Understanding the Surge in German Investments in China

German direct investments in China reached a remarkable four-year high in 2025, totaling more than €7 billion from January to November alone. This figure represents a 55.5 percent increase compared to the previous year and surpasses the average annual investment of €6 billion seen between 2010 and 2024. Compiled by the IW German Economic Institute using data from Germany's Bundesbank, these numbers highlight a strategic pivot by German firms amid escalating global trade tensions.

The boom underscores China's enduring appeal as a manufacturing powerhouse and consumer market. Foreign direct investment, or FDI, refers to investments made by a firm or individual in one country into business interests located in another country, typically involving establishing business operations or acquiring assets. In this case, German companies are channeling funds into factories, joint ventures, and expansions to localize production and tap into local demand.

This trend is particularly notable given Germany's official 'de-risking' stance toward China, outlined in its 2023 China Strategy. Yet, business pragmatism appears to override policy caution, with firms prioritizing stability in supply chains and market access.

US Trade Wars: The Primary Catalyst

The resurgence of protectionist policies under US President Donald Trump has been the key driver behind German firms' accelerated investments in China. Trump's administration imposed broad tariffs on European Union imports, including automobiles, chemicals, and machinery—sectors where Germany excels. These tariffs, aimed at protecting American industries, have created 'sand in the gears' of transatlantic trade, as described by industry analysts.

To circumvent potential retaliatory measures and tariff hikes, German companies are adopting a 'China-for-China' model. This approach involves producing goods locally in China solely for the domestic market, thereby avoiding export-related duties and restrictions. "Many companies say: 'if I'm only producing in China for China, I'm reducing my risk of being affected by possible tariffs and export restrictions,'" noted an expert from the IW Institute.

Germany's exports to the US fell by more than 7 percent in 2025 to under €150 billion, while bilateral trade with China rebounded, with China reclaiming its position as Germany's top trading partner. Imports from China surged 8.3 percent in the first eight months, pushing total trade to €163.4 billion by August.

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Key Sectors Fueling the Investment Wave

Several industries are at the forefront of this investment surge, reflecting Germany's industrial strengths and China's market needs.

• Automotive: The sector dominates, with giants like Volkswagen and Mercedes-Benz deepening commitments. China accounts for nearly 40 percent of Volkswagen's global sales, driving expansions in electric vehicle (EV) production.
• Chemicals: BASF, the world's largest chemical producer, continues massive investments, including new plants for specialty chemicals tailored to Asian demand.
• Electronics and Semiconductors: Infineon Technologies is ramping up chip manufacturing to meet local needs amid global shortages.
• Machinery and Ventilation: Mid-sized firms like ebm-papst are expanding facilities, such as their Changzhou plant, to serve China's booming construction and HVAC sectors.

These sectors benefit from China's vast domestic market—home to over 1.4 billion consumers—and its role as the 'world's factory.' Investments not only secure sales but also foster innovation through joint ventures.

Case Studies: German Giants Doubling Down

Volkswagen Group exemplifies the trend. With joint ventures like SAIC Volkswagen and FAW-Volkswagen, the company invested billions in 2025 to boost EV capacity. Despite challenges like slowing car sales in China (down 10 percent overall), VW's localization strategy shields it from external shocks.

BASF announced expansions worth €10 billion over several years, focusing on Verbund sites—integrated campuses that optimize production efficiency. These facilities produce everything from basic chemicals to advanced materials for batteries and coatings.

ebm-papst, a family-owned firm specializing in fans and motors, highlighted its China model as 'an anchor of stability' amid tariffs. The company's new production lines in Changzhou cater exclusively to local demand, planning further US expansions separately.

Mercedes-Benz and BMW are similarly investing in luxury EV segments, partnering with local firms like BAIC and Brilliance to navigate regulations.

Photo by Kaja Sariwating on Unsplash

Survey Insights: Optimism Amid Caution

The German Chamber of Commerce in China (AHK Greater China) Business Confidence Survey 2025/26 reveals strong intent: 56 percent of respondents plan deeper partnerships with Chinese firms, motivated by knowledge sharing and market access. Over half aim to increase investments in the next two years, particularly in metal processing and machinery.

However, DIHK's World Business Outlook notes caution: only 16 percent plan more investments in some views, with 33 percent considering cuts due to geopolitical risks. Satisfaction in China stands at 18 percent rating conditions 'good,' yet expansion plans persist at 25 percent.

These mixed signals reflect a pragmatic approach: firms weigh opportunities against headwinds like regulatory scrutiny and economic slowdowns.

Policy Clash: De-Risking vs. Business Drive

Germany's 2023 China Strategy advocates 'de-risking'—diversifying supply chains, enhancing FDI screening, and reducing dependencies in critical areas like semiconductors and rare earths. Yet, actual FDI flows contradict this: German outbound to China rose sharply, accounting for 57 percent of EU investments in H1 2024 (pre-surge data).

Chancellor Olaf Scholz emphasized no full decoupling, allowing business flexibility. Critics argue this creates a policy-business divide, with firms prioritizing profits over national strategy.

In China, policies like the Negative List for FDI encourage high-tech inflows, offering incentives in green tech and advanced manufacturing.

Boost to China's Economy and Job Market

For China, German FDI injects capital, technology, and expertise. It creates high-skilled jobs—estimated tens of thousands annually—and supports supply chain upgrades. In 2025, amid domestic FDI slowdowns (down 27 percent overall), European inflows provide stability.

Provinces like Jiangsu (ebm-papst) and Guangdong (VW) benefit most, fostering industrial clusters. This aligns with China's 'dual circulation' strategy, emphasizing domestic consumption while engaging globals.

Professionals in engineering and management gain opportunities; check China job listings for related roles.

Challenges and Potential Risks

Despite the boom, risks loom. Overreliance exposes firms to China's economic slowdown, property crisis, and policy shifts. Geopolitical tensions—US-China rivalry, EU probes into subsidies—could trigger scrutiny.

• Supply chain vulnerabilities: Rare earth dependencies.
• Regulatory hurdles: Stricter IP enforcement, data laws.
• Competition: Local EV makers like BYD eroding market share.

Germany plans tighter outbound investment rules in 2026, potentially curbing flows.

Photo by Tianyou Wang on Unsplash

Outlook for 2026: Continued Momentum?

Analysts predict sustained investments if US tariffs persist. BGA exporters foresee weakness in US/China export markets but localize to adapt. AHK surveys suggest optimism in partnerships.

China's stimulus measures—fiscal expansion, tech incentives—could amplify appeal. However, a global recession or escalated trade wars might temper enthusiasm.

Long-term, expect hybrid strategies: China expansion plus diversification to ASEAN, India.

Global Implications and Strategic Lessons

This surge signals a multipolar trade era, where firms hedge against US dominance. For Europe, it challenges unity on China policy; for China, validates openness amid US decoupling.

Stakeholders—from policymakers to executives—must balance opportunities with resilience. Actionable insights include localizing production, forging JV partnerships, and monitoring tariffs.

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