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German companies are pouring a record amount of investments in the U.S. as Germany’s tight economic relationship with China wobbles

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Germany has watched its economic brand diminish in the face of economic indicators that make analysts cringe and embarrassing comparisons with the rampant U.S. Now, German companies are voting with their feet and cash by committing record levels of capital to the U.S., showing the private sector’s dismay at the state of Germany’s economy and fears over the fate of a traditionally crucial trading partnership with China.

German firms committed $15.7 billion in capital projects to the U.S. last year, marking a steep rise on 2022’s figure of $5.9 billion, according to an analysis of company announcements by fDi Markets, a subsidiary of the Financial Times

German giants vote with their feet

There have been several high-profile companies getting in on that trend, with the U.S. accounting for 15% of Germany’s total capital commitments in 2023, compared with 6% in 2022. 

Car-making giant Volkswagen announced last March it was committing $2 billion to a production plant in South Carolina for its off-road brand Scout. The company is launching an EV version of its classic SUV.  

Fellow German automaker Mercedes-Benz, meanwhile, said it had pledged more than $1 billion to a U.S. battery plant in Alabama in 2022.

Activity has probably been given a boost by U.S. President Joe Biden’s Inflation Reduction Act, which offered such huge subsidies to foreign companies that it led to a squabble with the EU. 

But it also points to a worsening economic environment in German companies’ home country.

Germany was hurt more than most by Russia’s invasion of Ukraine, which led to sanctions and the loss of cheap Russian oil and gas that had powered the country’s manufacturing engine. 

A series of bad data points has followed in the last year, highlighting the country’s decline and even leading Deutsche Bank CEO Christian Sewing to label it a prospective “sick man of Europe.”

Germany’s economy contracted by 0.3% through 2023, fighting varying stages of stagnation and recession. Exports declined 4.6% in the year to December 2023, while imports declined more than 12% in a broader sign of falling demand.

Consumer sentiment has also hit the skids, although there were signs of some recovery to end last year.

But the signs of strain are probably most evident in the county’s production and construction industries. According to Hamburg Commercial Bank’s chief economist Dr. Cyrus de la Rubia, demand is “in the doldrums.”

German PMI data shows new orders in the production sector have been declining for 22 straight months. Construction PMI is no different, with a house-building glut extending a trend of falling orders in the sector that stretches back to April 2022.

“Just when you think it cannot get any worse, it can,” de la Rubia summed up.

But in the U.S., German multinationals’ appetite for expansion only seems to be ramping up. 

Data from fDi Markets found German companies announced 185 projects in 2023, with 73 coming from the manufacturing sector.

A study by Deloitte last year found two-thirds of German companies had moved some of their operations overseas. That trend has been driven by Germany’s crucial production sectors, according to the consultancy.

China feels German blowback

Germany’s increased coupling with the U.S. has come at the expense of not just its own economy, but also its relationship with China. 

The two countries have developed strong economic ties over the years, with China being Germany’s biggest trading partner for the seventh straight year last year.

Germany has traditionally imported input materials from China, while rising disposable income among Chinese residents has increased demand for German consumer goods like its cars.

But increased protectionism and a rising trade war between China and the U.S. has made the import of cheap Chinese goods less appealing. 

A wake-up call was delivered last week when thousands of Porsche, Bentley and Audi imports to the U.S. were held up because they contained a banned Chinese component, the FT reported

The mammoth Chinese economy has also struggled with a slowdown since COVID-19, hurting demand for German consumer goods. 

For the third year in a row, Germany’s capital commitments to the U.S. have outweighed those in China. 

Research from the International Trade Council (ITC) suggests this shift will lead to the U.S. usurping China as Germany’s largest trading partner by 2025.

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