Philippa Kaur

HABITS CAN be slow to form. But when they do, they can become entrenched. When workers headed home during the first lockdown of March 2020, they probably thought the break would last for a month or so. Had that been true, old routines would soon have resumed.
It is now ten months since many employees have made a regular commute into the office. New routines have taken root and those will be much harder to break. Some of these new habits are bad, and they may stem as much from managers as from workers.

Asana, a maker of office software, commissioned a survey of more than 13,000 knowledge workers (defined as those who mostly work at a computer) across eight countries. It found that, on average in 2020, employees were working 455 hours a year more than their contracted requirement, or around two hours a day. That overtime had almost doubled relative to 2019. And much of the excess may not have been necessary; workers complained about the amount of time they spent in meetings and video-calls, or in responding to messages.
Perhaps this forced communication is the result of manager anxiety. Fearful that remote workers will be tempted to slack, they have monitored their teams like an anxious parent who has taken a toddler to a swimming pool.
Or managers may have felt the need to look busy, prompting them to call more meetings than before. They may have trapped themselves in a cycle of futile activity—corporate hamsters on a wheel. Many managers complain of “Zoom fatigue”, as they drag themselves from one video-call to another, often keeping other participants waiting as they try to wrap up the previous meeting.
This bad news has a silver lining. Get rid of the needless meetings and productivity should improve. Perhaps managers will make it their new year’s resolution to ask the question, “Is this meeting really necessary?” Bartleby’s Law is that 80% of the time of 80% of the attendees at meetings is wasted. The lockdowns have provided ample evidence to corroborate your columnist’s hypothesis.

Research suggests that executives may spend 23 hours a week in meetings. Cut that time in half and think of how much more might be achieved. And that will be just as true when people return to the office as it is when they work from their kitchen table. The pandemic could provide a wake-up call on meeting futility.
The best habit developed during the pandemic has been flexibility. The ritual of the daily commute and the standard working day has been abandoned. And with it, the curse of “presenteeism”—the idea that, unless you are constantly visible, you are not working. Self-isolating workers have shown they will happily get on with their work, even when not under the beady eye of their boss.
A survey of personnel chiefs by Gartner, a research firm, found that 65% planned to allow employees flexibility on their working arrangements, even after vaccines have been distributed. They predicted that around half the workforce would want to return to the office, for at least part of the time.
Permitting this flexibility makes perfect sense. When lockdowns end, many workers may relish the chance to escape from their homes and see their colleagues in the flesh. They will be even happier if they can arrive at 10am one day, and 8.30am the next, if that suits their domestic requirements. And if they decide to work at home on Fridays, they will no longer feel as guilty as they might have done before the pandemic. The office can be a refuge, not a prison.
Employers will also take advantage of the new flexibility. Silvina Moschini, who runs TransparentBusiness, a workforce-management company, says that firms will change the way they scale up their operations, relying far more on freelancers, contractors and vendors than on full-time employees.
Handling a combination of remote workers and freelancers will require managers to acquire new habits. Ms Moschini says the key will be to develop “empathic leadership” that understands the varied working conditions of team members. This might involve sending small gifts; at the start of the lockdown, she sent slippers to her team so they could feel comfy (mentally as well as physically) working from home.
Contacting workers should not be a matter of a rigid schedule but rather akin to the sentiment that prompts children to check in with elderly parents every so often. Friendly, informal contacts are a new habit that managers must still hone.
Editor’s note: Some of our covid-19 coverage is free for readers of The Economist Today, our daily newsletter. For more stories and our pandemic tracker, see our hub
This article appeared in the Business section of the print edition under the headline “Creatures of habit” More

WHEN AMERICA slammed sanctions on Huawei, barring American firms from supplying the Chinese telecoms-equipment titan on national-security grounds, China’s state media predicted that the restrictions would spur innovation in the local technology industry. In time, they may well do. But for now, much of the innovating is taking place within the Chinese state as it experiments with a new system of control over Chinese business.
On January 9th the Ministry of Commerce struck back against American sanctions. It said that it may force Chinese companies to stop complying with “unjustified extra-territorial application of foreign legislation” (in Beijing’s eyes, that means virtually all of it). It also gave Chinese firms the right to sue foreign and domestic companies that have complied with some foreign sanctions for compensation.

The measures are part of a broader trend, as the Communist regime led by Xi Jinping adopts an increasingly muscular stance towards the private sector. In November it halted the $37bn initial public offering of Ant Group, the payments affiliate of Alibaba, China’s biggest e-commerce empire, two days before the firm was due to debut in Shanghai and Hong Kong. The same month the State Administration for Market Regulation (SAMR), created in 2018 from three regulators, issued rules to rein in e-commerce giants and, in December, it opened an antitrust investigation into Alibaba. On January 10th the Communist Party’s main body for political and legal affairs vowed to take trust-busting more seriously.
The antitrust buildup has spooked investors—Alibaba’s share price has dropped by a quarter since October. And the barrage of new rules creates uncertainty for business in two other ways. First, who is in charge of one of the world’s biggest companies. Jack Ma, the tycoon who co-founded both Alibaba and Ant, has not been seen in public since October, when he likened Chinese state banks to pawn shops. He owns just 4.8% of Alibaba and stepped down as chairman in 2019, but is thought to remain firmly in control of strategic decisions. Even if he does resurface soon, as other AWOL tycoons have in the past, after showing contrition and “assisting” investigators, the episode sends a chilling signal.
The blowback could yet destabilise Alibaba in unexpected ways. Like many mainland tech firms, it uses an offshore legal structure that allows foreigners to invest in Chinese assets that would otherwise be off limits. The arrangement has been tolerated by regulators, without being fully endorsed by them, for two decades. But last month SAMR fined Alibaba and Tencent, another internet behemoth, for not seeking approvals for past acquisitions. If the firm is subject to a sustained legal onslaught by regulators it could raise doubts about the sustainability of these complex foreign-ownership arrangements—a situation that would further spook outside investors in tech groups in China.
The other immediate source of instability is the battle between the superpowers over their extraterritorial legal reach. In 2019 the commerce ministry dabbled with this by creating a list of “unreliable entities”. So far it has not been populated with any prominent foreign companies. Rumours that it would include HSBC, a British bank that played a role in an American investigation into Huawei, turned out to be wrong. If the commerce ministry acts more decisively this time, its proposed measures could pose an impossible dilemma for Western multinationals in China: either face fines in America for breaking sanctions, or end up in a Chinese court. Wang Jiangyu of the City University of Hong Kong imagines that the new rules will force global businesses to do something they would love to avoid: take sides.

The measures are a mixed blessing even for Chinese firms, which they are ostensibly designed to assist. Many firms could, it is true, seek damages from foreign partners. But some Chinese firms may be damaged themselves—for instance, mainland banks operating abroad which have abided by Uncle Sam’s sanctions over the years in order to avoid fines and maintain access to the dollar-clearing system, the backbone of global finance. Chinese lenders that have been forced to shut Hong Kong accounts for blacklisted Chinese companies and individuals could come under fire. Carrie Lam, Hong Kong’s leader, who has overseen a crackdown on pro-democracy activists, has said she has cash piling up in her apartment, unable to deposit it in a bank as a result of American sanctions against her.
In the short run, concludes a trade lawyer in Washington, DC, the commerce ministry’s rules are “more likely to sow discord than actually help Chinese companies”. This is not exactly conducive to innovation. Nor is the long arm of the Chinese state, especially as it grows ever longer and beefier. More

KITEX GARMENTS is one of the largest private companies in Kerala, a communist-led state in southern India. Its embrace of corporate social responsibility (CSR) is enthusiastic. In the fiscal year ending in March 2020 it allocated 5.3% of its average profit over the past three years to public roads, schools, housing and safe drinking water. That makes it a poster-child for an Indian law passed in 2013, in the aftermath of a corporate fraud scandal, that requires Indian companies to divert at least 2% of annual profits to CSR projects.
Arguments leading up to the law’s approval pitted NGOs and populist politicians, who supported it, against India Inc, which said it merely created a new tax. Several big corporate contributors argued that philanthropy would be damaged by government involvement. A new study by Shivaram Rajgopal of Columbia Business School and Prasanna Tantri of the Indian School of Business suggests that last group has a point.

The researchers sifted through the filings of 39,000 companies to see how behaviour changed. Advocates of the law will be pleased to see that the sum the average company channelled annually to CSR efforts rose slightly in fiscal 2014-19, compared with 2009-14. It was not, however, an unalloyed triumph. Kitex, with its consistently high charitable contributions, turns out to be an exception.

Of the 2,152 companies that gave more than 5% of profits before the law went through, average real contributions fell by half (see chart). In place of spending on social causes, Mr Rajgopal and Ms Tantri found increased spending on advertising.
Economists studying CSR spending posit three possible incentives for it: genuine altruism; private interests of managers who enhance their own position with corporate cash; and improved performance and valuations as a consequence of a burnished reputation among customers and better morale among employees.
If the first two were at work, Mr Rajgopal and Ms Tantri speculate, India’s biggest spenders would not have cut back: setting a minimum payment would impede neither altruism nor benefits to managers. Instead, the reduced payments suggest that past spending was mostly about “signalling value”. Once they became obligatory, CSR payments were seen as merely another component of regulatory compliance. Or, as Mr Rajgopal concludes, “The halo was lost.”
The question left open by the study is where CSR money goes and whether that too has been affected by the law. Many Indian businesses are family-controlled. Their CSR contributions often go from the companies to charitable entities also controlled by the families. India’s largest company, Reliance Industries, for example, directed 94% of its 2019 contributions to the Reliance Foundation, chaired by Nita Ambani, the wife of Mukesh Ambani, Reliance’s largest shareholder and boss. To its credit, Reliance discloses these contributions. Many others are less forthcoming.

Where CSR money ultimately ends up is often unclear. Some may flow into India’s political system. Kitex is again the exception. The company’s allied do-gooding arm is quite transparent about supporting political candidates and has spoken out about its efforts to do so in response to past government failures. This, it would argue, is the socially responsible thing to do. ■
This article appeared in the Business section of the print edition under the headline “Giving and taking” More

TO THE GWICH’IN people, the coastal plain of the Arctic National Wildlife Refuge in Alaska is “the sacred place where life begins”. To environmental campaigners, it is a rare habitat that must remain protected, home to caribou, polar bears and migratory birds from six continents. To President Donald Trump, it is a promising source of oil wealth and American energy security. To energy companies, it is a risk not worth taking.
On January 6th, after four decades of fighting over whether to allow drilling in the refuge, the federal Bureau of Land Management (BLM) held an auction for oil leases on the coastal plain. The state of Alaska and two small local companies were the only bidders—offering just $14.4m for about half of the more than 1m acres for sale—with the state hoping to find an oil company to drill in future.

It is a fitting final chapter in Mr Trump’s campaign to unleash drilling on federal lands, characterised by maximum bravura and mixed corporate impact. Companies have happily poured capital into areas with low costs and ample reserves. Chevron, Occidental and Concho Resources, to name a few, have invested in federal property in New Mexico, home to part of the rich Permian shale basin. Joe Biden has said he would ban new permits, prompting firms to secure acreage before he takes office on January 20th. The number of new permits on federal lands was 52% higher in 2020 compared with 2019, according to Enverus, a research firm. New Mexico was abuzz with activity.
Yet broader interest in Mr Trump’s auctions has been lukewarm. Even before covid-19 rocked the energy industry, poor performance was prompting executives to become choosier about new projects. When they do invest, says Artem Abramov of Rystad Energy, another research firm, “the industry has very little interest in new conventional projects that are unproven.”
That has helped ensure that many federal lands remain untapped, despite Mr Trump’s best efforts. During his presidency the BLM has offered more than 25m acres of onshore public lands for oil and gas leasing, according to the Centre for Western Priorities, a conservation group. Only 22% of those acres have found takers. Of these, a fifth have been purchased at $2 an acre.
Mr Trump’s enthusiasm for Arctic drilling is matched by that of Alaska’s Republican senators and allies in Congress. The tax reform of 2017 required two big auctions of leases in the refuge within seven years, with the first mandated by late 2021. Even so, the industry’s appetite for Alaskan projects, even outside the refuge, has been weak. Many big companies had lost interest in the state well before the pandemic, lured by cheaper prospects elsewhere. Last year BP, a British energy giant, sold its Alaskan assets to Hilcorp, a smaller private company. Alaska’s oil production in 2019 was less than a quarter of its level in 1988.

To an oil executive deciding how to allocate a limited capital budget, the refuge itself looks as appetising as a rancid stew doused with arsenic. Estimates for the refuge’s reserves range wildly, from 4.3bn barrels to 11.8bn.“We don’t know the size of the resource, the cost is uncertain and the regulatory framework is uncertain,” notes Devin McDermott of Morgan Stanley, a bank.
Less in doubt is that litigation will continue. On January 5th a federal judge rejected an effort by native Alaskans, the Natural Resources Defence Council, the National Audubon Society and other NGOs to halt the auction. But broader legal challenges will drag on. Banks including Goldman Sachs and JPMorgan Chase have vowed not to lend to any oil project in the refuge. Mr Biden opposes drilling there and could obstruct development. If his efforts fail, lease-holders will have paid a low price. Bids averaged less than $26 an acre, barely above the BLM’s minimum of $25. Mr Trump’s pursuit of energy dominance would then have a characteristically strange postscript: America’s most pristine natural habitat, sold for a song.■
This article appeared in the Business section of the print edition under the headline “Thanks, but no thanks” More

AFTER A pandemic lull, $900bn-worth of deals were announced in late 2020. This year got off to a hot start, with mgm Resorts’ $11bn bid for Entain, a British betting-shop operator, and a potential $18bn tie-up of Gojek and Tokopedia, two Indonesian tech darlings.■

This article appeared in the Business section of the print edition under the headline “An M&A revival” More

THANKS FOR contacting me for an update on the international corporate-tax landscape. For global tech firms like yours, the headlines make worrying reading. A fragile transatlantic truce has been shattered. France has resumed collecting the digital-services tax it introduced in 2019, targeting tech firms (and catching others in the net). The outgoing Trump administration has lined up retaliatory tariffs on $1.3bn of posh French handbags, cosmetics and more, ready to pull the trigger. If America acts, the European Union may strike back against American products of equivalent value.
America complains that national tech taxes unfairly target its digital giants. It had better get used to them. Such levies, typically 2-3% of local sales, are spreading as governments try to claw back taxing rights lost in a dysfunctional global system. Among those joining France in implementing or mulling a digital tax are Brazil, Britain, India and Italy. An EU-wide version has been mooted.

You don’t need me to tell you that this is just one front on which big tech is being assailed, alongside alleged anticompetitive behaviour, the handling of user data and the policing of speech. Employees are growing restless, too. I imagine you saw this week’s news from across town about Alphabet’s geeks forming a union.
Amid this onslaught, it is worth keeping a sense of perspective. The winds on tax are shifting from favourable to, with luck, no worse than fair. We are coming off a golden age for tax-minimisation. Breakneck globalisation allowed multinationals to replace fears of double taxation with the joys of double non-taxation, using tax havens to game the system. By exploiting mismatches between different countries’ tax laws, taxable profits could be made to vanish. No wonder corporate tax departments swelled, as more brainboxes were hired to find loopholes. You have enough tax lawyers these days to fill a small concert hall (were that allowed). You and other tech firms were some of the craftiest innovators: the five largest Silicon Valley giants paid $220bn in cash taxes over the past decade, or just 16% of their cumulative pre-tax profits.
This era could not last for ever. Already, some tax gymnastics are no longer possible, owing to a multilateral clampdown brokered by the OECD club of industrialised countries after the global financial crisis. The “Double Irish with a Dutch Sandwich”, a popular dish that channelled profits through EU-based shell subsidiaries to a tax haven like Bermuda, is off the menu. So are “hybrid mismatches”, whereby differences in two or more countries’ treatment of an instrument or type of entity could be exploited to magic away taxable income or create a long-term tax deferral. The most egregious tricks involving intra-company loans have also been snuffed out. Governments, especially in Europe, have grown teeth in going after what they perceive as aggressive avoidance; Apple, don’t forget, is still tussling with Brussels over a $16bn back-tax demand. And now Facebook reportedly wants to close its Irish holding companies.
That still leaves plenty of scope to bring down tax bills, in particular through creative use of intangible assets, such as patents and other intellectual property. Balance-sheets of digitally focused firms like yours are stuffed with these. The tax-free route via the Caribbean has grown trickier, but you can still get the rate down to single figures using the EU’s haven-lites, including Ireland and Luxembourg. Governments, including in Europe, that have excoriated tax-shy firms in public have been quietly cooking up new schemes to attract investment, such as “patent boxes”.

Better still, “transfer pricing” also remains largely intact. It has underpinned global tax policy for decades, allowing firms to move profits to lower-tax territories by, in essence, pretending that their subsidiaries deal with each other at arm’s length. From the (patchy) data available, the amount of profits being shifted around hasn’t fallen much. According to the Tax Justice Network, a pesky NGO with gratingly solid number-crunchers, multinationals continue to short-change governments by around $250bn a year.
Covid-19 is a worry, to be sure. The huge holes it has blown in budgets could send people reaching for the pitchforks, demanding all pay their “fair share”. And what better target than the tech giants that have “made out like bandits” in the pandemic? Reflecting the mood, some countries have banned firms registered in tax havens from receiving bail-out funds. Self-styled tax-fairness campaigners have been throwing emotionally charged statistics around, for instance that the lost $250bn is equivalent to 20m nurses’ salaries.
With risks growing, you may want to wrest control of this issue personally from your tax department, which cannot see the pitchforks for the profit. You should lobby for a multilateral, OECD-led deal. Why? For starters, big tech could do with an armistice in at least one of its global battles with regulators—and the antitrust and data dust-ups will grind on relentlessly for years.
Yours, Lou Pohl
As important, a global deal is the least bad option for business. It would bring in a minimum global tax rate, but the bar is likely to be set low, at perhaps 12.5% of profits—below the average cash-tax rate you actually pay as a big American tech firm these days. The deal’s other pillar—making digital firms liable for tax in markets where they have customers but lack a physical presence—will make you twitchier. But even its champions accept it is unlikely to skim more than $5bn-10bn in extra revenue globally once all the horse-trading is done. Much will depend on the incoming Biden administration, which has yet to signal its intentions.
Unless it does, and soon, a draft accord by mid-2021 looks optimistic. Push for it nonetheless. The alternative looks ugly: a global tax tit-for-tat as national tech levies of varying severity become the norm, with overlapping tax claims and a possible return to pre-globalisation double taxation. So back a global deal, and trust that it will be relatively modest. The rules of the tax-avoidance game may be changing. But there’s still a game.■
This article appeared in the Business section of the print edition under the headline “The game goes on” More

FIAT CHRYSLER AUTOMOBILES (FCA), an Italian-American carmaker, and PSA Group, the French owner of Citroën and Peugeot, do not like to dwell on their shared past. When PSA acquired Chrysler Europe in 1978 for a nominal $1 it picked up some struggling British and French marques and a heap of debt. That tie-up crashed a few years later with the demise of Talbot, the brand created from these motoring scraps. On January 4th shareholders of both firms voted to give it another go, acceding to a mega-merger agreed in 2019. Hopes seem higher this time. The name of the combined firm, Stellantis, is derived from the Latin for “brightens with stars”.
Stardust is sadly lacking from an industry that, along with many others, has taken a beating in the pandemic. But the creation of the world’s fifth-largest carmaker by vehicles produced (see chart) is well set to deal with the effects of covid-19—and to navigate the other difficulties facing the automotive business.

The pandemic has sent screeching into reverse an industry that was already going backwards, as demand slumped in car-mad China. Annual worldwide sales fell from 94m units in 2017 to 90m in 2019. Covid-19 depressed sales by 15% in 2020, to 76.5m, according to IHS Markit, a data firm.
On the bright side, they are expected to rebound sharply this year. The signs are encouraging. Monthly Chinese sales have exceeded last year’s in the second half of 2020. General Motors has led America’s recovery, with sales up by 5% in the fourth quarter, year on year. And electric vehicles are booming, helping Tesla make good on Elon Musk’s pre-pandemic forecast of delivering 500,000 cars in 2020.
Despite the rebound, the industry is not likely to get back to its size in 2019 before 2023. What does that mean for Stellantis (whose largest shareholder, Exor, part-owns The Economist’s parent company)? Size will let it spread the costs of new technology. The savings, forecast at €5bn ($6.2bn) a year, are more important than ever while the industry recovers. Cash reserves will be shored up by the decision of FCA’s investors in September to accept a reduction in the special dividend that was part of the deal, by nearly half, to €2.9bn.
Stellantis also has Carlos Tavares. He has already turned round two loss-making firms: PSA, which he has led since 2014, and then Opel, acquired from General Motors in 2017. His task now is to revive the Fiat brand, which is dependent on Europe and was starved of investment after the merger with Chrysler in 2014. Only the ageing 500 supermini is selling well.

The reticence of both Mr Tavares and Sergio Marchionne, FCA’s late boss, to rush headlong into electrification may also prove wise. Other carmakers had poured cash into electric cars that did not sell well. Now that they are becoming more popular, Stellantis’s plans, including PSA’s new architecture for electric vehicles due by 2023, have more chance of success.
The deal also affords the opportunity to reset strategy, says Jefferies, a bank. The firms are strong regionally, PSA in Europe and FCA in America, but lack global clout. Neither has much presence in China. And in an industry where complexity is now a dirty word, Stellantis will have 15 brands. Volkswagen’s 11 are seen as unwieldy.
Mr Tavares needs to make Jeep a worldwide profit machine like VW’s Audi and Porsche, and to decide what to do about underperforming premium brands. Maserati and Alfa Romeo have defied numerous relaunches to stay peripheral. DS is profitable but has little presence outside France.
Stellantis’s boss must also overcome the clashes of culture that have brought down many a car-industry merger. Marchionne made FCA work through force of personality and the width of the Atlantic, which let him keep the subsidiaries at arm’s length. Mr Tavares does not have that luxury, or Marchionne’s charisma. But his stellar track record shows he has the character to make it happen.■
This article appeared in the Business section of the print edition under the headline “A Stellantis is born” More

THE IDEA of “political change through trade” has lost its appeal across much of the West as China has grown more, not less, authoritarian under President Xi Jinping. That has not stopped Karl Haeusgen, chairman of Hawe, a maker of hydraulic pumps, from believing in the long-term success of its German version, Wandel durch Handel.
Mr Haeusgen has a self-interested reason for optimism. China accounts for about one-quarter of Hawe’s sales. This will grow substantially once a 25,000-square-metre factory in Wuxi near Shanghai is finished. On January 1st Ye Jiang, an engineer who has worked for the family firm since 1999, joined its management board as its first Chinese member.

Many German bosses are in a similar situation. Goods trade between the EU and China grew eight-fold between 2000 and 2019, to €560bn ($626bn). In 2019 Germany accounted for 37% of that, or €206bn. In the first seven months of 2020 German business helped China edge out America as the EU’s largest trading partner. Between January and September China’s share of German exports rose by one-eighth, year on year, to nearly 8%. China is also Germany’s top supplier; its share of German imports rose to more than 11% in the same period, from less than 10% in 2019.

Although the most China-dependent American companies, like its casino operators and chipmakers, get more of their revenues from the Asian giant than the most exposed German firms, German Sino-dependency is concentrated in its biggest and most powerful industries (see chart). Of Germany’s 15 most valuable listed firms, ten derive at least a tenth of revenues from China, according to The Economist’s rough estimates; in America, less than half do.
That is why German business applauded the hasty conclusion last month, in the last days of Germany’s rotating presidency of the EU Council, of an investment treaty between the bloc and China. The deal is meant to grant European firms better access to the Chinese market by, for instance, removing the requirement that they form a joint venture with a local firm and creating a more level playing field for investors.
Deutschland AG’s peculiar reliance on China also helps explain its reluctance to heed the German government’s pleas to diversify markets and supply chains away from the Asian giant. Indeed, many German firms, from medium-sized Mittelstand stalwarts like Hawe to its bluest chips, are doubling down on the Middle Kingdom. Hahn Automation, which makes industrial robots, plans to invest millions of euros in new Chinese factories and boost its revenues in China from 10% of the total to 25% in the next five years. BASF is building a gargantuan $10bn plastics factory in the southern province of Guangdong, the biggest investment in the chemicals giant’s 155-year history. “We have to play ball with the Chinese,” says Joerg Wuttke, the German head of the EU chamber of commerce in China. “If you are not at the table, you are on the menu,” he warns.
The loudest cheerleaders are in Germany’s car industry. “China is the present and the future of German carmakers,” says Noah Barkin of Rhodium Group, a research firm. As the world’s biggest market, China accounts for two in five cars the Volkswagen Group sells globally. Without China it would have been hit harder both by the “Dieselgate” emissions scandal and by the pandemic. China is the biggest foreign market for BMW, a Bavarian rival, whose sales there rose by 31% in the third quarter, year on year. In December Ola Källenius, boss of Daimler (in which two Chinese carmakers hold a combined 15% stake) hailed a “remarkable” recovery in China, the largest and most lucrative market for its Mercedes-Benz brand, whose sales grew by double digits for six straight months.

German carmakers are also becoming more reliant on China for their capacity to innovate, notes the Mercator Institute for China Studies, a think-tank. In September the new iX3 electric car rolled off the production line in Shenyang, where it was also wholly developed by BMW and its Chinese state-run partner, Brilliance Auto. The joint venture also opened a new battery factory in the northeastern city. Volkswagen and its Chinese partners pledged to invest €15bn into e-mobility in China by 2024. VW recently bought a stake in Gotion High-Tech, a maker of batteries, to bolster its “electrification strategy in China”. Daimler’s latest annual report calls China “a significant market for new technologies”.
No wonder carmakers are genuflecting before China’s Communist Party. According to the Süddeutsche Zeitung, a newspaper, in 2012 Volkswagen opened a loss-making plant in the western city of Urumqi, in exchange for permits for new, lucrative factories on the eastern coast. VW denies the accusation. It has kept its Urumqi plant running, despite pressure from activists and politicians in America and Europe to stop doing business in Xinjiang province, where the authorities have been persecuting the Uyghur Muslim minority (see article).

Some voices in corporate Germany are worried that this is short-sighted. Two years ago the BDI, one of the two main German industry associations, published a paper outlining its concerns about high barriers to entry, state subsidies to local firms and other distortions in the Chinese market. Although it now praises the new investment treaty, the BDI warned that its members should be under no illusion: even once the pact is ratified by the European Parliament and implemented, German firms will not have truly free access to the Chinese market.
Chinese firms are also increasingly competing with German ones, particularly in the sort of specialist machinery manufactured in the Mittelstand. China is already the world’s second-biggest exporter of such kit. With high labour costs at home, “innovation is our only competitive advantage”, says Ulrich Ackermann of the VDMA, an association of machinery-makers. And that advantage is being eroded as more Chinese firms follow its electric-car industry in becoming more sophisticated.
German firms’ relationship with China has therefore become “a constant walk on a tightrope between systemic competition and business partnerships”, says Friedolin Strack of the BDI. No one believes in “political change through trade” in the foreseeable future, admits Wolfgang Niedermark, who until last year headed the German chamber of commerce in Hong Kong. But, it seems, German bosses still believe in trade, through all the political change.■
This article appeared in the Business section of the print edition under the headline “Riding high” More