The clamor for the introduction of a German Supply Chain Act was great. Between 2019 and 2021, the then CSU Development Minister Gerd Mueller got it off the ground. It has been in force since Jan. 1 and most German companies seem to be prepared. We take a closer look at the first effects of the new regulation.
Some companies currently have to consider whether importing from China is worthwhile if they have to hire special software or even a human rights officer. However, most companies have no problems meeting the requirements. This is the result of a survey by the Chamber of Foreign Trade in Beijing. But perhaps the excitement is only postponed. Because the Supply Chain Act at the EU level is in the making and is expected to be much stricter.
Many EV manufacturers in China are worried. Many of them will not live to see their vehicles ready for the market – or they are already out of the picture. The state-subsidized EV market, with more than 300 suppliers at last count, is consolidating, as Christian Domke Seidel reports in his Feature. This is good news for German automakers.
Have a great Thursday!
So far, the anger about the new Supply Chain Act has been limited and only one person in the German public is upset about the law: Wu Ken, the Chinese ambassador. China will not interfere in Germany’s legislation, he said in an interview with Handelsblatt. “But politicizing economic and trade issues distorts the principles of the market economy.”
The ambassador of the People’s Republic apparently sees the new law, which obliges companies in Germany to comply with human rights standards and requirements against environmental pollution in their supply chains, as a targeted attack on China. Some countries would use such a law “to make a fuss about the internal affairs of other states,” the ambassador raged. His country would take all necessary measures “to consistently protect the legitimate rights and interests of its companies,” the ambassador said, without, however, providing details.
There is probably a reason why the excitement – apart from that of the Chinese ambassador – has so far been limited: The Supply Chain Act is quite tame in its implementation.
In essence, German companies, but also foreign companies with branches or subsidiaries in Germany, must take a closer look at their supply chains and document them using an electronic procedure. Those who accept child labor, immoral wages or environmental disasters at suppliers must expect fines in the millions. It could therefore make sense for large companies to hire a human rights officer. Volkswagen has already done so.
But there is only an obligation to make an effort, not an obligation to succeed. In the case of indirect suppliers, companies are also only required to take action if there is evidence of human rights violations such as poverty wages or child labor in the region where the supplier’s factory is located. If violations are proven, the companies in question are not punished immediately, but only if they do nothing about it.
While the Federal Office for Economic Affairs and Export Control (BAFA), which is responsible for ensuring compliance with the new law, emphasizes that it can
However, the turnover-based fine framework only applies to companies with annual sales of more than €400 million. In addition, the new law will only come into force in stages. Starting this year, it will initially apply only to large companies with more than 3,000 employees – that’s around 600, and from 2024 to just under 3,000 companies with more than 1,000 employees.
Trade unions and non-governmental organizations have the possibility to sue in the event of indications of human rights violations if the victims also specifically agree to this. However, there is no corporate liability under civil law. This means that the victims have no prospect of compensation from the companies. However, BAFA can intervene with its demands for fines.
Most German companies do not yet see a problem for business in the current version of the Supply Chain Act. “For us, not so much has changed,” says Jan Philippi, who runs a design manufactory near Hamburg and sources many of the goods he offers from China. His company, he says, had already previously negotiated a code of conduct from its Chinese partners. He has also personally verified their statements during factory visits.
The German Chamber of Commerce in China generally views the Supply Chain Act as an “opportunity to improve the social and environmental situation worldwide.” Jens Hildebrandt, Executive Board Member in Beijing, does admit that the law “also poses challenges” for German companies in China. According to their latest business climate survey, only just under a third of companies have problems fully meeting the requirements of the Supply Chain Act.
In some cases, there are difficulties in communicating with suppliers on site or in inspecting production facilities, according to Hildebrandt. Despite these hurdles, however, few companies would consider reorganizing their suppliers. A full 86 percent of companies do not need to take any further action to restructure their supply chains, Hildebrandt emphasizes.
For large German companies that produce in Xinjiang, however, things are likely to become much more difficult. The United Nations Human Rights Office accuses the leadership in Beijing of arbitrarily detaining Uyghurs and other members of Muslim minorities in detention camps. For years, there have been accusations of forced labor in the factories, and the US government has even spoken of genocide. German companies that operate factories in Xinjiang, such as Volkswagen or BASF, have not been able to prove that forced labor takes place in their supply chains. But they are likely to come under greater scrutiny from non-governmental organizations and auditing authorities with the Supply Chain Act.
The BAFA, which is responsible for such cases, intends to significantly increase its staffing levels. At the turn of the year, around 50 people were already hired at the authority’s new branch office in Borna near Leipzig for the Supply Chain Act. By summer 2023, it is planned to double their number to around 100.
The reports are piling up. Sometimes more, sometimes less prominent projects on the Chinese car market fail on a regular basis. In August 2022, for example, the driving service provider DiDi filed for bankruptcy. In September, Byton’s liquidator auctioned off a drivable prototype of the brand. By then, the production lines had long been at a standstill. In November, WM Motor announced that manager salaries would have to be cut in half. At the same time, wages would be paid later. The manufacturer faced a total loss of $1.2 billion in 2021 (on 44,000 cars sold).
The Chinese EV market is consolidating. No wonder. BYD (29.3 percent) leads by a wide margin in terms of market share, followed by Wuling (9.6 percent), Tesla (7.0 percent) and Cherry (5.0 percent). “In this highly fragmented market, almost all companies are in debt and making losses. They are sometimes kept alive artificially by purchase premiums and subsidies from local governments,” analyzes Gregor Sebastian in an interview with Table Media. He is an analyst at the Mercator Institute for China Studies (MERICS).
For years, the government in Beijing has subsidized the market with purchase premiums and protectionist laws. A gold-rush atmosphere is needed. There are currently about 300 EV brands in China, Sebastian estimates. About two-thirds of them have never sold cars, are not listed on the stock exchange, and do not value transparency. The industry’s debt level is, therefore, difficult to quantify.
“The Chinese EV market is developing well. But there are new factors coming that indicate headwinds. Like the expiration of the purchase premium,” Sebastian predicts. That’s hitting local governments in particular. They’ve been able to convince nascent EV manufacturers to set up shop in your area with lavish subsidies. The idea was to create and maintain jobs. Many of these companies have been artificially kept alive because of this.
The Communist Party in Beijing supported the approach. The goal was to create an industry that could compete on the global market. A goal that China has achieved. Brands like BYD, as well as Nio, Xpeng and Li Auto, are considered benchmarks in the EV market. “From the Communist Party’s point of view, the subsidies have paid off. Because there is now a serious industry that is globally competitive. Now the change from a subsidy-driven to a market-oriented model has to work,” according to Sebastian.
An impending wave of bankruptcies is not the accidental product of a chaotic market, he stresses. “Consolidation is politically intentional. You’ve seen that with the big tech companies that are also in the market. They had to buy existing companies to even get a license.” With many companies still lacking significant production, even legal minimums could loom. Those who don’t meet them could lose their licenses. Consolidation will not happen quickly, he said, but political pressure will increase in the coming months and years.
Active competitors are thus presented with new market opportunities. “The biggest beneficiaries of consolidation will be the top five to ten Chinese companies, which will be able to buy up other companies at low cost. Supported by local governments that will try to save production facilities,” Sebastian believes. Younger brands, which need to scale quickly because of the dynamic market, could take over production lines and skilled employees to drive growth cost-effectively and gain market share.
The prerequisites of the German manufacturers, however, are different. Brands such as Porsche or Volkswagen, BMW and Mercedes have sufficient production capacity. They need to convert existing factories to produce EVs rather than buy new ones. The longer the consolidation takes, the more time foreign brands have to adapt to the new conditions. However, if the market were to completely reorganize within just two years, German companies would have a hard time regaining market share after the fact.
Timm Rohweder has always wanted to be a mediator between cultures. “My desire was either to explain China to the Germans or the other way around.” Rohweder is also committed to this idealistic idea, as he classifies it, in his current role as Regional Expert Greater China at the Hamburg Chamber of Commerce. Here, he primarily imparts knowledge from and about China to Hamburg companies.
An elementary part of his work consists of gathering and analyzing information on developments in China. This raises questions such as: What do these mean for companies on the ground, for companies in Hamburg and for their business in China? What impact do they have on Hamburg as a business location? At present, such matters are being discussed, in particular, against the backdrop of the Covid restriction loosenings.
Hamburg occupies a prominent position in German-Chinese economic relations: “We have over 600 Hamburg companies that maintain business relations of some kind with China,” says Rohweder. But the city partnership with Shanghai, the Hamburg Liaison Office China and the Hamburg Summit organized by the Chamber of Commerce also characterize the intensive economic exchange.
Probably one of the best-known Chinese companies in Hamburg is the shipping company China Cosco Shipping Corporation. “We as the Chamber of Commerce see quite clearly from the fact that every third container in the Port of Hamburg is handled with China that the People’s Republic plays a large and important role for Hamburg as a business location.” The chamber, therefore, wants to further promote the relationship with the Chinese economy – but “without naively ignoring the political changes in the People’s Republic.”
Before joining the Hamburg Chamber of Commerce, the business expert had worked for the German Chamber of Commerce Abroad in Beijing for three years. In addition, he had already gained some experience in the Far Eastern country during his studies of Applied Business Languages and International Business Management (AWS) at the Bremen University of Applied Sciences as well as during a previous language study program in Beijing.
In his professional career, one of his tasks has been to advise companies seeking their way into the Chinese economy. He points out as essential: “Do your homework, think about: How do I set myself up? What legal form do I go in with? Where do I get my partners?” Company culture and compliance considerations also play a role. “I’ve always recommended: To go into the country and exchange ideas with companies already there.”
And he shares another key principle: “It’s important to take a close look at the Chinese market and economic policy developments, and also to understand that it’s not one big market, but ultimately China is divided into many small individual parts markets.” Juliane Scholübbers
The species of the two animals in this picture, taken in Heilongjiang, is clear: They are black bears. It is important to emphasize this because there is obviously risk of confusion.
In 2018, a young Chinese woman on vacation fell in love with a puppy being sold on the side of the road. The animal was advertised as a Tibetan dog. Over time, however, the animal grew bigger and fatter, ate two buckets of noodles per meal – and suddenly stood on two legs.
Only then did it dawn on the young woman that it was a completely different animal. Today, Little Black, as the woman called him, lives in a game preserve in Yunnan.
The clamor for the introduction of a German Supply Chain Act was great. Between 2019 and 2021, the then CSU Development Minister Gerd Mueller got it off the ground. It has been in force since Jan. 1 and most German companies seem to be prepared. We take a closer look at the first effects of the new regulation.
Some companies currently have to consider whether importing from China is worthwhile if they have to hire special software or even a human rights officer. However, most companies have no problems meeting the requirements. This is the result of a survey by the Chamber of Foreign Trade in Beijing. But perhaps the excitement is only postponed. Because the Supply Chain Act at the EU level is in the making and is expected to be much stricter.
Many EV manufacturers in China are worried. Many of them will not live to see their vehicles ready for the market – or they are already out of the picture. The state-subsidized EV market, with more than 300 suppliers at last count, is consolidating, as Christian Domke Seidel reports in his Feature. This is good news for German automakers.
Have a great Thursday!
So far, the anger about the new Supply Chain Act has been limited and only one person in the German public is upset about the law: Wu Ken, the Chinese ambassador. China will not interfere in Germany’s legislation, he said in an interview with Handelsblatt. “But politicizing economic and trade issues distorts the principles of the market economy.”
The ambassador of the People’s Republic apparently sees the new law, which obliges companies in Germany to comply with human rights standards and requirements against environmental pollution in their supply chains, as a targeted attack on China. Some countries would use such a law “to make a fuss about the internal affairs of other states,” the ambassador raged. His country would take all necessary measures “to consistently protect the legitimate rights and interests of its companies,” the ambassador said, without, however, providing details.
There is probably a reason why the excitement – apart from that of the Chinese ambassador – has so far been limited: The Supply Chain Act is quite tame in its implementation.
In essence, German companies, but also foreign companies with branches or subsidiaries in Germany, must take a closer look at their supply chains and document them using an electronic procedure. Those who accept child labor, immoral wages or environmental disasters at suppliers must expect fines in the millions. It could therefore make sense for large companies to hire a human rights officer. Volkswagen has already done so.
But there is only an obligation to make an effort, not an obligation to succeed. In the case of indirect suppliers, companies are also only required to take action if there is evidence of human rights violations such as poverty wages or child labor in the region where the supplier’s factory is located. If violations are proven, the companies in question are not punished immediately, but only if they do nothing about it.
While the Federal Office for Economic Affairs and Export Control (BAFA), which is responsible for ensuring compliance with the new law, emphasizes that it can
However, the turnover-based fine framework only applies to companies with annual sales of more than €400 million. In addition, the new law will only come into force in stages. Starting this year, it will initially apply only to large companies with more than 3,000 employees – that’s around 600, and from 2024 to just under 3,000 companies with more than 1,000 employees.
Trade unions and non-governmental organizations have the possibility to sue in the event of indications of human rights violations if the victims also specifically agree to this. However, there is no corporate liability under civil law. This means that the victims have no prospect of compensation from the companies. However, BAFA can intervene with its demands for fines.
Most German companies do not yet see a problem for business in the current version of the Supply Chain Act. “For us, not so much has changed,” says Jan Philippi, who runs a design manufactory near Hamburg and sources many of the goods he offers from China. His company, he says, had already previously negotiated a code of conduct from its Chinese partners. He has also personally verified their statements during factory visits.
The German Chamber of Commerce in China generally views the Supply Chain Act as an “opportunity to improve the social and environmental situation worldwide.” Jens Hildebrandt, Executive Board Member in Beijing, does admit that the law “also poses challenges” for German companies in China. According to their latest business climate survey, only just under a third of companies have problems fully meeting the requirements of the Supply Chain Act.
In some cases, there are difficulties in communicating with suppliers on site or in inspecting production facilities, according to Hildebrandt. Despite these hurdles, however, few companies would consider reorganizing their suppliers. A full 86 percent of companies do not need to take any further action to restructure their supply chains, Hildebrandt emphasizes.
For large German companies that produce in Xinjiang, however, things are likely to become much more difficult. The United Nations Human Rights Office accuses the leadership in Beijing of arbitrarily detaining Uyghurs and other members of Muslim minorities in detention camps. For years, there have been accusations of forced labor in the factories, and the US government has even spoken of genocide. German companies that operate factories in Xinjiang, such as Volkswagen or BASF, have not been able to prove that forced labor takes place in their supply chains. But they are likely to come under greater scrutiny from non-governmental organizations and auditing authorities with the Supply Chain Act.
The BAFA, which is responsible for such cases, intends to significantly increase its staffing levels. At the turn of the year, around 50 people were already hired at the authority’s new branch office in Borna near Leipzig for the Supply Chain Act. By summer 2023, it is planned to double their number to around 100.
The reports are piling up. Sometimes more, sometimes less prominent projects on the Chinese car market fail on a regular basis. In August 2022, for example, the driving service provider DiDi filed for bankruptcy. In September, Byton’s liquidator auctioned off a drivable prototype of the brand. By then, the production lines had long been at a standstill. In November, WM Motor announced that manager salaries would have to be cut in half. At the same time, wages would be paid later. The manufacturer faced a total loss of $1.2 billion in 2021 (on 44,000 cars sold).
The Chinese EV market is consolidating. No wonder. BYD (29.3 percent) leads by a wide margin in terms of market share, followed by Wuling (9.6 percent), Tesla (7.0 percent) and Cherry (5.0 percent). “In this highly fragmented market, almost all companies are in debt and making losses. They are sometimes kept alive artificially by purchase premiums and subsidies from local governments,” analyzes Gregor Sebastian in an interview with Table Media. He is an analyst at the Mercator Institute for China Studies (MERICS).
For years, the government in Beijing has subsidized the market with purchase premiums and protectionist laws. A gold-rush atmosphere is needed. There are currently about 300 EV brands in China, Sebastian estimates. About two-thirds of them have never sold cars, are not listed on the stock exchange, and do not value transparency. The industry’s debt level is, therefore, difficult to quantify.
“The Chinese EV market is developing well. But there are new factors coming that indicate headwinds. Like the expiration of the purchase premium,” Sebastian predicts. That’s hitting local governments in particular. They’ve been able to convince nascent EV manufacturers to set up shop in your area with lavish subsidies. The idea was to create and maintain jobs. Many of these companies have been artificially kept alive because of this.
The Communist Party in Beijing supported the approach. The goal was to create an industry that could compete on the global market. A goal that China has achieved. Brands like BYD, as well as Nio, Xpeng and Li Auto, are considered benchmarks in the EV market. “From the Communist Party’s point of view, the subsidies have paid off. Because there is now a serious industry that is globally competitive. Now the change from a subsidy-driven to a market-oriented model has to work,” according to Sebastian.
An impending wave of bankruptcies is not the accidental product of a chaotic market, he stresses. “Consolidation is politically intentional. You’ve seen that with the big tech companies that are also in the market. They had to buy existing companies to even get a license.” With many companies still lacking significant production, even legal minimums could loom. Those who don’t meet them could lose their licenses. Consolidation will not happen quickly, he said, but political pressure will increase in the coming months and years.
Active competitors are thus presented with new market opportunities. “The biggest beneficiaries of consolidation will be the top five to ten Chinese companies, which will be able to buy up other companies at low cost. Supported by local governments that will try to save production facilities,” Sebastian believes. Younger brands, which need to scale quickly because of the dynamic market, could take over production lines and skilled employees to drive growth cost-effectively and gain market share.
The prerequisites of the German manufacturers, however, are different. Brands such as Porsche or Volkswagen, BMW and Mercedes have sufficient production capacity. They need to convert existing factories to produce EVs rather than buy new ones. The longer the consolidation takes, the more time foreign brands have to adapt to the new conditions. However, if the market were to completely reorganize within just two years, German companies would have a hard time regaining market share after the fact.
Timm Rohweder has always wanted to be a mediator between cultures. “My desire was either to explain China to the Germans or the other way around.” Rohweder is also committed to this idealistic idea, as he classifies it, in his current role as Regional Expert Greater China at the Hamburg Chamber of Commerce. Here, he primarily imparts knowledge from and about China to Hamburg companies.
An elementary part of his work consists of gathering and analyzing information on developments in China. This raises questions such as: What do these mean for companies on the ground, for companies in Hamburg and for their business in China? What impact do they have on Hamburg as a business location? At present, such matters are being discussed, in particular, against the backdrop of the Covid restriction loosenings.
Hamburg occupies a prominent position in German-Chinese economic relations: “We have over 600 Hamburg companies that maintain business relations of some kind with China,” says Rohweder. But the city partnership with Shanghai, the Hamburg Liaison Office China and the Hamburg Summit organized by the Chamber of Commerce also characterize the intensive economic exchange.
Probably one of the best-known Chinese companies in Hamburg is the shipping company China Cosco Shipping Corporation. “We as the Chamber of Commerce see quite clearly from the fact that every third container in the Port of Hamburg is handled with China that the People’s Republic plays a large and important role for Hamburg as a business location.” The chamber, therefore, wants to further promote the relationship with the Chinese economy – but “without naively ignoring the political changes in the People’s Republic.”
Before joining the Hamburg Chamber of Commerce, the business expert had worked for the German Chamber of Commerce Abroad in Beijing for three years. In addition, he had already gained some experience in the Far Eastern country during his studies of Applied Business Languages and International Business Management (AWS) at the Bremen University of Applied Sciences as well as during a previous language study program in Beijing.
In his professional career, one of his tasks has been to advise companies seeking their way into the Chinese economy. He points out as essential: “Do your homework, think about: How do I set myself up? What legal form do I go in with? Where do I get my partners?” Company culture and compliance considerations also play a role. “I’ve always recommended: To go into the country and exchange ideas with companies already there.”
And he shares another key principle: “It’s important to take a close look at the Chinese market and economic policy developments, and also to understand that it’s not one big market, but ultimately China is divided into many small individual parts markets.” Juliane Scholübbers
The species of the two animals in this picture, taken in Heilongjiang, is clear: They are black bears. It is important to emphasize this because there is obviously risk of confusion.
In 2018, a young Chinese woman on vacation fell in love with a puppy being sold on the side of the road. The animal was advertised as a Tibetan dog. Over time, however, the animal grew bigger and fatter, ate two buckets of noodles per meal – and suddenly stood on two legs.
Only then did it dawn on the young woman that it was a completely different animal. Today, Little Black, as the woman called him, lives in a game preserve in Yunnan.
