Sustainable investment is the trend of the moment. But what is considered sustainable, and what is not? The EU taxonomy is the right approach to classification, but it is too comprehensive and contains fundamental errors, says Silke Stremlau, Chair of the Sustainable Finance Advisory Board, in an interview with Leonie Düngefeld. A green financial market still has a long way off.
How Chinese is Mercedes? My colleague Markus Grabitz raises this question in his analysis. The Stuttgart-based car manufacturer sells more than one-third of its vehicles in China, and one-fifth of its shares are owned by Chinese investors. Will a takeover soon follow?
German Chancellor Olaf Scholz and Minister of Economics Robert Habeck will stay in Canada for three days starting on Sunday. They plan to sign an agreement on the production of green hydrogen.
Today, our columnist Claire Stam reports not from Brussels, but from Paris. There, political life is returning to the Élysée Palace. President Emmanuel Macron will now have to do everything in his power to find an advantageous position for possible new elections.
Ms. Stremlau, for Europe to achieve its climate targets, gigantic sums of investment have to be raised. How well is that working out?
The fact that we actually need a socio-ecological restructuring of our entire economy has only entered the minds of those responsible in the last year or two – and unfortunately, it has still not reached everyone. However, the Ukraine war has accelerated this process enormously. And climate change is also becoming more and more noticeable here in Europe every year. With financing, we are still at the very beginning: The market for sustainable investments has been growing significantly every year since the last financial crisis, in both the institutional and private sectors. But of all that still lies ahead of us, we have reached perhaps 10 percent. 90 percent of the funds that need to be moved still lie ahead of us. The financial market is ready, but a lot needs to change and we need different guard rails.
With the taxonomy, the EU has created a classification system for sustainable investments. Is that not a suitable guard rail?
The approach of the EU Commission – its Action Plan on Sustainable Finance and the various regulatory steps it has in mind – I think is right. We need a clear definition of what is sustainable. We need better metrics and reports on how far companies have progressed on their path to sustainability. And we need more transparency among financial market players about the way they implement sustainability. The Commission has taken these three steps with the Taxonomy, the Disclosure Regulation and the CSRD Directive. But I wonder if this is the right way to go about it: For the first environmental objective, the Taxonomy Regulation covers 460 pages – and five other environmental objectives have not even been defined yet. There are also technical problems with the implementation. So a review process is needed.
What kind of technical problems are you referring to?
For example, the green asset ratio of banks. Banks now are obliged to report how high their share of green loans is in the overall loan portfolio. However, they are only allowed to include companies that are subject to the reporting obligation, i.e. large companies listed as stock corporations. This can result in certain banks being misleadingly rated: GLS Bank, for example, with a 95 percent sustainable loan portfolio, has a green asset ratio of four percent because it lends to many smaller project companies, for example, citizen energy cooperatives or private individuals. These are all not covered by the reporting obligation. This is a technical error that needs to be worked on.
Many also consider it a mistake that nuclear power and natural gas projects were included and thus considered sustainable. Has the taxonomy lost its power and credibility as a result?
In Germany, yes. In many other European countries, nuclear power is still the answer to the climate crisis. For them, there is not this loss of taxonomic credibility as here in Germany. But I don’t think it’s a technical mistake, I think it’s an entirely political mistake. My understanding of the taxonomy is that it is the gold standard for sustainable, future-proof, resilient economic activities – and that it is scientifically sound. All the sciences consulted in the process opposed the inclusion of nuclear and gas. Neither has any place in a green environmental taxonomy. The decision is a bitter one. I am also disappointed with the parliament that went along with it.
Back in July, the European Parliament missed the chance to veto the decision. But what are the consequences – will investors in Germany now actually invest more in nuclear energy and natural gas?
I hear from the fund and investment industry that financial products for the German market will continue to exclude nuclear power and gas. The issue will have no relevance in the future. No investor in Germany, not even the big institutional investors, want to invest in nuclear power and gas again. Right now, the debate is being reignited by CDU leaders and Mr. Lindner, but actually, there is a consensus. The situation is different if I, as an investor, want to invest in a fund of a bank from countries like France, which then has the taxonomy stamp, or want to buy a bond. Then I have to look very carefully to see whether nuclear power projects are also in the portfolio. But I should do that in general. This advice to all investors is still valid for sustainable investing: You should always look at the ten largest stocks in the portfolio and ask yourself whether they fit your own conception of sustainability.
Tens of thousands of European companies will soon be affected by the new sustainability reporting requirements. What will change for banks and investors?
Over the next few years, all companies will notice that they will have to provide more and more socio-ecological data if they want a bank loan. This is because banks are required to create transparency about their loan portfolio, their carbon footprint, and about their social-ecological and climate risks. If I invest as a bank today, I depend on companies to voluntarily report well. This will become easier because they will now be required to do so and the main data will then be included in the management report. In the next three to ten years, we will see a huge change: Banks will have to adopt a completely different mindset because they will have to incorporate climate and biodiversity risks into their credit and risk management. They will have to collect new data, engage with their borrowers in a completely different way, build new data collection systems.
Medium-sized companies in particular complain about the huge bureaucratic effort that the reporting requirements involve …
It is definitely more effort. Banks are desperately looking for sustainability analysts and experts because they are completely overwhelmed. They have to collect data that is not available at the push of a button. But this is a ramp-up effort for which Banks, for example, receive support from their umbrella organizations. The idea is to set up a standardized database solution. But in the end, the costs are much higher later on: If I don’t price it into the loan beforehand and, for example, buildings are washed away by extreme weather events, I will have loan defaults later on. That is far more expensive, it could run into the millions. Ultimately, a medium-sized company is more manageable than a large corporation with various locations and companies. It also has to file a tax return, prepare an annual report and feed an auditor with data. So it is also possible to collect twenty ecological key indicators.
The EU also plans to impose stricter requirements on supply chains. To what extent does this affect banks and investors?
From a financial market perspective, this is a very relevant topic. All institutional investors invest not only in Germany, where we have few supply chain problems, but globally. They invest in stocks like Adidas, which has 1,500 suppliers, or in the raw materials industry, which mines rare earth elements in Africa and Asia. If it gets out that a company has not complied with environmental standards or workers’ rights, then it won’t receive any more orders. Then the share price will go down and no more dividends can be paid out. For me as an investor, this involves high financial risks. That is why we have a fundamental interest in ensuring that high environmental and social standards apply in the supply chain and that there is transparency about this. In Germany, the Due Diligence Act has been greatly softened, partly due to pressure from associations and companies. I hope that the EU supply chain law will be stricter than currently planned and that the German law will then have to stretch itself even further.
The Sustainable Finance Advisory Board, which you chair, has just begun its work, and a work program is to be prepared at the end of September. What are the key points of the program?
It deals with how the financial market can support the social-ecological transformation, redirect the money and manage existing risks. Reporting will also be a big topic. We are sparring partners for the federal government and associations because we have the opportunity to provide feedback from a broad stakeholder perspective. Where are still problems, where do we need to pay attention to harmonization? Where are medium-sized companies overburdened and need help? Capacity building and expanding knowledge will accompany us, both in the financial industry as well as in the supervisory authorities and among those responsible in the federal government who invest pension funds of civil servants. And the issue of public investments will continue to be on our agenda: How can these be aligned with sustainability criteria even more strictly than before?
Among other things, a “sustainability traffic light for financial products” is to be introduced in Germany. What does that mean?
Every financial product, be it a savings bond, a construction loan, or an investment fund, is assigned an A to E rating of how sustainable it is and what opportunities and risks it has from an ESG perspective. Similar to the energy efficiency logo on the refrigerator, where I can see at a glance how efficient the refrigerator is. There is already a concept, developed by the first advisory board, and it is now being further coordinated regarding its content. The idea is to also roll this out across Europe. We are currently discussing this in the advisory council, but the Ministry of Finance will certainly introduce it into the European process and see what the response is.
The German Sustainable Finance Strategy was adopted shortly before the change of government. Is there now a need for change?
In February 2021, we presented 31 recommendations as an advisory board. The German government came up with 26 measures in May. Not everything was included, but in some points, it also went beyond what the advisory board had recommended. In other parts, the strategy is very general and unclear. It should be more stringent and ambitious. I also interpreted the coalition agreement of the current federal government as meaning that the strategy should be tightened up. On four pages, the German government has told us what it expects of the council and where it sees a need for action and advice. As an advisory council, we can work on this and then put our finger in the wound. We are now at the beginning, in the process of identifying topics. But we are already further along than we were at the beginning of the first advisory council.
Mercedes was late to discover China. It was not until 2005 that the German manufacturer went to Beijing and founded the joint venture Beijing Benz Automotive Co. (BBAC) with the state-owned company BAIC. In the early days, business with China played a moderate role for the headquarters in Stuttgart. “When colleagues in Stuttgart saw the Chinese country code on the display of their phones, they didn’t even bother to answer,” recalls an employee from the finance department about his early days in China.
That has changed in the meantime. China has become very important for the company. Last year, Mercedes sold 2.093 million passenger cars worldwide, of which 763,706 went to buyers in China. That is over 36 percent of total sales. For other German manufacturers, too, China is securing the business model and bringing in the money to invest in transformation. VW sold 40 percent of the group brands’ new vehicles to China in 2021, while BMW’s figure was 34 percent.
Mercedes knows Mandarin: 586,804 Mercedes vehicles were assembled locally at the Beijing plant in 2021. In its 17th year in China, the group with the star thus built 28 percent of its global sales in China. Board member Hubertus Troska has been in charge of China operations in Beijing since 2012. Cars with extra-long wheelbases are produced for Chinese customers. A separate model – just for the Chinese market – has been announced.
China is not just the workbench: Research and development (R&D) are being shifted to China. A second R&D center has just opened in Shanghai. A total of around a thousand developers are already working there. CEO Ola Kaellenius has hired McKinsey consultant Paul Gao, who speaks Mandarin and has studied in China and the United States. Gao’s title is Chief Strategy Officer. His mission is to keep the specific requirements of the key Asian markets in mind when making strategic business decisions.
Mercedes not only operates from China and earns good money from its China business, but the group is to a considerable extent in the hand of the Chinese. The state-owned group BAIC has increased its share to ten percent, which did not reach the public for a long time. And the businessman Li Shufu, who has owned Volvo since 2018, as well as the manufacturer Geely, is the largest single shareholder through his investment company with a further 9.7 percent stake.
Due to the ownership structure at Mercedes – unlike BMW and VW, there are no Quandts, Porsches, or Piechs pulling the strings, and many shares are in free float – the Stuttgart-based group is considered vulnerable to takeovers. The situation was quiet just a moment ago, when Winfried Kretschmann, the Minister-President of the German state of Baden-Wuerttemberg, fuelled speculation with an announcement that the German government would veto a takeover attempt from China. Whether the Green politician had a specific reason for his intervention remained unclear.
However, it can be assumed that investors in China are looking very closely at a further increase in shareholdings. Hardly any brand is more important to the Germans. Beijing is also aware that a takeover of Mercedes in Germany would be a political issue. Nevertheless, the Group has reportedly taken precautions: When it spun off its truck division last year, it very deliberately assigned a business unit that produces a military variant of the G model to the passenger car division rather than to the truckers. “This provides the German government the option of prohibiting a takeover by China on the grounds of security interests alone,” one hears.
In total, one-fifth of Mercedes shares are in Chinese hands. When looking at the shareholder structure, it often goes unnoticed that the two Chinese players are pursuing their own interests. “BAIC and Geely do not get along at all,” says one observer. State-owned BAIC is Mercedes’ originally chosen partner.
In the case of Li Shufu, on the other hand, one can question his motivation for joining the Swabians. Did the Chinese businessman want to adorn himself with the trophy of being a shareholder in a traditional German brand? Did he initially expect more? Did he want to be in the driver’s seat at Mercedes? One analyst tells Europe.Table, “It’s striking that Kaellenius’ predecessor, Zetsche, has responded rather favorably to questions about BAIC and more neutrally to questions about Geely.”
Meanwhile, there is a cooperation between Geely and Mercedes for the Smart small car. The new model – the company has never made money with the Smart brand in Europe – is now built by Geely in China. The Stuttgart-based company is responsible for the design and technology.
Do Chinese investors have any influence on the operating business? Little is known about this. What is obvious is that they are not represented on the board of management or the supervisory board. It could be that Mercedes will become more Chinese in the future and that activities previously based in Europe will move away, for example, the internal combustion engine business.
Kaellenius proclaimed the “electric only” strategy. By the end of the decade, the company wants to sell only EVs. But he always adds, “where market conditions permit.” The EU will decide to phase out the internal combustion engine by 2035. But a new EV study by management consultants PWC shows that in 2035, 41 percent of newly registered cars worldwide will still have an internal combustion engine.
The study states that 27 percent of new registrations in China will still be internal combustion engines. It is hard to imagine Mercedes abandoning the internal combustion engine business entirely. Once the combustion engine will be buried in Europe, a lot of signs point toward shifting the development of new engines to China.
There is also speculation about the production of volume models. Kaellenius had recently announced the tightened luxury strategy and that four of seven body variants in the entry-level range would be discontinued. The Group has never rejected reports that the A- and B-Class production will not be continued in Rastatt. In the Group’s environment, there were rumors that production of the A- and B-Class would be handed over to shareholder Geely. A Mercedes spokesman told Europe.Table: “I ask for your understanding that, as usual, we do not comment on speculation.”
Cordon bleu Parisian style or an anecdote that went down in the annals of political history: During the 2017 presidential campaign, more precisely on the Sunday of the first round of voting, candidate Emmanuel Macron and his team took a lunch break at a highway rest stop. Which meal do they choose? “I like cordon bleu,” said Emmanuel Macron. The waitress replies: “That’s part of the children’s menu…”.
In this political autumn, however, Emmanuel Macron will have to choose between a disruptive menu and election campaign cuisine. Before we continue with France’s political cuisine, it should be reminded at this point that the Council of Ministers is the formation that brings together all 16 ministers each week – usually on Wednesday – under the chairmanship of the head of state.
It is one element that allows the head of state to oversee the formulation and implementation of government policy and to give – or withhold – his or her approval to several important decisions. More generally, this council allows the head of state to shape discussions involving the entire government with his or her views. The pompous reception halls in which government members are received at the Élysée Palace rival the high level of formality that reigns there – and the tedium.
But that was part of the world of the past, the world before the June parliamentary elections in which Emmanuel Macron’s political formation was dealt a stunning electoral blow, losing its absolute majority in the National Assembly. Not only did his party lose almost half of its mandates, it also lost a majority in the National Assembly: When Macron took office in 2017, La République en Marche (LREM) had entered the Assemblée Nationale with 314 deputies; in 2022, under its new name Renaissance, it will have to make do with 170 seats. The National Assembly consists of a total of 577 deputies.
In a country as centralized as France, political actors and observers have suddenly had to embrace the need for compromise, an approach that seems like a UFO in French politics. The only question is how long this culture of compromise, so alien to France, will last. Because it is a fact that Emmanuel Macron’s opponents, with whom parliamentary compromises could be found, are not numerous enough to guarantee him a stable and lasting five-year term.
After all, in his quest for power, the current French president has weakened his political opponents on the right and left fringes of the political spectrum. While his strategy has made his re-election possible, it has also helped the two extremes and made them heard. In this way, the hypothesis of a blockade leading to the dissolution of the National Assembly becomes particularly credible in this context.
And there will be no shortage of reasons for a political blockade: A health care system on the edge, the increasingly loud resentment of teachers and the galloping precariousness of students, inflation and rising energy prices, pension reforms, and so on. And all this at a time when the country has experienced unprecedented drought and fires.
So, what does this mean for Germany and the European Union? Both Germany and the EU should prepare for two distinct phases in Macron’s second term, state Ronja Kempin and Julina Mintel of the German Institute for International and Security Affairs (SWP) in a new analysis. In the first period, the president will pursue a policy of reform majorities, to win back the trust of citizens and secure a good starting position for new elections. “Accordingly, Macron will devote a great deal of political energy in this phase to negotiating domestic political compromises – and, to this end, will also back away from his promise to reduce France’s national debt,” the two researchers write.
This means Emmanuel Macron will lobby the EU to introduce further stimulus packages and develop new funds, as well as advocate a reform of the Stability and Growth Pact to gain more financial leeway for his domestic reform projects. “Conflicts with Berlin are thus inevitable at this stage if Berlin refuses to continue to suspend or reform the Maastricht criteria,” the two analysts write. “But the German government should always keep in mind that Macron will be forced to dissolve the National Assembly during his mandate in order to circumvent a domestic political blockade.”
If he succeeds, then he would have more room to maneuver in the second phase of his term to address the EU’s future issues – the “European Political Community“, the Union’s autonomy, and peace in Europe. “To work on these issues in Franco-German harmony, German European policy should formulate for itself the goal that Emmanuel Macron can realize his domestic reform agenda. To counteract the growing social disparities in his country, Macron needs Berlin’s support. It would be important for the German government to clearly commit to the EU’s autonomy in health and energy policy and to provide impetus in favor of a unified social and labor market policy,” they stress.
And they conclude: “It may sound threadbare, but it is more likely than ever: If Macron fails, his successor in 2027 will probably be Marine Le Pen. Since the parliamentary elections in June, she has found herself in a very comfortable position of power – which should not be further strengthened in the coming months by a rigid German European policy.”
Sustainable investment is the trend of the moment. But what is considered sustainable, and what is not? The EU taxonomy is the right approach to classification, but it is too comprehensive and contains fundamental errors, says Silke Stremlau, Chair of the Sustainable Finance Advisory Board, in an interview with Leonie Düngefeld. A green financial market still has a long way off.
How Chinese is Mercedes? My colleague Markus Grabitz raises this question in his analysis. The Stuttgart-based car manufacturer sells more than one-third of its vehicles in China, and one-fifth of its shares are owned by Chinese investors. Will a takeover soon follow?
German Chancellor Olaf Scholz and Minister of Economics Robert Habeck will stay in Canada for three days starting on Sunday. They plan to sign an agreement on the production of green hydrogen.
Today, our columnist Claire Stam reports not from Brussels, but from Paris. There, political life is returning to the Élysée Palace. President Emmanuel Macron will now have to do everything in his power to find an advantageous position for possible new elections.
Ms. Stremlau, for Europe to achieve its climate targets, gigantic sums of investment have to be raised. How well is that working out?
The fact that we actually need a socio-ecological restructuring of our entire economy has only entered the minds of those responsible in the last year or two – and unfortunately, it has still not reached everyone. However, the Ukraine war has accelerated this process enormously. And climate change is also becoming more and more noticeable here in Europe every year. With financing, we are still at the very beginning: The market for sustainable investments has been growing significantly every year since the last financial crisis, in both the institutional and private sectors. But of all that still lies ahead of us, we have reached perhaps 10 percent. 90 percent of the funds that need to be moved still lie ahead of us. The financial market is ready, but a lot needs to change and we need different guard rails.
With the taxonomy, the EU has created a classification system for sustainable investments. Is that not a suitable guard rail?
The approach of the EU Commission – its Action Plan on Sustainable Finance and the various regulatory steps it has in mind – I think is right. We need a clear definition of what is sustainable. We need better metrics and reports on how far companies have progressed on their path to sustainability. And we need more transparency among financial market players about the way they implement sustainability. The Commission has taken these three steps with the Taxonomy, the Disclosure Regulation and the CSRD Directive. But I wonder if this is the right way to go about it: For the first environmental objective, the Taxonomy Regulation covers 460 pages – and five other environmental objectives have not even been defined yet. There are also technical problems with the implementation. So a review process is needed.
What kind of technical problems are you referring to?
For example, the green asset ratio of banks. Banks now are obliged to report how high their share of green loans is in the overall loan portfolio. However, they are only allowed to include companies that are subject to the reporting obligation, i.e. large companies listed as stock corporations. This can result in certain banks being misleadingly rated: GLS Bank, for example, with a 95 percent sustainable loan portfolio, has a green asset ratio of four percent because it lends to many smaller project companies, for example, citizen energy cooperatives or private individuals. These are all not covered by the reporting obligation. This is a technical error that needs to be worked on.
Many also consider it a mistake that nuclear power and natural gas projects were included and thus considered sustainable. Has the taxonomy lost its power and credibility as a result?
In Germany, yes. In many other European countries, nuclear power is still the answer to the climate crisis. For them, there is not this loss of taxonomic credibility as here in Germany. But I don’t think it’s a technical mistake, I think it’s an entirely political mistake. My understanding of the taxonomy is that it is the gold standard for sustainable, future-proof, resilient economic activities – and that it is scientifically sound. All the sciences consulted in the process opposed the inclusion of nuclear and gas. Neither has any place in a green environmental taxonomy. The decision is a bitter one. I am also disappointed with the parliament that went along with it.
Back in July, the European Parliament missed the chance to veto the decision. But what are the consequences – will investors in Germany now actually invest more in nuclear energy and natural gas?
I hear from the fund and investment industry that financial products for the German market will continue to exclude nuclear power and gas. The issue will have no relevance in the future. No investor in Germany, not even the big institutional investors, want to invest in nuclear power and gas again. Right now, the debate is being reignited by CDU leaders and Mr. Lindner, but actually, there is a consensus. The situation is different if I, as an investor, want to invest in a fund of a bank from countries like France, which then has the taxonomy stamp, or want to buy a bond. Then I have to look very carefully to see whether nuclear power projects are also in the portfolio. But I should do that in general. This advice to all investors is still valid for sustainable investing: You should always look at the ten largest stocks in the portfolio and ask yourself whether they fit your own conception of sustainability.
Tens of thousands of European companies will soon be affected by the new sustainability reporting requirements. What will change for banks and investors?
Over the next few years, all companies will notice that they will have to provide more and more socio-ecological data if they want a bank loan. This is because banks are required to create transparency about their loan portfolio, their carbon footprint, and about their social-ecological and climate risks. If I invest as a bank today, I depend on companies to voluntarily report well. This will become easier because they will now be required to do so and the main data will then be included in the management report. In the next three to ten years, we will see a huge change: Banks will have to adopt a completely different mindset because they will have to incorporate climate and biodiversity risks into their credit and risk management. They will have to collect new data, engage with their borrowers in a completely different way, build new data collection systems.
Medium-sized companies in particular complain about the huge bureaucratic effort that the reporting requirements involve …
It is definitely more effort. Banks are desperately looking for sustainability analysts and experts because they are completely overwhelmed. They have to collect data that is not available at the push of a button. But this is a ramp-up effort for which Banks, for example, receive support from their umbrella organizations. The idea is to set up a standardized database solution. But in the end, the costs are much higher later on: If I don’t price it into the loan beforehand and, for example, buildings are washed away by extreme weather events, I will have loan defaults later on. That is far more expensive, it could run into the millions. Ultimately, a medium-sized company is more manageable than a large corporation with various locations and companies. It also has to file a tax return, prepare an annual report and feed an auditor with data. So it is also possible to collect twenty ecological key indicators.
The EU also plans to impose stricter requirements on supply chains. To what extent does this affect banks and investors?
From a financial market perspective, this is a very relevant topic. All institutional investors invest not only in Germany, where we have few supply chain problems, but globally. They invest in stocks like Adidas, which has 1,500 suppliers, or in the raw materials industry, which mines rare earth elements in Africa and Asia. If it gets out that a company has not complied with environmental standards or workers’ rights, then it won’t receive any more orders. Then the share price will go down and no more dividends can be paid out. For me as an investor, this involves high financial risks. That is why we have a fundamental interest in ensuring that high environmental and social standards apply in the supply chain and that there is transparency about this. In Germany, the Due Diligence Act has been greatly softened, partly due to pressure from associations and companies. I hope that the EU supply chain law will be stricter than currently planned and that the German law will then have to stretch itself even further.
The Sustainable Finance Advisory Board, which you chair, has just begun its work, and a work program is to be prepared at the end of September. What are the key points of the program?
It deals with how the financial market can support the social-ecological transformation, redirect the money and manage existing risks. Reporting will also be a big topic. We are sparring partners for the federal government and associations because we have the opportunity to provide feedback from a broad stakeholder perspective. Where are still problems, where do we need to pay attention to harmonization? Where are medium-sized companies overburdened and need help? Capacity building and expanding knowledge will accompany us, both in the financial industry as well as in the supervisory authorities and among those responsible in the federal government who invest pension funds of civil servants. And the issue of public investments will continue to be on our agenda: How can these be aligned with sustainability criteria even more strictly than before?
Among other things, a “sustainability traffic light for financial products” is to be introduced in Germany. What does that mean?
Every financial product, be it a savings bond, a construction loan, or an investment fund, is assigned an A to E rating of how sustainable it is and what opportunities and risks it has from an ESG perspective. Similar to the energy efficiency logo on the refrigerator, where I can see at a glance how efficient the refrigerator is. There is already a concept, developed by the first advisory board, and it is now being further coordinated regarding its content. The idea is to also roll this out across Europe. We are currently discussing this in the advisory council, but the Ministry of Finance will certainly introduce it into the European process and see what the response is.
The German Sustainable Finance Strategy was adopted shortly before the change of government. Is there now a need for change?
In February 2021, we presented 31 recommendations as an advisory board. The German government came up with 26 measures in May. Not everything was included, but in some points, it also went beyond what the advisory board had recommended. In other parts, the strategy is very general and unclear. It should be more stringent and ambitious. I also interpreted the coalition agreement of the current federal government as meaning that the strategy should be tightened up. On four pages, the German government has told us what it expects of the council and where it sees a need for action and advice. As an advisory council, we can work on this and then put our finger in the wound. We are now at the beginning, in the process of identifying topics. But we are already further along than we were at the beginning of the first advisory council.
Mercedes was late to discover China. It was not until 2005 that the German manufacturer went to Beijing and founded the joint venture Beijing Benz Automotive Co. (BBAC) with the state-owned company BAIC. In the early days, business with China played a moderate role for the headquarters in Stuttgart. “When colleagues in Stuttgart saw the Chinese country code on the display of their phones, they didn’t even bother to answer,” recalls an employee from the finance department about his early days in China.
That has changed in the meantime. China has become very important for the company. Last year, Mercedes sold 2.093 million passenger cars worldwide, of which 763,706 went to buyers in China. That is over 36 percent of total sales. For other German manufacturers, too, China is securing the business model and bringing in the money to invest in transformation. VW sold 40 percent of the group brands’ new vehicles to China in 2021, while BMW’s figure was 34 percent.
Mercedes knows Mandarin: 586,804 Mercedes vehicles were assembled locally at the Beijing plant in 2021. In its 17th year in China, the group with the star thus built 28 percent of its global sales in China. Board member Hubertus Troska has been in charge of China operations in Beijing since 2012. Cars with extra-long wheelbases are produced for Chinese customers. A separate model – just for the Chinese market – has been announced.
China is not just the workbench: Research and development (R&D) are being shifted to China. A second R&D center has just opened in Shanghai. A total of around a thousand developers are already working there. CEO Ola Kaellenius has hired McKinsey consultant Paul Gao, who speaks Mandarin and has studied in China and the United States. Gao’s title is Chief Strategy Officer. His mission is to keep the specific requirements of the key Asian markets in mind when making strategic business decisions.
Mercedes not only operates from China and earns good money from its China business, but the group is to a considerable extent in the hand of the Chinese. The state-owned group BAIC has increased its share to ten percent, which did not reach the public for a long time. And the businessman Li Shufu, who has owned Volvo since 2018, as well as the manufacturer Geely, is the largest single shareholder through his investment company with a further 9.7 percent stake.
Due to the ownership structure at Mercedes – unlike BMW and VW, there are no Quandts, Porsches, or Piechs pulling the strings, and many shares are in free float – the Stuttgart-based group is considered vulnerable to takeovers. The situation was quiet just a moment ago, when Winfried Kretschmann, the Minister-President of the German state of Baden-Wuerttemberg, fuelled speculation with an announcement that the German government would veto a takeover attempt from China. Whether the Green politician had a specific reason for his intervention remained unclear.
However, it can be assumed that investors in China are looking very closely at a further increase in shareholdings. Hardly any brand is more important to the Germans. Beijing is also aware that a takeover of Mercedes in Germany would be a political issue. Nevertheless, the Group has reportedly taken precautions: When it spun off its truck division last year, it very deliberately assigned a business unit that produces a military variant of the G model to the passenger car division rather than to the truckers. “This provides the German government the option of prohibiting a takeover by China on the grounds of security interests alone,” one hears.
In total, one-fifth of Mercedes shares are in Chinese hands. When looking at the shareholder structure, it often goes unnoticed that the two Chinese players are pursuing their own interests. “BAIC and Geely do not get along at all,” says one observer. State-owned BAIC is Mercedes’ originally chosen partner.
In the case of Li Shufu, on the other hand, one can question his motivation for joining the Swabians. Did the Chinese businessman want to adorn himself with the trophy of being a shareholder in a traditional German brand? Did he initially expect more? Did he want to be in the driver’s seat at Mercedes? One analyst tells Europe.Table, “It’s striking that Kaellenius’ predecessor, Zetsche, has responded rather favorably to questions about BAIC and more neutrally to questions about Geely.”
Meanwhile, there is a cooperation between Geely and Mercedes for the Smart small car. The new model – the company has never made money with the Smart brand in Europe – is now built by Geely in China. The Stuttgart-based company is responsible for the design and technology.
Do Chinese investors have any influence on the operating business? Little is known about this. What is obvious is that they are not represented on the board of management or the supervisory board. It could be that Mercedes will become more Chinese in the future and that activities previously based in Europe will move away, for example, the internal combustion engine business.
Kaellenius proclaimed the “electric only” strategy. By the end of the decade, the company wants to sell only EVs. But he always adds, “where market conditions permit.” The EU will decide to phase out the internal combustion engine by 2035. But a new EV study by management consultants PWC shows that in 2035, 41 percent of newly registered cars worldwide will still have an internal combustion engine.
The study states that 27 percent of new registrations in China will still be internal combustion engines. It is hard to imagine Mercedes abandoning the internal combustion engine business entirely. Once the combustion engine will be buried in Europe, a lot of signs point toward shifting the development of new engines to China.
There is also speculation about the production of volume models. Kaellenius had recently announced the tightened luxury strategy and that four of seven body variants in the entry-level range would be discontinued. The Group has never rejected reports that the A- and B-Class production will not be continued in Rastatt. In the Group’s environment, there were rumors that production of the A- and B-Class would be handed over to shareholder Geely. A Mercedes spokesman told Europe.Table: “I ask for your understanding that, as usual, we do not comment on speculation.”
Cordon bleu Parisian style or an anecdote that went down in the annals of political history: During the 2017 presidential campaign, more precisely on the Sunday of the first round of voting, candidate Emmanuel Macron and his team took a lunch break at a highway rest stop. Which meal do they choose? “I like cordon bleu,” said Emmanuel Macron. The waitress replies: “That’s part of the children’s menu…”.
In this political autumn, however, Emmanuel Macron will have to choose between a disruptive menu and election campaign cuisine. Before we continue with France’s political cuisine, it should be reminded at this point that the Council of Ministers is the formation that brings together all 16 ministers each week – usually on Wednesday – under the chairmanship of the head of state.
It is one element that allows the head of state to oversee the formulation and implementation of government policy and to give – or withhold – his or her approval to several important decisions. More generally, this council allows the head of state to shape discussions involving the entire government with his or her views. The pompous reception halls in which government members are received at the Élysée Palace rival the high level of formality that reigns there – and the tedium.
But that was part of the world of the past, the world before the June parliamentary elections in which Emmanuel Macron’s political formation was dealt a stunning electoral blow, losing its absolute majority in the National Assembly. Not only did his party lose almost half of its mandates, it also lost a majority in the National Assembly: When Macron took office in 2017, La République en Marche (LREM) had entered the Assemblée Nationale with 314 deputies; in 2022, under its new name Renaissance, it will have to make do with 170 seats. The National Assembly consists of a total of 577 deputies.
In a country as centralized as France, political actors and observers have suddenly had to embrace the need for compromise, an approach that seems like a UFO in French politics. The only question is how long this culture of compromise, so alien to France, will last. Because it is a fact that Emmanuel Macron’s opponents, with whom parliamentary compromises could be found, are not numerous enough to guarantee him a stable and lasting five-year term.
After all, in his quest for power, the current French president has weakened his political opponents on the right and left fringes of the political spectrum. While his strategy has made his re-election possible, it has also helped the two extremes and made them heard. In this way, the hypothesis of a blockade leading to the dissolution of the National Assembly becomes particularly credible in this context.
And there will be no shortage of reasons for a political blockade: A health care system on the edge, the increasingly loud resentment of teachers and the galloping precariousness of students, inflation and rising energy prices, pension reforms, and so on. And all this at a time when the country has experienced unprecedented drought and fires.
So, what does this mean for Germany and the European Union? Both Germany and the EU should prepare for two distinct phases in Macron’s second term, state Ronja Kempin and Julina Mintel of the German Institute for International and Security Affairs (SWP) in a new analysis. In the first period, the president will pursue a policy of reform majorities, to win back the trust of citizens and secure a good starting position for new elections. “Accordingly, Macron will devote a great deal of political energy in this phase to negotiating domestic political compromises – and, to this end, will also back away from his promise to reduce France’s national debt,” the two researchers write.
This means Emmanuel Macron will lobby the EU to introduce further stimulus packages and develop new funds, as well as advocate a reform of the Stability and Growth Pact to gain more financial leeway for his domestic reform projects. “Conflicts with Berlin are thus inevitable at this stage if Berlin refuses to continue to suspend or reform the Maastricht criteria,” the two analysts write. “But the German government should always keep in mind that Macron will be forced to dissolve the National Assembly during his mandate in order to circumvent a domestic political blockade.”
If he succeeds, then he would have more room to maneuver in the second phase of his term to address the EU’s future issues – the “European Political Community“, the Union’s autonomy, and peace in Europe. “To work on these issues in Franco-German harmony, German European policy should formulate for itself the goal that Emmanuel Macron can realize his domestic reform agenda. To counteract the growing social disparities in his country, Macron needs Berlin’s support. It would be important for the German government to clearly commit to the EU’s autonomy in health and energy policy and to provide impetus in favor of a unified social and labor market policy,” they stress.
And they conclude: “It may sound threadbare, but it is more likely than ever: If Macron fails, his successor in 2027 will probably be Marine Le Pen. Since the parliamentary elections in June, she has found herself in a very comfortable position of power – which should not be further strengthened in the coming months by a rigid German European policy.”
