(Yicai) Jan. 19 -- 2016 marked the peak of Chinese business investment in Germany, with 45 mergers and acquisitions, including the acquisition of industrial robot manufacturer Kaku by Chinese home appliance giant Midea Group.

A decade later, Germany’s investment environment has become a lot more challenging, and the risks faced by Chinese firms going global are increasing. Against this backdrop, their investment logic in Germany should shift from scale expansion to more meticulous cultivation of value.

Since 2016, Germany has continuously revised its Foreign Trade and Payments Ordinance, known as AWV, to strengthen the security review mechanism for foreign direct investment. This change did not occur in isolation but was carried out within the framework of the European Union’s institutional and strategic system, becoming an important governance tool in the EU’s economic security and industrial policy.

The 17th revision of the AWV in 2021 significantly expanded the cross-industry review list, bringing key areas such as artificial intelligence, semiconductors, robotics, quantum technology, and cybersecurity into the regulatory scope. These are precisely the areas where Chinese companies are investing.

In 2023, the EU released the European Economic Security Strategy, identifying leakage of key technologies, reliance on supply chains, and geopolitical risks as its key concerns. Against this backdrop, Germany’s FDI review not only assesses whether a transaction directly threatens national security, but also pays closer attention to the position of the target business in the technology and supply chains, as well as its technological and capital links to third-party countries.

As the FDI review has become stricter, compliance risks for Chinese firms in Germany have also increased and are expanding from “transaction compliance” to “ongoing operation and responsible governance.”

In terms of environmental protection, the EU introduced the European Green Deal in 2019 and the Fit for 55 package in 2021, significantly raising the carbon compliance requirements for enterprises doing business in the bloc. For Chinese companies in Germany, calculating carbon emissions, fulfilling disclosure obligations, and bearing emission reduction costs have become key factors affecting their long-term profitability.

In terms of data security and privacy protection, the EU introduced the General Data Protection Regulation in 2018. Since then, Germany has continuously strengthened its data supervision, and if Chinese enterprises fail to establish a compliant governance system for cross-border data transmission, they may face heavy fines and business restrictions.

Shift in Chinese Investment Logic

Ten years ago, the main goal of Chinese corporate investment in Germany was to acquire high-end technologies, international brand reputation, and global sales channels through big M&A deals to achieve rapid development.

That investment strategy has completely changed now. Firstly, Chinese firms align their investments with European policy guidance to focus on compliance-friendly sectors. Secondly, they gain trust and market recognition through hiring local staff, investing in research and development, and co-building supply chains. Thirdly, they use Germany as a key node in near-shore development of global supply chains, to reduce their reliance on a single market.

Chinese companies should consider shifting the main areas of their investment in Germany from traditional high-end manufacturing to new energy, industrial software, and other green technologies and digital economy fields. They should also focus on complementary cooperation with strong, emerging local firms in niche market segments.

The investment structure should shift from gaining a controlling stake and M&As to a diversified combination of minority equity investment, technology licensing, and greenfield investment. The financing model should also change from relying on China’s policy-based funding to German syndicated loans or bringing in European industrial funds to cut the review risk.

Chinese enterprises should also set up a full-cycle risk management system that comprehensively covers various requirements such as FDI review, subsidy declaration, carbon emissions, and data protection, as well as using insurance tools and localized operations to hedge against systemic risks.

Finally, Chinese firms should move beyond clustering in western Germany and explore the lower-cost regions in the East, while using the country as a base to expand their near-shore supply chains to Central and Eastern Europe.

(The author, Zhu Yufang, is a researcher at the German Research Center and the Center for Sino-German Cultural Exchanges at Tongji University.)

Editors: Dou Shicong, Tom Litting