European industry is in crosshairs of China’s new five-year plan

Luxembourge Times - For Europe, a new cycle of Chinese rivalry heralded by its latest roadmap for advancement is forcing soul searching on how to respond.

Beijing’s five-year plan issued in March articulates aspirations for technological sophistication that amount to another big warning to the region’s businesses: the same economy whose rise Germany and other manufacturing hubs long benefited from is now, more than ever, a threat to prosperity.

China’s goals include the continuing modernisation of traditional industries like chemicals and machineries, on which big European companies built their riches. 

But Beijing’s aims to cultivate emerging and frontier technologies like robotics, biomedicine and nuclear fusion energy, while catching up with western spending levels on research and development, pose further risks in areas where the region still has an edge.

China’s government insists its ambition is to build its own economy and resiliency. But with past five-year plans demonstrating how authorities came to deliver on their goals, the results — including a widening trade deficit — have become an existential threat for swathes of Europe’s economy. 

Coupled with concerns about Chinese aid for domestic firms, and overcapacity, the latest roadmap is giving European officials yet more reason to question the free-market model they have long relied on. 

Within Germany, Europe’s biggest economy, the angst is intense. The country has seen barely any growth since the pandemic — nor since Beijing’s last five-year plan, for that matter — and manufacturing output has been on a downward trend since late 2017. The latest readings for factory orders, industrial production and trade there will be released on Thursday and Friday.

China’s track record has caused unprecedented interest in the new roadmap, said Claudia Barkowsky, the Beijing representative of VDMA. Her group lobbies for German machinery manufacturers, now the country’s biggest export category to China after a slump in car shipments. 

“Companies want to know what the plan means for the future,” Barkowsky said. “It definitely means more competition, because China is now shifting massively from scale toward quality, efficiency, and sustainability. This transition is increasingly affecting areas where the European machinery industry has traditionally been very strong.”

The struggles of Germany’s auto industry have been particularly acute. China has become the world’s biggest car exporter after significant strides in electric vehicles, offering cheaper alternatives to Volkswagen AG, BMW AG and Mercedes-Benz Group AG.

For Frank Konrad, chief executive officer of German machinery maker Hahn Automation Group GmbH, China’s pace of change is remarkable. His company has operations there, and he remembers how visiting a tractor factory in the country early this century stirred memories of “old movies,” whereas now it has a totally different vibe. 

“People in China still say Porsche is a good car, but there’s a BYD that has the same power, is made in China, and costs half as much,” he said. “And they’ll tell you that right to your face.”

The threat to pillars of export strength is already weighing on prosperity and rendering production capacity obsolete. The impact of China’s renewed focus on manufacturing and trade, as assessed by Goldman Sachs economists, could cost the euro area 0.6% of gross domestic product by the end of 2029, with Germany facing an even bigger drag of 0.9%.

Pressure points in the near term will be areas of established manufacturing where China plans to deploy new technology, like chemicals, the automotive sector, machinery and electrical engineering. But more futuristic industries cited in the five-year plan — including robotics, quantum technology and 6G communications — also matter. 

Michael Laha, a senior research fellow at the German Council on Foreign Relations, highlights biomanufacturing — where living cells like bacteria or yeasts are used to make food ingredients, pharmaceuticals and related items — as an area that will “increasingly become a focal point of global geopolitical tensions” and where Europe risks new dependencies. 

The five-year plan includes a goal of strengthening the social safety net and boosting domestic consumption, which is seen as a major weak spot. Such steps have been a key demand of European officials, as they would reduce the economy’s reliance on exports. 

Chinese leaders including Premier Li Qiang have also pledged to further open up their market to overseas companies, while denying that state subsidies are behind the rise of manufacturing. The government has launched a campaign to fight excessive competition and overcapacities, though effects have been limited so far. 

“Demographic pressures of an aging population, together with the Chinese economic model’s reliance on suppressing wage growth, inevitably limit domestic consumption’s weight in the economy,” said Alicia Garcia-Herrero, a senior fellow at the Bruegel think tank, and chief economist for Asia Pacific at Natixis. “Instead, the government plans to sustain high growth by expanding the country’s global market share of exports, especially exports of high-tech goods.”

Manufacturing in France, the euro zone’s second-biggest economy, is also in the frame. Heavyweights like Airbus SE and Safran SA may face growing pressure from China’s investments in aviation, while Sanofi SA and other drugs companies are under threat as the country commands a growing share of the global market amid a heavy push into innovation. Renault SA is meanwhile launching cheaper EVs to stave off a Chinese offensive in its home market. 

It’s against that backdrop that President Emmanuel Macron has called China’s trade surplus with the European Union unsustainable, and warned of possible “strong measures” in response. But forging a common front isn’t easy, further complicated by the need to field trade barbs from US President Donald Trump.

Disagreement has plagued the European Commission’s own proposal, called the Industrial Accelerator Act, which aims to raise the share of European manufacturing in the economy to 20% in 2035 from 14.3% in 2024. Its measures would break from the bloc’s commitment to open trade by favoring some European goods in public procurement. 

That plan was postponed repeatedly due to internal divisions, as Macron strongly pushed such a “Made in Europe” approach while German Chancellor Friedrich Merz urged a focus on cutting red tape and strengthening the EU single market. 

Konrad of Hahn Automation Group says the region must become more assertive in supporting the private sector.

“Without any measures, I really do see technology companies continuing to disappear,” said Konrad, whose industry is likely to be affected by China’s plans. He supports local-content requirements, but acknowledges such rules would cause a “friction” in the economy. 

Other business leaders have pushed back against the idea, a signal that the debate is likely to rage when the commission proposal is discussed among EU governments and in European Parliament. For Reinhard Buetikofer, a former lawmaker there who is now a senior fellow at the Center for European Policy Analysis, such bickering obscures the real issue.

“It is important that we finally address the gravity of this industrial threat,” he said. “We’re facing a threat of deindustrialisation ‘made in China.’ We know the tools to counter it. The question is whether we have the political will to use them.”