BREMEN, Germany/TOKYO -- The German tabloid Bild has a reputation for being staunchly pro-American, but one particular article left a Chinese diplomat in shock.
The newspaper had blasted the Federal Association of the German Silk Road Initiative, or BVDSI, for unscrupulously teaming up with China despite its "aggressive economic policy" and "blatant human rights abuses." This struck a nerve in Du Xiaohui, the Chinese consul general in Hamburg, who complained at the association's launch event that some Germans have a "sick immune system" that makes them allergic to their country's largest trade partner for the three years through 2018.
Germany, Europe's largest economy, has in recent months taken a series of steps that discourage Chinese investment in its industries. Ambitions on both sides to nurture more competitive "champion" companies are complicating the relationship, as are persistent concerns about individual liberties and U.S. President Donald Trump's policies.
Though Berlin and Beijing do share common interests, China is encountering pushback at the farthest reaches of the Belt and Road Initiative.
The BVDSI exists to promote participation in the Belt and Road -- China's drive to build an infrastructure network that bridges Asia and Europe. A local banker attending the event with Du on March 29 reminded members that the city of Bremen, connected by a river to the North Sea, had flourished through free trade with Asia back when "Mr. Trump's America hadn't even been discovered."
Public opinion and the government, however, are turning against the group and Chinese companies that are hungry for European expansion.
Although German Chancellor Angela Merkel joined Chinese President Xi Jinping in calling for "win-win cooperation" at a summit in Paris in March, the reality is far from that, a BVDSI representative argued.
"Cooperation with China presents great opportunities for German small and medium-sized enterprises in all the economies along the BRI route, but there are strong headwinds from Berlin and the European Commission, with no improvement perceivable whatsoever," said Hans von Helldorff, the association's spokesman.
"The German government does not only reduce the opportunities by restricting Chinese investment in German firms," he continued, "but also by not delivering regulative measures that are needed for German SMEs to actively engage in the BRI countries."
In December, the government tightened the foreign trade law, allowing Berlin to intervene for the sake of public order or security if a non-European investor buys 10% of a company. The threshold had been 25%.
Then, in February, Economic Affairs Minister Peter Altmaier revealed a "National Industry Strategy 2030" designed to push back against powerful Chinese state-backed enterprises. Altmaier called for creating a state fund that could outbid any foreign investor targeting German companies with critical technology.
All this has coincided with a steep plunge in Chinese investment.
Research by Baker McKenzie and Rhodium Group shows China invested $380 million in Germany in the first half of 2019, down 75% from $1.51 billion a year earlier, as the U.S. warned allies to keep cutting-edge technology out of Chinese hands.
Europe as a whole saw a 26% decline, to $9 billion -- the lowest first-half total since 2015 and 83% below the peak of $53.9 billion in 2017. Baker McKenzie said the deal pipeline offers few reasons for optimism about the second half.
Beijing's controls on nonessential investments, from soccer clubs to real estate, are a significant factor in the decline. The rules were tightened last year in light of decreasing foreign exchange reserves and China's deteriorating current account.
Still, the numbers suggest a souring of a relationship that is important to both sides. For China, Europe is not only a lucrative export market but also an alternative source of technology and a political counterweight amid the trade conflict with the Trump administration. European companies, in turn, are eager to access the giant Chinese market.
"Western European countries are very keen to continue economic links with China," said Donghyun Park, principal economist at the Asian Development Bank. U.S. trade restrictions, he added, open up "new opportunities for European countries."
Yet investments in at least two crown jewels of German industry raised alarm bells.
In December 2016, Chinese appliance maker Midea Group acquired robotics company Kuka for 4.6 billion euros ($5.1 billion at the current rate). The marriage has been rocky: Kuka's annual sales dropped 7% to 3.2 billion euros for 2018, prompting 350 job cuts. Midea fired Kuka's longtime CEO Till Reuter late last year.
"Chinese acquisitions of global leaders in high-end manufacturing risk hollowing out Germany's Industry 4.0 strategy," Jost Wubbeke, an analyst with the Berlin-based Mercator Institute for China Studies, wrote in the run-up to the Kuka takeover, referring to next-generation "smart" manufacturing. "If China's buying spree in this sector continues at the current speed and volume, Industry 4.0 may end up being China's and not Germany's success story."
Those fears were hardly dispelled by the news in February 2018 that the chairman of Chinese automaker Zhejiang Geely Holding Group had become the biggest shareholder in one of Germany's brightest corporate stars -- Mercedes-Benz owner Daimler -- after quietly building a 9.7% stake.
There is also deep concern in the European tech sector that using Chinese technology or accepting Chinese shareholders could lead to companies being locked out of the U.S. market on national security grounds.
"We want to be very careful on the companies we are investing into, so they are able to sell into the biggest markets, which are the U.S. and Europe," said Mark Boggett, CEO of Seraphim Capital, a global venture capital that focuses on aerospace. "That's the reason why we are very cautious with Russia or China."
Boggett continued: "I'm not disparaging anything to do with the Chinese or Russians. But it's very difficult to see which company is private and which is government. ... We are trying to limit the risk as best as we can by not having these investors and limiting where we are investing."
Another move Altmaier made in July was aimed at not only protecting Germany's industrial base but making sure Europe has companies capable of battling the biggest rivals from China -- or anywhere else for that matter.
The economic minister teamed up with his French and Polish counterparts to weaken the European Union competition law. The catalyst was the European Commission's decision in January to block a merger between the rail units of France's Alstom and Germany's Siemens. This was to the obvious benefit of Chinese rolling stock giant CRRC, which has made no secret of its desire to expand in Europe.
Not everyone in Germany agrees with Altmaier. "The idea of nurturing champions is opposed by the SMEs, and it also lacks popularity with the academia," said Christian Schmidkonz, who studies China as a professor of international business at Munich Business School. "Indeed, Germany much too often has knee-jerk reactions to new phenomena from China instead of self-confidently focusing on its own strengths."
Beyond business, the issue of human rights is a minefield for European governments and companies. This is particularly true of Germany, which has sheltered Chinese dissidents and received a harsh rebuke from China's foreign ministry in May for granting refugee status to two Hong Kong independence activists.
In April, Volkswagen CEO Herbert Diess landed in hot water after stating at the Shanghai Auto Show that he knew nothing about "re-education" camps in China's Xinjiang region, where over 1 million Uighur Muslims are allegedly interned, and where VW runs a plant with local partner SAIC Motor.
Germany's biggest opposition party, Alliance 90/The Greens, insists Berlin should take a stand. "Our economic policy must become human rights-oriented, which means inter alia that any company involved in abuses, be it Chinese or German, must get banned from public procurement deals here," said Margarete Bause, the Greens' caucus speaker for human rights policy. "The German government bears great responsibility."
Yet, even if politicians wanted to untangle industrial ties with China, it would not be easy. Consider auto batteries.
China's biggest supplier, CATL, is building a plant for lithium-ion cells near Erfurt in eastern Germany. In late June it boosted its investment commitment to 1.8 billion euros, up from the initial plan of 240 million euros. BMW and Daimler are among the expected clients.
No German company produces batteries for electric vehicles.
"German automakers' demand for batteries is huge, given that they have numerous EV models lined up for entering the market from next year on," said Kai-Christian Moeller, a battery expert at the Fraunhofer research institute in Munich. "Even if the Europeans would team up now in earnest to produce the batteries themselves, it would take them at least five years, which is far too long for German automakers to wait."
Smaller European companies, meanwhile, look as eager as ever to reach China.
V-Next, a startup matchmaking platform under the Shenzhen Stock Exchange, saw the number of registered foreign ventures surge to 500 in the first half of 2019, from 40 in 2017. Many are European companies seeking Chinese investment and partners, especially from northern countries like Norway and Finland. "They say they don't need money, but they need a market," a V-Next official said. "Their populations and markets are small. They can sell technology to China."
While Chinese investment in Europe has slowed, Tracy Wut, Baker McKenzie's head of M&A for Hong Kong and China, thinks the pace will pick up again eventually. "There is still plenty of Chinese capital looking for a home globally," she said.
And ultimately, Trump's trade war, national pride and other considerations may take a back seat to corporate pragmatism.
German or otherwise, "business owners don't mind who will win" the trade conflict, said Enrique Quemada, chairman of ONEtoONE Corporate Finance, an M&A advisory company. "If they have a Chinese company who is willing to pay 12 times EBITDA, while all the other buyers are willing to pay 10 times EBITDA, they will sell to the Chinese."