Volkswagen and China: the risks of relying on authoritarian states

As Western companies begin to count the cost of writing off thirty years of investments in Russia, some of them have already begun thinking about the prospect of doing the same in China. The only difference is that after cosying upto the Chinese Communist state over the past forty years, Western companies’ investments in China are many many multiples of what they are in Russia. As this piece by Joe Miller in the FT says: “Withdrawing from Russia, says an adviser to one of the German carmakers, was one thing, but what if, in a similar scenario, there was pressure to withdraw from China, which accounts for upwards of a third of sales at all three companies?
“That,” the person said, “would be close to an existential crisis”.”
The FT article then uses the case study of Volkswagen to explain how operationally disruptive and financially destructive it will be for Western companies to disentangle themselves from their hundreds of billions of investments in authoritarian China: “…VW, the world’s second-largest carmaker by volume. It employs roughly 500,000 people in Europe and runs the continent’s largest auto plant in Wolfsburg, 125 miles west of Berlin. But beneath the hood, in terms of revenues and profits, VW is more Chinese than German.
VW, which was the first foreign manufacturer to build a presence in China almost four decades ago, relies on the country for at least half of its annual net profits — the precise number is not disclosed. A VW car, or one made by subsidiaries Audi, Porsche and Skoda, was sold in China every 9.5 seconds in 2021. Over the years, VW has come to be “viewed as a synonym for the German business community” in that country, says the company’s China boss, Stephan Wöllenstein.”
The FT article explains, as the German authorities, like other Western governments, harden their resolve to take on authoritarian regimes, life could get a little tricky for Western companies like VW: “The new government, led by Olaf Scholz, has signalled a shift in foreign policy that could lead to a more fraught relationship with China. In an interview with a German newspaper on December 1, before the new coalition government was in place, soon-to-be foreign minister Annalena Baerbock made it clear she would differ from her predecessors when it came to dealing with Chinese leader Xi Jinping.
Calling the Chinese government an “authoritarian regime”, and highlighting forced labour practices in the region of Xinjiang, where VW has a plant, Baerbock said she believed “a values-driven foreign policy [was] always a combination of dialogue and toughness”, adding that “eloquent silence is not a form of diplomacy”.”
What is keeping German executives up at night is what would happen if China starts lending military support to Russia in Ukraine (something that the Americans claim the Chinese are already contemplating): ““I don’t want us to be facing a similar situation with China in 10 years,” Lars Klingbeil, co-chair of the Social Democratic party, told Der Spiegel at the weekend. “We have to drastically reduce our dependence on authoritarian states. We can see that with Russia in terms of our energy supply. With China, we can start now.”
So why do Western giants like VW find themselves in such a pickle? Why could they not see this problem coming? The FT article claims that the Chinese sold the Westerners a fantasy when a few decades ago they needed Western capital & technology: “The German company was one of the first multinationals to enter China in the early 1980s, after Beijing relaxed rules on outside investment. The country, in the words of the then chief executive Carl Hahn, quickly became VW’s “motor for global [economic] expansion”.
With bicycles still the dominant form of transport and the domestic car industry producing just a few thousand cars a year, China courted VW. One former VW official remembers a trip to the country with German politicians in the early 1990s, which included a dinner with then premier Li Peng, who had been a central figure in the bloody suppression of the Tiananmen Square protests in 1989.
The Chinese politician told the delegation of executives and lawmakers that wealth would pave a path to liberalisation. “Li said: ‘we need economically stable conditions to allow more democratic openness’,” the person recalls. The premier added: “You can’t vote on an empty stomach.”
Thirty years later China neither needs Western capital nor Western technology. Indeed in many areas China is now technologically ahead of the West eg. Chinese EVs outsell Western EVs in China a by a massive margin. Clearly, there will be fireworks and the CEOs of Western companies who pumped capital into China for the last 30 years will be the first in the firing line: ““What should be putting the fear into German companies is the Russia story in the sense that you can see how risky investments in authoritarian great powers that are considering using their military to take over another territory are,” says Thorsten Benner, director of the Global Public Policy Institute in Berlin.
He adds: “The biggest trailblazer for a more realistic China policy in Germany has been Xi Jinping, because he is doing more than anyone else to convince us that the Merkel approach of becoming ever more dependent on China, and lying to ourselves that China is opening up . . . was wrong.””