German companies under pressure to adapt as China challenges them at their own game

The core of Germany's economy, its production and export of high-value, complex goods such as cars, locomotives, factory machinery, aircraft, and construction equipment, faces severe challenges from a new competitor. This competitor, China, often matches or surpasses Germany's quality and sells its products at a fraction of the cost, leading to a phenomenon dubbed the "China shock" by economists.

This economic strain is a significant factor contributing to Germany's ongoing stagnation since the COVID-19 pandemic, which has made Chancellor Friedrich Merz's governing coalition unpopular, particularly as the far-right Alternative for Germany parties approach a regional election in Saxony-Anhalt with their best opportunity yet to secure a state governorship.

Historically, German companies thrived by selling their products to China. However, the tables have now turned as Beijing provides support to domestic industries in specific sectors where German companies compete. Given China's sluggish economy, a considerable portion of its manufactured goods remains unsold domestically, prompting them to be exported to foreign markets, including Europe.

This shift in export dynamics has worsened the economic stagnation that has plagued Germany for several years, with the GDP contracting in 2023 and 2024, and growing inflation surpassing wage growth, resulting in only a meager rise in real wages.

The German economy, the largest in Europe, has experienced a contraction in recent years, with GDP shrinking in 2023 and 2024, and experiencing a mere 0.2% growth in the latest reported period. While the unemployment rate remains below the EU average at 4%, the German populace can perceive the unsettling economic news, like layoffs at longstanding economic pillars like Volkswagen, with reports of more to come, or the planned buyouts at BMW, amounting to 8,000 positions by the end of 2026, and a reduction of 13,000 at Bosch by 2030.

Moreover, inflation has outrun wage increases since the pandemic, with real wages barely recovering to pre-pandemic levels in 2019.

Economists note that Germany has been among the hardest-hit of the major economies, largely because its export-driven economy is now competing for the same manufactured goods that China is prioritizing for support. While countries like Britain, Italy, and France have smaller manufacturing sectors, the United States' tariffs deter many Chinese goods from entering while simultaneously shielding others, such as automobiles, from the same fate.

Now, Germany not only imports more from China than it exports but also confronts the prospect of Chinese companies encroaching on industries where Germany once reigned supreme – cars, trucks, buses, trains, aircraft, factory machinery, and medical devices. As economists Brad Setser and Sander Tordoir put it, "China has already devoured much of German industry's lunch and is now preparing to move on to dinner."