The decline of German manufacturing

The second China shock is top of the agenda among European manufacturing businesses and in political circles. It describes the trend for Chinese companies to compete with European manufacturers in high-tech goods in their European home markets as well as third countries. And this seems to hurt European manufacturers badly, in particular German ones.

The Kiel Institute for the World Economy measured how much the market share of Chinese companies and EU companies has changed in third markets in the ten years between 2012-14 and 2022-24. The chart below on the left shows that apart from a few goods like leather goods (mostly luxury items like handbags), art and weapons, EU manufacturers have lost market share in third countries while Chinese manufacturers have gained market share. The chart on the right-hand side translates the change in export growth rates to these countries to show how much faster Chinese exports have grown than European ones.

Change in market share (left) and change in total exports (right) in third markets

Yet, while European manufacturers on average have lost market share, exporters from some countries have lost more than others. The chart below left shows how much more exports from Germany have changed than a proportional change in line with the European average. The red triangle shows goods that have seen their market share drop more than the European average. As you can see in the table on the right (column titled ‘Excess’), German manufacturers have lost ground in their core strengths, from cars to machinery, electrical equipment, to optical and medical equipment.

Germany loses market share particularly fast

Compared to other European countries, German manufacturers lose market share faster and across a wide range of goods. And this, according to the authors (and I largely agree), hints at a major problem that many manufacturers in Germany are still denying, in my view: Germany’s manufacturing output has been overtaken by Chinese goods not just in price but also in quality and innovation.

And tariffs won’t help manufacturers survive if they are not innovative enough. Heavy investment in technologies of the future is needed, but you just have to look at the state of the German automotive industry to realise that they are not doing that at all.