Pressure from China and the US has German business on the back foot | DW News

Key Concepts

• American reindustrialization
• Tariffs (Trump tariffs, EU tariffs)
• Global value chains
• Innovation (environment for innovation, fast innovation)
• Regulation (AI regulation, CBAM)
• Competitiveness (China's competitiveness)
• Subsidies
• Bureaucracy (cost of bureaucracy)
• AI (application of AI)
• SMEs (small and medium-sized enterprises)
• Demographics (aging workforce)
• Rule-based vs. power-based global economy
• Defense industry scaling
• Reforms (government reforms)

1. Trade and Tariffs

• The US is the single biggest export market for German machinery outside the EU.
• Trump's tariffs on the car industry and potential expansion to other sectors pose a threat to German business.
• The speaker believes tariffs ultimately hurt all inhabitants of a country.
• Existing tariffs between the EU and the US for machinery and equipment are around 1-2% and are "more or less the same," suggesting fairness. The speaker suggests setting both to zero.
• The speaker states that German companies don't want to compete against Chinese competition via tariffs, but with competitive and innovative products.
• International trade is connected, and many companies have global value chains, so tariffs would hurt.

2. Competition with China

• China is a massive competitor against Germany in the global market, increasingly competing in third markets.
• The environment for innovation in China, supported by the state, is pro-innovation.
• Germany and the EU have implemented a lot of regulation, becoming "world champions in regulation," which hinders their ability to compete.
• Chinese competition is not always fair, especially in third markets, with exports sometimes heavily subsidized by the government.
• The speaker disagrees with the assumption that China is ahead of Germany, stating that they are "at Handover" in some areas.
• The speaker mentions examples like BYD selling cars into Europe as sharper examples of Chinese competition in other industries.

3. Innovation and Regulation

• Germany and the EU need to create a better environment for fast innovation.
• The speaker cites AI regulation as an example, stating that in Europe, regulation comes before development, which is not fast.
• The speaker met with US congressmen who said "in Europe first you regulate then you develop the technology."
• The speaker suggests developing technologies first and then regulating carefully and manageably.

4. Government Policy and Industry Demands

• The speaker states that the industry needs lower taxes because taxes on companies in Germany are higher than the OECD average (close to 30%), and they are asking for 25%.
• The speaker clarifies that they are not asking for more subsidies, as vdma members are broad in business, and subsidies might be good short-term for certain industries, but they are asking for a broad innovative environment.
• The speaker states that subsidies socialize risks and privatize profits.
• The speaker emphasizes the need for a good work environment, well-educated people, low taxes, an innovative surrounding, good universities, and free trade agreements.

5. Challenges for SMEs

• The speaker addresses the concern that smaller members may not have enough capital to invest in AI and automation.
• A study found that small companies pay more than 6% of their turnover for bureaucracy, which is more than the typical profit of such a company.
• Germany is 5% over the OECD average in taxes, resulting in a 10% shortfall.
• Another study found that applying AI in smaller companies could raise profits by 10%.
• The speaker disagrees with the idea that Germany's small and medium enterprise backbone is holding it back, arguing that small companies are good because they are specialized.

6. External and Internal Factors Affecting Orders

• External factors contributing to the drop in orders include Russia's war in Ukraine, broken value chains after Corona, China's slowing economy, and Trump's tariffs.
• Internal factors include responsible bureaucracy, regulation, and taxes.

7. Potential Consequences of Inaction

• If the government doesn't lower taxes and remove bureaucracy, the economy will go down, tax income will decrease, and unemployment will increase.
• Some companies may move, while others will suffer.

8. Government Actions for the Future

• The government should reform to become more efficient, digitalize the administration, and create a positive environment for R&D and innovation.
• Germany needs to work with migration to fill open positions and strengthen AI to fill the gap.

9. Defense Industry

• The increase in defense spending is driven by external threats, such as an aggressive Russia and an isolationist USA.
• The machinery and equipment producers enable scaling up production, including armored vehicles and drones.
• The industry will likely participate, but it is not their main market.

10. Optimism for the Future

• The speaker expresses optimism about the future for the industry and Germany as a whole.
• The speaker emphasizes the need to spend wisely and not forget reforms.

Synthesis/Conclusion

The German machinery industry, a crucial component of the German economy, faces significant challenges from global competition, particularly from China, and internal pressures such as high taxes and bureaucracy. While tariffs are seen as a hindrance to global value chains, the primary focus is on fostering innovation through deregulation and tax reduction. The speaker advocates for government reforms to create a more business-friendly environment, emphasizing the importance of investing in education, promoting AI adoption, and addressing demographic shifts through migration. Despite the risks posed by external factors and potential government missteps, the speaker remains optimistic about the future of the industry and Germany's ability to maintain its leading economic position.