Historically, German investments in China have significantly exceeded Chinese investments in Germany. However, fears over Chinese investors buying up European/German companies have resulted in stricter M&A regulations in Europe in the times of Covid-19 to protect companies from hostile takeovers. Could rapid Chinese economic recovery and increasingly tense China-US trade relations lift Chinese FDI in a post Covid-19 setting?

1. Trade and investment overview

China was Germany's most important trading partner for the third consecutive year in 2019; bilateral trade totalled €205.9 billion, comprising exports to China of €96 billion and imports from China of €110 billion (GTAI1). Considering the trade balance in isolation, the relationship is roughly in equilibrium.

Importe und Exporte von China und Deutschland

Foreign direct investment, however, tells a different story: around 5,200 German companies in China employ 1.1 million people (2019)2. By contrast, roughly 700 Chinese companies operate in Germany, employing 58,000 people (2017)3.

While German accumulated direct investments in China amounted to €81 billion in 2017, Chinese investments in Germany from 2014-2019 totalled $39.9 billion. Of this, a record approx. $12 billion was invested in Germany in 2018, driven by a few major transactions including Geely's purchase of a 9.69% stake in Daimler for $9 billion4. This contrasts starkly with 2014 and 2015, when FDI was in the lower single digits5. In a broader perspective: direct investment in Germany in 2018 totalled €540 billion, with €99 billion coming from the US alone (18.3%). These figures challenge the view of a potential sell-off of German companies to Chinese investors. Further, the numbers of acquisition and equity deals continuously decreased from 40 to 33 (2017-2018)6 with a sharp decline to 25 in 20197.

Notwithstanding recent developments and China's ranking as number six in greenfield and M&A deals in 20188, we see upside for Chinese M&A activities overall:

2. Investment rationale, implications and past limitations in Germany

Previous Chinese M&A activities in Germany mainly targeted inorganic growth and expansion alongside core business operations. The upcoming 14th five-year plan and the global expansion strategy will encourage Chinese investors to focus on the key reasons for investing in Germany:

  • access to the German market to expand distribution channels;
  • further development of domestic brands and product portfolio;
  • diversification of investments and
  • access to technology and skilled workforce. 

According to the latest KPMG study, 77% of Chinese companies use their German subsidiary as their European headquarters to tap into regional markets. According to survey participants, Germany is key due to its diverse sectors (e.g. automotive, advanced manufacturing, consumer goods, healthcare, etc.) and its favourable business environment. A prime example is Joyson Electronics, a listed automotive supplier on the Shanghai stock exchange, which successfully acquired majority stakes in German automotive suppliers in 2011 and 2016 and has since added to acquisitions in Europe. 

Despite ongoing difficulties by Chinese investors in the EU, the willingness to invest appears unaffected. A CCCEU China Chamber of Commerce to the EU study reported that while 43% of Chinese companies assessed their economic situation in Germany as good or very good prior to the Covid-19 outbreak and 52% have yet to turn a profit in Europe, the same percentage deems the overall business environment to have improved; more than 60% plan further investments in the EU. The strategic rationale has shifted: while past investment decisions were driven by price and affected by the limited availability of M&A targets, now the focus is on investments to capture competitive advantage or to gain market access.

Nevertheless, management and culture need to be aligned: owing to the less dominant Chinese management style, 63% of Chinese-invested companies in Germany feel very or rather independent. Long and irregular information flows, amplified by cultural barriers in language and business etiquette, exemplify the lack of strong leadership from the Chinese headquarters. Another study insight is the uncertainty felt by Chinese investors regarding the geopolitical and regulatory environment in the EU.

3. Business impact of coronavirus on foreign investments in Germany/Europe

The coronavirus pandemic coincided with measures by European governments to tighten restrictions on foreign investment, e.g. lowering the security screening threshold from 25% to 10%, and the introduction of similar measures by various Member States such as Sweden.

The European Commissioner for Competition, Margrethe Vestager, announced plans to protect struggling businesses during the pandemic and urged Member States to build stakes to block Chinese takeovers. Nevertheless, most participants in the CCCEU study consider the investment screening regulation has had no impact so far or they are uncertain and consider it difficult to evaluate. 

While infrastructure or public safety-related industries are affected by the new regulation, evidence of investment screening deterring Chinese investors is not apparent in outbound investment activities. Foreign investment in Europe remains an opportunity for China and Europe. This is particularly true for distressed industries and for acquisitions, where funding produces a turnaround, further growth and protects/creates jobs. 

Many potential Chinese buyers appear to be state-backed enterprises, which can trigger the lower threshold for screening mechanisms in critical infrastructure and defence-related companies. The recent EU-China Summit prompted discussion about further limitations for state-owned enterprises. However, as of this article's publication date, regulations governing foreign capital impact only a few investments and are not a barrier to Chinese investors acquiring businesses. The impression that Chinese M&A deals are no longer welcome is clearly distorted: the trend points to agreements that are mutually beneficial. This especially applies to greenfield and brownfield investments, with Chinese investors being welcomed where opportunities benefit both sides, i.e. in healthcare, renewable energy, building and construction, industrial manufacturing and the automotive sector. 

China's Covid-19-related economic slowdown in spring was followed by a decline in Chinese deal-making. Early data for H1 2020 show the lowest outbound deal volume from China in almost ten years. Yet with the Chinese economy rapidly recovering and the crisis having spread worldwide, discounted transaction multiples create buying opportunities in Europe and elsewhere. In July 2020 for instance, the distressed German luxury kitchen manufacturer Poggenpohl was acquired by JOMOO, a leading sanitary and kitchen-fitting manufacturer from China, which aims to expand its product mix and enter the European market. 

Containing the virus has dominated policy; but as China's economy recovers, the focus will shift to the upcoming 14th five-year plan and to China-US trade relations. The strategic imperative to invest in key industries and to convert foreign assets (from US government bonds to equity investments) is expected to trigger a new wave of Sino-German transactions in strategic sectors similar to Alibaba – Artisan (2019).

4. Summary

Although the German-China trade balance is more or less in equilibrium, German investments in China clearly outweigh Chinese investments in Germany. While recent EU regulations indicate a more critical attitude to foreign takeovers, most industries attracting Chinese investors are unaffected by this. Covid-19 effects are expected to have a temporary impact on inward investment but are unlikely to diminish Germany's attraction over the medium term.*

* Legal services are provided by KPMG Law Rechtsanwaltsgesellschaft mbH.

In cooperation with KPMG Law Rechtsanwaltsgesellschaft mbH, Boris Schilmar, Head of China Country Practice Legal, offers you support.



2 Deutscher Industrie- und Handelskammertag 2018

3 KPMG Business Destination Germany 2020: https://home.kpmg/de/de/home/insights/2020/03/business-destination-germany-2020.html

4 Kiel Institute For The World Economy


6 Institut der Deutschen Wirtschaft Köln 2019

Wirtschaftsdienst EU 2020

8 KPMG Business Destination Germany 2020: http://home.kpmg/de/de/home/insights/2020/03/business-destination-germany-2020.html