade in Europe, is increasingly caught up in the diplomatic battle between the world’s two largest economies – provoked by China but urged by Washington to move further away from Beijing, even as Treasury Secretary Janet Yellin arrives in China on Thursday for talks seeking a common economic base.
How Hawe and other medium-sized German companies navigate these new global forces will be critical to the country’s future prosperity. While Germany’s success in the 20th century as Europe’s economic powerhouse is often credited to its biggest brands – such as Volkswagen, Mercedes and Siemens – small and medium-sized enterprises are the backbone of its economy.
Known in German as the “Mittelstand,” these companies struggle to create a model for the future as the country’s socio-economic order begins to falter under the weight of stalled modernization and rifts in world politics.
Some executives, such as Mr. Haeusgen, embrace transformation and test new strategies and markets. Other companies, however, are hesitant to let go of a model that has allowed Germany to prosper for decades but defied change.
Tensions can even be felt on Hawe’s factory floor.
‘I just can’t see it. What is the alternative to China?” said Holger Rebbe, a floor manager.
Hawe’s handling of international affairs is not just a concern for its 2,700 employees. The economies of some German cities depend on it.
In Kaufbeuren, a brightly painted Bavarian town nestled beneath the Alps, Hawe is a top employer. In the small village of Sachsenkam, 60 miles to the west, Hawe provides 250 jobs – the next largest employer is the local brewery, with a workforce of 17.
“It’s like we’ve been successful for too long,” says Stefan Bosse, the mayor of Kaufbeuren, who is eager to attract other companies to diversify his city’s employers. “Now we’re gradually seeing, ‘Uh oh – this is not a given. This can also be compromised.’”
Based in a rural German town, the archetypal Mittelstand company makes a device few people have heard of, but one that is critical to goods around the world – like a screw needed for every plane or passenger car.
These companies account for the bulk of Germany’s economic output some studies. They employ 60 percent of the workforce and make up 99 percent of the private sector – a higher percentage than any industrialized country in the world.
“The German business model, especially Mittelstand, is extremely good at one thing: slowly but surely perfecting one product,” says Mathias Bianchi, spokesperson for the German Mittelstand Association. “Because it worked so well for years, they didn’t have to adapt to changes. But now they have to adapt to the new economic reality.”
Even as the technological revolution and climate change added pressure in recent decades, the German model floundered profitably.
But the pillars it relied on to do so — cheap Russian natural gas and the Chinese market — are collapsing.
Moscow’s invasion of Ukraine forced Germany to get rid of the gas that supplied its industry with cheap power. China’s push for self-reliance means that a market that once seemed like a never-ending source of growth is not only less secure, but a rival.
The plotting of a socio-economic transformation for the country promised by Chancellor Olaf Scholz’s coalition government has become a source of national fear.
Like the population, German entrepreneurs and entrepreneurs are aging – the average member of the Mittelstand association is 55.
Some resist adapting to new technologies and cling to a loyalty-based system that has created lifelong employees and customers. (Hawe’s very first customer in 1949, a manufacturer of forklift trucks, still buys from them.)
The government, too, has a poor track record of shedding antiquated practices—such as its labyrinthine, paperwork-based bureaucracy. In 2017, it pledged to digitize its 575 most used services, such as company registrations, by 2022. A year past that deadline, Mr. Bianchi said, only 22 percent of those services are online.
Such failures make companies wary of transformation plans that the government says will now be costly, but that will make Germany a diversified, digitized and climate-neutral economy.
“Our companies are not seeing it right now,” Mr Bianchi said.
a questionnaire of Mittelstand companies released on Tuesday by the analytics firm Kantar showed a sobering statistic: More than half of the companies surveyed did not want to expand in Germany and a quarter were considering relocating.
Even at companies like Hawe, the pace of geopolitical shifts is staggering.
The day after Vladimir V. Putin’s forces invaded Ukraine, Hawe decided to halt operations in Russia. It was an easy decision. Russia was not a big market.
Still, Mr Haeusgen said, the move felt like a shock: “This was something that had never happened before – that we stopped an operation due to a political event.”
On Hawe’s factory floor, the fears it created still linger.
Marita Riesner, who inspected parts, said her heating bills had risen from $120 to $740 a month. She and her neighbors are growing vegetable gardens to ease the pain of inflation as the country sinks into recession.
“I was a very positive thinker before,” she said. “But these days I sweat it. There seems to be a lot going wrong.”
Should geopolitical events disrupt business with China, Mr. Haeusgen, the fallout could wipe out more than half of Hawe’s jobs in Kaufbeuren. Currently, he said, 20 percent of Hawe’s sales come from China.
Some business groups have sounded the alarm over Germany’s massive exposure to China in recent years – before the risks were taken seriously by former Chancellor Angela Merkel’s government, which had strongly encouraged German-Chinese trade.
Today, some policymakers are concerned that an event like a Chinese attack on Taiwan would be an inevitable disaster for the German economy. The government is now pushing for “risk reduction” by finding alternatives to trade with China.
Berlin plans to release a new strategy paper this month to outline how it will move forward with its relationship with China. It is expected to take into account pressure from Washington, Germany’s security guarantor, to leave China.
But big brands like Volkswagen and BASF insist that China, as the world’s second-largest economy, is too important a market to give up. Such German-based multinationals are responsible for a 20 percent increase in foreign direct investment in China this year.
German officials say their strategy will preserve ties with China, but offset that by strengthening relations with other countries, such as India or Vietnam.
The Mittelstand is doing the same: Hawe is investing heavily in India, where it plans to build a new factory, and other companies are looking to North America.
In Kaufbeuren, Hawe’s head of department, Markus Schuster, says diversification brings new challenges.
“We used to do most of our sales with three customers from China,” he said. “Now we have a lot of smaller customers all over the world.”
Instead of making a few parts on a large scale, as cheaply as possible, Hawe needs to make a wide variety of parts for a range of customers as quickly as possible.
That means seeking cost savings while developing automation systems to enable flexible production, he said. He pointed to a team of robots engaged in an intricate dance, drilling and polishing of metal parts.
Mr. Haeusgen believes that trade with China will remain a cornerstone of the German economy. And he will continue to travel to China with other Mittelstand leaders for talks to resolve business disputes and rebuild ties.
The new socio-economic model for Germany may be less about erecting pillars than managing an increasingly complex international juggling game.
“Being able to live with and deal with uncertainty and deal with complexity becomes, in my opinion, a core strength,” said Mr. Haeusgen. “The way my grandfather did it won’t work today.”