Why BMW and Audi face risks in China as political tensions grow

Relations between Europe and China have been deteriorating for more than a year, and Beijing’s refusal to condemn Russia’s invasion of Ukraine has only worsened political ties. A bilateral investment treaty with Brussels was frozen last year, adding another layer of risk. On top of that, punishing lockdowns across China this year pushed the economy into contraction and hurt business profits.

Despite this, exports from Europe have held up, with the total value of shipments in the first six months of 2022 largely unchanged from last year, despite tough COVID-19 lockdowns in some Chinese cities that significantly reduce demand in the second quarter.

The Chinese market was a savior for the balance sheets of many foreign companies in recent years, with the government controlling COVID-19 infections and quickly reopening the economy in 2020 and growth reaching 8.1 per cent last year, offsetting recessions and blockages in other markets. . That situation has reversed in 2022, with lockdowns in Shanghai and elsewhere closing factories and hitting profits so far this year.

However, many foreign companies still believe that there is more to gain than to lose from being in China.

Earlier this year, BMW opened a multimillion-dollar factory extension in Shenyang, while Volkswagen Group’s Audi is building its first electric vehicle plant in Changchun.

“If your definition of decoupling is foreign companies exiting China directly or at least significantly reducing their footprints and diversifying investments outside of China, that’s not happening,” said Jacob Gunter, senior analyst at the Mercator Institute of China Studies. in berlin “What we generally see in most industries is just the opposite.”

Whether this will change in the future is unknown, but for now, some European companies with activities in China are choosing the less radical option of separating their China operations from their global operations. The so-called “localization strategies” involve the creation of supply chains and local partnerships to avoid being caught in the struggle of geopolitical risks.

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