Back in 2017, China’s former SASAC chairman told Joerg Wuttke, then president of the EU Chamber of Commerce in China, precisely which industries China’s overcapacity machine would roll through next: EVs, batteries, solar, wind, basic chemicals.
Fast forward a decade, and it happened exactly as he predicted.
Joerg’s very blunt take: “China, in essence, is kind enough to tell us when and how they’re going to roll over us.”
On this episode, Trivium China Podcast host Andrew Polk, along with co-host Cory Combs, sits down with Joerg – now a partner at DGA-Albright Stonebridge Group – to unpack:
Why “China Shock 2.0” isn’t really a shock at all, but a systemic feature of how Beijing plans its economy – which was written out in black and white years in advance
The shipping container math that captures the trade imbalance better than any dollar figure: one container now leaves Europe for China for every four that come back
Why Wuttke thinks a stronger renminbi, not tariffs, may be China’s real concession on the table before October’s EU-China trade negotiation deadline
The key Chinese tech sector Wuttke says Europe should consider closing its market to (and it’s not the one you’d guess)
Why demographic collapse, not trade policy, might ultimately be China’s biggest vulnerability – and Europe’s unlikely opportunity
This episode is another banger, y’all. You won’t want to miss it!
Transcript:
Andrew Polk: Hi, everybody, and welcome to the latest Trivium China Podcast, a proud member of the Sinica Podcast Network. I’m your host, Trivium co-founder Andrew Polk, and I’m joined today once again by Trivium’s Head of Supply Chain and Critical Minerals Research, Cory Combs, who’s going to be co-hosting with me today because we once again have an excellent guest who I’m really, really excited to have on.
I’ve known this gentleman for a long time. I have a ton of respect for his views on China. He is a longtime president or was a longtime president of the EU Chamber of Commerce in China and former chief representative of BASF in China. Now he’s a partner at DGA Albright Stonebridge Group in Washington, D.C. Of course, I’m talking about Joerg Wuttke. Joerg, welcome to the podcast.
Joerg Wuttke: Thank you. And I’m glad you do it in German.
Andrew: That will be the next go-around. The next iteration of the podcast will be the German version. Cory, how are you doing today?
Cory Combs: Very well. Just really excited to have this conversation with Joerg.
Andrew: So, today, we are going to talk about EU-China trade relations, which have been increasingly fraught, shall we say. Last week or a few days ago, we had on Evan Medeiros to talk U.S.-China. So we thought a great way to pair that would be talking with Joerg about EU-China going through all the sort of ins and outs of the latest moves. Of course, this comes as the EU’s goods deficit, trade deficit with China has widened to roughly 1 billion euros a day. Brussels and Beijing are both squaring up ahead of an October deadline to make “tangible progress,” whatever that means. So, we’re going to get Joerg’s read on all of it. But of course, before we do, we have to start with the customary vibe check. Joerg, how’s your vibe today coming into this podcast?
Joerg: Excited. Excited to participate here. I’m a big fan of your podcast.
Andrew: Well, thank you so much. And thanks again for coming on. Cory, how about yourself?
Cory: Likewise. It’s been really fun. I mean, we know what we have to say. And so, the best part of this to me is just getting to hear what experts, especially in regions where we don’t specialize. So, really excited to have this conversation again.
Andrew: Yeah, same. I have to say, for my part, I am coming into this well-rested. I never take naps, but I’ve been running a lot. So, I’ve been getting increasingly tired during the day. I sat down to have a late lunch and just passed out for an hour right before this podcast. So, I am well-rested and ready to get into it with Joerg. Of course, before we do get into the meat of it, we have to quickly go through the housekeeping.
Just a quick reminder, we’re not just a podcast here. Trivium China is a strategic advisory firm that helps businesses and investors navigate the China policy landscape. That, of course, includes domestic policy in China on a bunch of different issues, whether that be technology, macro markets, you name it, we do it. But it also includes policy towards China out of Western capitals like D.C., London, Brussels, and others. So, if you need any help on any of those fronts, please reach out to us at hq@triviumchina.com. We’d love to have a conversation about how we can support your business or your fund.
And otherwise, please do tell your friends and colleagues about Trivium. The word-of-mouth recommendations really, really mean a lot to help us grow our business, get the word out about the podcast, and what we’re doing here so we appreciate those recommendations all the time. All right, Joerg, with that, are you ready to get into it?
Joerg: Yes, definitely looking forward.
Andrew: All right, I think we just start with the big narrative that everyone’s talking about right no,w which is China Shock 2.0, which I think you can loosely define as sort of this deluge of tech-intensive goods, especially clean tech, batteries, EVs, even machinery and chemicals as well, though, replacing the old labor-intensive model of low-cost goods being sold out of China and to other markets.
From where you sit, do you think that framework is the right one to use? I mean, I know it’s coming to vogue. We’ve, at Trivium, I think we have a few different views on it, but I just want to start there. Tell me how you think about the China Shock 2.0 framework.
Joerg: But China Shock 1.0 was basically shortly after WTO recession. We have to keep in mind that China was 4% of global GDP in 2000. Last year, they were about 17%, 18%. So, we talk about a completely different China. Second, China was nowhere in manufacturing and exports, in particular 20 years ago, 30 years ago, but now they produce 25% of all the goods that are floating around in the world. And their plan is clearly communicated, and China has a plan. They want to go to 30%.
So, in a way, where’s space for other countries? I’m not talking about Europe and the U.S. Where’s space for Turkey, Thailand, and others? Because the miracle of China Shock 2.0 is, it’s not just leaving some items, socks and bras and shoes behind, 95% of the fire lighters are still coming from Hunan. So, in a way, China is expanding without leaving certain areas, and they’re expanding, unfortunately, exactly where the OECD countries were strong.
Andrew: Yeah, it’s obviously sort of getting more and more attention from businesses and policymakers. I know you talk to policymakers a lot in the EU. How would you characterize the mood there? I’ll kind of take my stab at it. Every time I talk to European officials, they seem more and more ready to go toe-to-toe with China. Is that tension ratcheting up from what you see? Am I reading that right?
Joerg: Well, we are in the perfect storm as Europe. First of all, we have a war across the border, which has jacked up our energy prices tremendously, and there’s no end to the war. Second, we have Washington-Gaga, meaning we are in a trade war and every agreement that Europeans sign with the Americans seems to be signed by the Americans with a pencil. So, how long is it valid? And then, of course, there’s China. And we are part of that.
We are, as a foreign direct investment, deeply embedded in China. And that’s the policy problems that we are facing. Is a Volkswagen built in China with 98% local content, the design is not in Shanghai, is that a German car or not? It is a German-branded car. So, policymakers see that basically the divergence from added value from actually a shareholder value that companies derive from China.
So, in a way, it is very hard. And hence, they get a lot of fire from trade unions and public opinion. At the same time, everybody knows if policymakers would get real about the toolbox that they have built up, China would retaliate, and that might be even more painful.
Andrew: Yeah, well, we’ll get into the toolbox a little bit here in a minute. And I want to bring in Cory as well in just a second. But when you think about sort of broadening out to all of the volatility going on globally, there’s obviously U.S.-China tensions. And we just talked about how EU-China tensions are ratcheting up. How does the U.S.-China tension in those negotiations play out for Europe? Do you think that helps Europe in its negotiations with China at all? Does it hurt? Does it just not matter?
I mean, there’s obviously tensions between the U.S. and Europe, as you just alluded to, but I’m just wondering how you think about sort of how that three-legged stool interacts.
Joerg: No, U.S.-China tensions are not good for us. First of all, the U.S. started a trade war, which they lost. And they lost because the Chinese found the magic of rare earth licenses. And guess who didn’t get to rare earth? Primarily Europeans and Indians, you know. And so, we have the U.S. withholding technologies, export controls, trying to squeeze the Chinese technology-wise, and they have the unattended consequences of actually making the Chinese stronger.
So in a way, the policies coming out of the United States have, to a large extent backfired, and they have put a lot of pressure on our politicians and business leaders because the U.S. says, “You have to be with me or you have to be against me.” But there’s no middle way. And we don’t want to be anywhere like this. We, meaning Europeans, but also Southeast Asians, we don’t even want to get asked. So, in a way, this kind of behavior that we have realized has made our supply chains very, very difficult. All of a sudden, we cannot import things that have certain Chinese components in the cars or in electronics, for example.
And the Chinese do exactly the same. So, the Europeans have to produce three versions, one for China, in China primarily, one in the U.S., hopefully in the U.S., and in Europe for the rest of the world. So, it doesn’t make it more easier. It makes it more complex, hence more expensive.
Andrew: Yeah, that makes a lot of sense. I want to follow up a little bit on the China Shock 2.0 narrative. we did a podcast with one of our colleagues a few weeks ago, Cosimo Ries, who I asked about the China shock 2.0 narrative, and he said, he thought it was kind of overblown, and we got a lot of comments on that narrative. His basic thesis was that, he’s Italian, that the Europeans didn’t do enough to sort of invest up front to sort of stave off, you know, the Chinese take over of clean energy and things like that.
We’ll get into the overcapacity piece just after this, but I was wondering what you make of that argument. Do you give any credence that European policymakers and European companies sort of under-invested and didn’t prepare? Or obviously, the flip side of that is that China was subsidizing and making it uneconomical to invest in these things for a long time. But just wondering if you had any thoughts on that view.
Joerg: Well, you have a shock when you are surprised. And I think COVID was part of this, that actually this non-travel, the kind of not actually seeing China developing disconnected with headquarter led to complacency in Europe. We looked inside, and basically we didn’t see the technology revolution that happened in China. And so, when, for example, the top executives came in early 2023, they couldn’t believe what they saw on the streets of Shanghai, for example.
And the showcase was more pronounced when, for example, they were given keys and hunting the race course and said, “Would you please get in the cars and drive these cars?” now car companies normally have the attitude of buying a competitor’s car take them apart to see how it’s going. And I think that’s exactly what happened. They bought Chinese cars shipped them to Germany, and they were taking them apart instead of driving them, getting the feel for it, how good these cars are. So, the shock built up over three years of non-meeting, so to speak, and then there it is. And shock is always when you’re not prepared.
And again, Europe has been incredibly complacent, as pronounced by the Draghi Report. Only 11% of the report has been implemented. So sometimes it’s a good thing. It helps us to focus. It could be a Sputnik moment, and maybe we get better because of this. But if we stay the way we are, we’re going to be duped.
Andrew: Yeah, I mean, that’s a great perspective. Cory, I want to bring you in. What are your thoughts on all this and any questions for Joerg there as well?
Cory: Absolutely. I really appreciate that framing of it. And I’d love to ask a bit more about the internal politics between member states within the EU. If I’m not mischaracterizing, push back if appropriate, but my understanding is China shock 1.0 and 2.0 have rather different characteristics. First of all, the 1.0 was obviously focused on lower value-added goods. And it really hit, I would argue, Italy, Spain, Portugal a lot harder than, say, Germany, which I don’t want to say is a net beneficiary, but the export growth of vehicles and machinery at that time, I think Germany came up pretty well.
From where I sit, it seems like Germany is the most exposed to the second shock, right? And so, thinking about the dynamics within the EU across the member states, I’m curious to hear how you would characterize and what that means. Is there unity of response across the EU? What do you expect based on the dynamics you see right now?
Joerg: Oh, no, we never have unity. Dream on. That is the base mode, the absolute situation. So, we have, of course, different opinions. But, you know, Jean Monnet, the father of Europe in many ways, a French politician more than 70 years ago, said, “Europe will be forged in crisis and will be the sum of the solutions adapted for those crises.” That is an optimistic outlook. And I hope it’s going to be true. And I hope that actually we find politicians that actually can voice it and communicate this, that we are in this situation. Unfortunately, and that’s where we have a crisis, is we have not strong, street-smart politicians.
We have possibly the weakest lineup across the whole of Europe, with a notable exception maybe of Denmark. The Danish leader is very strong. The Finnish president is very strong. But the others don’t find the language in order to get their countries to actually realize there’s a problem. And they still sort of see that as a zero-sum game, and it’s not. And, of course, wants to be more political and always looks like power grabbing. So. there’s this fight going on.
But, you know, the data is so clear that something has to happen. We have a billion euro as trade deficit a day. And that doesn’t even start to describe the magnitude of the problem. Because the interesting thing is that from 2015 to 2025, the tonnage in million tons went from 2024, 44.8 million tons, to 2025, 58 million tons, meaning 20% increase. So the overcapacity of China, the price erosion that we’ve seen, doesn’t really indicate in the dollar or the euro denominations of how big the challenge is.
Jens Eskelund, my successor, head of Maersk in Beijing, had a great example. He said 2019, one container went to Europe and 2.7 came back. In 2022, it was one container, and 3.4 went towards Europe. And I guess now we are at one container going to China and four coming back. And the interesting difference to the old days is also that 20%-25% of those things in the containers are made by European brands. And so that completely changed. And so, for us, it is a real challenge.
Andrew: I want to dig in a little further on the overcapacity piece specifically. You and others have argued, and I would agree, that overcapacity is sort of a structural feature of the Chinese economy. You’ve got companies that don’t fail, and of course subsidies, and sort of just a political economy that incentivizes local governments to overinvest. Do you see anything in the policy landscape that would make you think that China is getting in any way serious about addressing the issue of overcapacity? There’s, of course, the anti-involution campaign. We talk about that a lot. We’ve seen a patchwork of moves on that front. Nothing really building up to a major policy push yet that would address the root causes. But where do you see in terms of appetite among Chinese policymakers to do anything about this?
Joerg: Well, during the time of the great financial crisis, 2008/ 2009, my first term as president, I made a study called overcapacity. Now, the good news is that China grew out of it, out of overcapacity in steel, aluminum, because they just took off, you know. And then there was again overcapacity 2015, 2016. And I had the great privilege of knowing quite well the former SASAC chairman that runs the state of enterprises, Chairman Li Rongrong.
He was fired by Wen Jiabao because he wanted to reform SOEs. Bad idea. And so, in a way, Chairman Li stayed friendly with me. And I went to see him, he says overcapacity is a big problem in trade relations. He said it is not a big problem in trade relations. It could well be, but it is harmful to our domestic industry. And he was basically the report I launched in 2016, he was basically a little bit of my inspiration and ghostwriter. Because he outlined to me why overcapacity is systemic. Basically, he framed it like this. Whatever China plans has overcapacity.
Why? Because we project demand. Then we keep the foreigners out. We finance it. So, everybody knows there’s going to be the demand story. And replicate 31 regions. And he said, “Now comes the problem because we do not only have 100 SOEs, the big ones, but we have 150,000 regional and local SOEs.” And believe me, nobody’s going to leave the battlefield. They’re going to continue until never ever day because they get funded by local governments. So, he says, “Have you ever realized there are overcapacities in socks and underpants?”
And I said, not to my knowledge. He said, “Yes, because they are private companies. They go belly up.” But if you have overcapacity in other areas where SOE money is in there, they will definitely hang in. And so the report came out in ‘16. And I, then, because of the success, asked him to help me on a report made in China 2025. That came out in March 2017, so nearly nine years ago. And the messaging there was basically, again, on his story, there will be overcapacity in EVs, in batteries, in wind parks, in solar panels, as well as basic chemicals, you know. So, China, in essence, is kind enough to tell us when and how they’re going to roll over us.
So, when you look at the 15th five-year plan, again, Chairman Li passed away 2020, unfortunately, so I can mention his name, he basically would say, you know, look into biotechnology, keep an eye on robotics and AI because these are the plans that China has in order to fight off basically the demographic disaster they’re facing. So, in a way, we have to see as companies where we are getting challenged and we might do a portfolio rearrangement. Say if the Chinese plan this, maybe I sell it now. And second, we, as policymakers, have the privilege of knowing exactly where the Chinese are going to hit us five years from now.
Andrew: Yeah, Cory, I know you’re doing a lot of work on these industries that Joerg just mentioned. How do you think it all fits together?
Cory: No, absolutely. And for one thing, it’s very validating to hear because that is effectively the methodology we’ve taken in trying to understand if there were a made in China 2035, what could it look like, and what lessons could we draw and what can we not draw? So, everything you just said, I mean, you mentioned that China projects demand. And part of that is it has remarkable ability to create demand, not as much as it has to create supply. Right? So, I mean, I have one question for you, which is, how do you effectively push back on that?
Or how do you correct this? In particular, does the EU have the ability to create demands the way that China does? I mean, not to the same extent, but that’s kind of a background question, I suppose. But in terms of where we’re looking right now, I think the diagnosis you’ve had is spot on. I mean, we see when we look at new R&D, we look at investments in fixed asset investment, a lot of it is in biotech, biomanufacturing, but China would call embodied AI. So, robotics and humanoid robots, all that stuff. So, it’s exactly as you said.
And I think something that maybe is a bit of a misperception among kind of non-China specialists is that this is tea leaf reading. It’s a structural feature of what industries can create, what types of value do we need, when. And there’s a certain timeline. Yes, quantum would be lovely, but it’s not right on the horizon, right? So, what is humanoid robotics, right? And so that’s kind of what I think Chinese authorities are doing. I think it’s what you’ve been reading. And it’s how those of us who learned from those studies carry it forward.
And I think that’s reliable because as much as we talk about, us learning from China. I mean, I think you and others have made this point very clearly in a lot of work, but the central authorities have to communicate plans and intentions to the rest of the country. So of course, it’s going to be available if you know where to look. So, anyway, that’s just a tip on that. But back over to you.
Andrew: Well, let me pick up on the point you made there, Cory, or the question I guess you had for Joerg, which you alluded to earlier, Joerg, which is the expanding toolkit of the Europeans. So, I guess double-barrel question here. One is, talk to us about that toolkit as you see it beyond just the tariffs piece. But then, if you would answer Cory’s question, does Europe have the wherewithal or the desire to also kind of create a domestic demand play? Because taking that page out of China’s book would seem like a pretty strong industrial policy play that the Europeans could follow as well. So, talk to us about the toolkit.
Joerg: Well, the toolkit has been built up over the last 10 years. And I give you one example. As a BASF manager, I was part of a group that constantly lost bits, M&As globally. Syngenta was gone. Adisseo and other [inaudible 00:20:47]. Definitely Michelin lost its bit on Pirelli. They all had Chinese owners. And I found this very unfair because the company that bought these from mentioned firms was technically bankrupt.
I know from Li Rongrong, he asked us to look into this, ChemChina. And he was of the same opinion. How can they possibly bid $34 billion for Syngenta and make it happen? Turns out to be they went bankrupt and Sinochem took over. Sinochem is a good company, but still, it was gone. I went to Brussels and said, you know, “We have to do something on this one. That is like 1988 Olympics.” It’s Carl Lewis against Ben Johnson. It’s 100 meters for all of us, but one guy has red eyes, you know, and he runs on steroids. And again, no freedom of capital.
You know, a shareholder wouldn’t take it and so forth. I went to Berlin and the vice minister of economics said to me, “We have to find a screening process to make it fair and square for everyone.” And that’s what I proposed. And I was absolutely surprised that within two years, this screening mechanism made it through the European Parliament is implemented. So, this nonsense of bankrupt companies being subsidized and buying up trophies in Europe has, to some exten,t stopped. And the Chinese have now turned more to generally greenfield things. We have, of course, a toolbox anti-coercion that looks into, if we are getting hammered, we exclude China from procurement and so forth.
But the space, the wiggle room is very, very small. Because Europe, in essence, unlike the U.S., is based on regulations and not on whims. And we don’t govern by exclamation marks. So, in essence, we take our time to make investigations and then come up with a result. And you see it coming and takes one or two years, and then maybe it’s already too late. The Chinese are much smarter about this one. They act, and the U.S. has been more brutal about this one. They just do it. So why are we so reluctant? Well, because we take our time. We have the bigger market. We have 500 million people. And we always thought that China depends on us. To some extent, yes, it’s an export market.
But they have rare earth. They have legacy chips. So basically, the pain that we inflict on China will take months, if not years. They can basically shut down our factories within months. And that’s the difference in the problem that we have, that China has politicized rare earths. And of course, the Nexperia implosion last year has shown us how close our factories, particularly the three big customers of Nexperia, which is Bosch, ZF, and Continental, got to a standstill, which would have then meant that Mercedes-Benz, BMW, and Volkswagen won’t have these pieces they need to.
A small piece makes that. So, in a way, that’s the impact assessment Berlin, Paris, and Brussels have to do. Where can we actually do something? So, there are lots of dumping cases up. The most famous recent one was on Beijing Duck. I’m not kidding you. It’s poultry. And so far as I can see, there was no retaliation. But a broadband U.S. style is not possible because A, we’re Europe. We squabble about it. And B, we have the fear that our factories will have a ripple on effect and basically have more damage than we have healed in our economic landscape.
Andrew: Yeah, I mean, I think as someone, one of the few free traders still left in America, and someone who appreciates the rules-based order that everyone worked so hard to develop post-World War II, I appreciate the deliberative nature of the European approach. It does seem like it is hamstringing the response both to the U.S. and China. And so, the question is, how do you maintain the commitment to those principles and the system that you’ve built, the rules-based system that you’ve built, while also having the capacity to fight back in an effective way?
Joerg: Well, I mean, again, I have a label for three countries that I deeply care about. USA, where I live, China, where I live 35 years, and Russia, where my wife is coming from. These typically autistic nations. They find it very difficult. We have to realize that. We are 28. We try to have a compromise and we talk to each other. They don’t care. And so, in a way, we have a situation where we have to realize that we have partners which we cannot influence.
Hence, we can only influence ourselves. That’s what I’m saying. Again, where we can fix ourselves is something where we can get more competitive, deregulate, get the venture capital more prominently going, knock down the domestic protectionism that we have within the European Union. And the other thing we have to do is we have to reach out to like-minded countries. And Brussels does this really, really well.
We have a free trade agreement signed now with Canada, with Mercosur. I mean, 30 years of negotiations, thanks to Donald Trump, we got this over the line. We have a free trade agreement, I can still hardly believe it, with India of all countries, which is far more protectionist than China, I would say. But still, we opened the door. We created room for European companies to operate easier, also with other countries. So, in a way, unlike the U.S., which basically is burning bridges, we are building bridges. But again, with the Global South. And there we meet a competitor called China that has a different attitude towards these countries.
So, in a way, we have to talk to China. We have to talk about the renminbi. Again, we have a devaluation of the renminbi towards the euro over a certain period of time. But the biggest problem that we have is the deflation in China and inflation in Europe. We have a differential every year of 5% over certain years. You add up a 20%-30% disadvantage. How can you possibly compete outside Europe with China? So, we can maybe with our toolbox protect ourselves in Europe, but we are losing the market in other places. I give an example— Exports from China to Africa increased by 50%.
I learned this on your podcast, by the way. And 40% of machinery in Nigeria and Kenya are coming from China. That used to be our market. How can you possibly compete against a weaker renminbi, deflationary companies struggling with overcapacity? So hence, we realize an industrial hollow out effect in Europe and other nations. And that’s why free trading games are so important to us.
Andrew: Yeah. I want to bring Cory in because I know he’s got some thoughts. But I’ll just quickly mention to you, you might think this is interesting, Joerg, increasingly, some of the work we do, especially when it comes to private equity firms, is private equity firms that want to buy European industrial players, usually mid- to small players. And they want studies done on what if China comes into the market, not in Europe, but in other jurisdictions.
Do the economics that the private equity firm is assuming for profitability, market share, all of that stuff hold if a Chinese player comes in and presumably really crushes margins? And so, that’s a new thing that we hadn’t heard in the past 10 years of us doing this work. But increasingly, we get those kinds of inquiries, which just shows you that this is really on people’s radar.
Joerg: Yeah. Well, the interesting thing that my firm does, we hardly overlap, by the way, Rhodium and Albright Stonebridge Group. We’re a little bit more in the machine room, I would say. Companies get in trouble in Africa or in Southeast Asia or China. We are there to do communication work or to explain how things are. It’s not just what we know, that’s where you’re strong, but who we know.
Andrew: Yeah, yeah, yeah. No, you guys are excellent at what you do.
Joerg: A new development I see is, you know, when you are a European company, and you’re Chinese-owned, then all of a sudden you’re in deep trouble in this country.
Andrew: Yeah, yeah.
Joerg: Syngenta was kicked out of Arkansas. We have two senators going after Mercedes-Benz because Mercedes-Benz has more than 50% Chinese shareholders.
Andrew: I saw that.
Joerg: Even though they have a footprint like there’s no one else in South Carolina as well as Alabama, all of a sudden they get threatened of basically getting kicked out of the United States. And at the same time, I realized in Europe that Chinese companies are going big and buying out European companies. When I was briefing our minister of economics before she left for China, I told her, you know, “Once you are Chinese, you might actually have some benefits,” meaning better access to the Chinese market, in particular when you are based in China as a company already.
But at the same time, you might have to kiss goodbye to the U.S. market, you know. And so, I think that there has to be an awareness, in particular the small and medium-sized companies that are targeted by the Chinese, high-tech companies. Some of these companies have a global market share of 70%-80% in their respective area. They’re called hidden champions. So that is a new development where we are trying to basically help these companies to stay in the U.S. and get a waiver or get licenses and so forth.
And at the same time, of course, we have companies that are targeted in China all of a sudden because they are participating in investigations in order to dump in cases and so forth and so forth. And we have to basically tell them, A, where the problem is, and B, how to get out of that situation. So, the U.S.-China trade tensions actually really make it far more difficult to operate. Supply chains are threatened, and it’s very complex. And again, at the end of the day, you know, when you see that USMCA is coming up and possibly it’s local for local, and they will desensitize Canada and Mexico, guess who is next in line who gets hammered? It’s the European Union.
Andrew: Yeah. Well, it’s fascinating stuff. I mean, the issues that companies are increasingly facing, the companies you’re working with, the companies we’re working with. I try actually not to say to clients like, “Oh, this is a really interesting problem,” because for them, it’s just a problem. They don’t care if it’s interesting. But Cory, you have some thoughts here.
Cory: Well, I have questions, always have questions. And I think that’s a good segue. So, I’d like to kind of step back and ask your view on there are multiple challenges here, some of which are really corporate and commercial questions and some of which are not. And you can obviously push back on the framing here, but I think we have obviously the trade issue, right? So, we have like the steel regulation trying to control how much Chinese steel comes in. So, it’s really a trade issue and trying to protect the existing industry. But it’s not industrial policy in terms of renovating, revitalizing or advancing that industry.
So, the separately industrial policy comes back to competitiveness. And then you have, I’d argue, the security element. And so, a lot of overcapacity obviously is commercially focused, but there’s also issues of when China holds 80%, I don’t have the actual numbers, so don’t quote me on this, but holds a very, very large portion of the subsea cables that are going to the EU, is that a security issue? In rare earths, for example, that is partly commercial, but also very much a military security issue.
And the problem with that is it’s just not a financially attractive industry. And you’re not going to find any secret technology that makes it suddenly attractive to private equity, except for the Pentagon giving a bunch of contracts. So I’m curious, in your view, and this can be compare-contrast to the US versus the EU, which have very different ways of handling the relationship between the trade, industrial policy, and security. But mostly, I’m curious to hear what you think the EU is/should be doing when it comes to these issues? Does it need to do more on protection, on trade protectionism?
Does it need to do more on really trying to advance industry in ways that make it more competitive? Or are there some things where the EU really needs to double down and do basically what the Pentagon’s doing with rare earths and saying, look, we don’t care how much it costs. We’re just going to pay for rare earths that are American. You know, there’s only so many resources. How do we prioritize?
Joerg: Yeah. Well, I think that for the European Union, the idea has to be, and I was trying to allude your industrial policy question, Andrew, there has to be a protective and defensive element in there, but very targeted. So, we don’t fall into, this is China, that’s security, let’s close borders, that makes us complacent, that makes us internationally not competitive. So, we have to sort of really get scientific about this and find where’s the damage, how big is the damage, and then act upon it, you know. I think Europe has done a good job in 2024 in September by outlining what kind of stacked up subsidies the EV cars had.
They spent, I think, 100 people, months, and came up with 9% to 28%, you know. And I think that’s the way how to do it. And you have to explain it to the Chinese that this is going to happen. You have to play defense, definitely, but also you have to play offense. Industrial policy is part of that. And again, we have to learn from China on the kind of demand story. The resource pooling, the kind of things that they have done in a wonderful manner. And we have a good history on this one. We used to have basic crappy planes until a politician, Franz Josef Strauss, in the 70s, emerged Airbus, created Airbus.
And all of a sudden, we are now airline producer number one with Boeing, more or less. So that is a success story of industrial policy. We have to basically pool and stop having 27 solutions to one problem in Europe. And at the same time, we have to also recognize the base of why we are getting weaker and why China is better in this respect. You know, China became so innovative over the last years. And my definition of innovation is demand meets brain.
You know, they have just the scale of market possibility. 1.4 billion people, and we have maybe some patchwork of 500 million people. So, we have to fix, again, according to Draghi, our domestic market. And second brain, you know, there is clearly an incredible pipeline of engineers in China. In chemicals, basically 50 of the top 100 universities are based in China. In instrumentation, 44. So if you want to be top, you go basically where the brains are and where basically these engineers are constantly, which are labeled, fitness center. You know, this was basically picked up also by the Prime Minister. China’s a fitness center.
No credit for me, but no. So, in a way, you know, if you have so many engineers and you basically put them at work all the time, that’s the demand story. And you basically then have a situation where you can build cheaper, faster, and the Chinese are more risk-saving in the first place, you know. We have to learn from them. And we have as multinationals to be in China in order to be in that situation that we can plug into this knowledge and maybe replicate this outside.
This is going to be dangerous for U.S. companies if they don’t do this. They basically fall behind and don’t realize it and then have a China shock 3.0, you know. So, in a way, it’s very interesting to see that in China now, not only kindergartens and maternity morts are closing, but also finance and marketing institutions, you know, teaching. Kids are moving away from accounting and from this kind of work to engineering. The engineering institutes in China are overwhelmed by the demand of students, you know. Why?
Because the students see clearly that I have to be an engineer to get a good income. And if I’m in finance or in marketing, I might be replaced by AI. So it is something where we have to learn in Europe that we actually really focus on that one. And now for us in Europe, of course, again, we are between a rock and a hard place on AI. Are we going to go Chinese, or are we going to go American? The Americans basically have threatened to close some software for us in AI, Anthropic, I think it’s called. And the Chinese are open-source. But if we install a Chinese AI, do we actually open a can of worms? Or is it beneficial because it’s also much cheaper?
So, in a way, Europe has to realize that AI is something where we are lagging behind. So maybe we have to sort of make it an effort with money, with demand. Again, the Chinese story of growing its demand story, not necessarily subsidies, by the way, in order to get less dependent on these two big nations.
Andrew: Yeah, I will say, I know the premier didn’t give you credit, and you have a long and consistent history of one-liners about China that get quoted over and over. But China is a fitness center for multinational companies is the most quoted China-relevant statement that I’ve seen over the past two years. So, I think you’re doing pretty well on that one, I got to say.
Joerg: I had a great coach. EU Commissioner Peter Mandelson came over and I admired his eloquence. I did not admire his money-grabbing, but he was a very intelligent man, charming man. And he said to me, “Politics is repetition.”
Andrew: Yeah, very much so. I want to pick up a little bit on everything you just said to ask, you know, you’ve talked about, I think it made a very eloquent case about how companies need to be in China to be able to compete the whole fitness center idea. I fully agree with that. I think you made a great point. American companies too, I think, in the U.S., we tend to have reductive thinking where it’s like, “Oh, well, China’s a threat. Let’s just extract ourselves from their market. Let’s extract them from our market.” It’s not that simple. And there’s a lot of unintended consequences, and not even unintended, but you can end up in even a worse place.
I think you’ve also talked a little bit about targeted self-sufficiency. Are there any areas where you think Europe should, I mean, is it the rare earths, should be a little bit harder on really focusing in on EU self-sufficiency in certain areas? Anything you can point to there that you think differently about?
Joerg: Well, I said I had dinner in Berlin, briefing our Chancellor Merz Friedrich in February before he went. By the way, very interesting story. I went in the room, and I said, “Chancellor, when have you been the last time in Beijing?” And he said, “When you were hosting me as chairman of the German chamber.” I said, “Holy moly, you know, that was 2001. How would you manage to stay away from the capital of China for 25 years?” You know, he’s very focused on the West. I think that we have to find allies, like-minded countries.
And at one stage, I hope that the U.S. again turns and signs deals with a ballpen. We have to realize that we have a long period of time ahead of us before we become sufficient in refining of rare earths. You know, despite the name rare earth, in most cases, it’s not rare. We have to realize that it’s the toxic dealing with rare earth that we have seen in Inner Mongolia, the kind of nuclear impact that it has, the kind of chemicals that created these lakes of chemistry in Inner Mongolia. You know, we outsource pollution to China by letting them do the refining process.
So, we have to learn how they do refining, and we have to learn to do it in a way which is more environmentally sensitive, or we have to do it where it doesn’t harm too much. We cannot do this in Luxembourg. of course. and we cannot do this in Switzerland. But maybe we do it in another country which has the facilities for it or has the water, and the energy and has all of the above and the ability in order to actually digest a bit of environmental penalty.
This is something where we cannot, as European, expect anything over the next five to ten years, maybe in ten years. We have to spend a lot of money on technologies we have to work with the Japanese in order to see how far they get. They’re normally very good at this because they learned the hardware already in 2010, 2011. And then, of course, we have to realize in some areas, we will never be self-sufficient. And maybe we don’t have to be. I said to the chancellor, on solar panels, so let it rip. If a country has 90% and the price fell by 80% over the last five years, happy-go-lucky.
They help us in our transmission. But just make sure that the datasets don’t end up in wrong hands, and that cannot be switched off from Shanghai. So, these are things where we have to sort of see where can it damage us, a real security threat, and take it serious. You know, Archimedes wind turbines, a security threat, certainly for the jobs of those that work for Siemens Gamessa, and for Vestas, but clearly not for the people actually running it. They can prove very easily with third-party checks that it is something where you can basically use Chinese wind turbines, which are very good.
But there’s one case where we might have to reconsider, and that is Huawei. I’m privileged in a project, you can imagine which company, that was bidding on 5G in southern China. And, to our surprise, turns out to be that Nokia was the most cheap and efficient, energy efficient, and quality-wise, best one. So, I said to the Nokia guy, “How is it possible that you guys, Ericsson and Nokia, after all,” we have still telephone companies like that, telephone equipment companies, “that you can basically not succeed in China?” You know, China is absolutely crucial because it’s 50% of the global 5G market.
So, if you have a percentage as they used to have 10 years ago, 30%, now they’re down to 0.2%. How is that possible? He said it’s very easy because Chinese companies were not very keen to actually bid for this project I was talking about because they would be undercutting their normal price level. So, China Mobile and Unicom actually agree on paying a premium so that Huawei and ZTE and all the others actually can go global, and with that kind of hidden subsidy, undercut Ericsson and Nokia that don’t have this privilege of having this huge, huge supply-demand story, particularly for these two providers.
So, in a way, they’re not necessarily saying, okay, Huawei is a security threat. Since forever, nobody has proven it, I think. But it’s an unfair business model that they’re driving. And that’s why, on 5G or maybe on 6G, we should actually really consider that, A, they open up their market more for these two players in China, because again, it’s 50%, or that we say, “Sorry, guys, you’re closed, we’re closed.”
Andrew: Yeah. Well, that’s actually a great segue into sort of the current talks, because it does seem, as we started off the conversation with, that Europe’s getting tougher. And it sounds like, you know, you say, you’re putting on the table, hey, maybe we need to close our market outright in some areas if they’re not going to open it. Can we just talk a little bit about where things stand currently in terms of the next few weeks?
I mean, we’ve got this October deadline that the two sides have said they want to make “tangible progress.” What is a realistic good outcome over the next few weeks? What is tangible progress? What is your expectation of any kind of breakthrough at all?
Joerg: Well, from now until I would say 15th and 16th of October is really its D-day. First, Ursula von der Leyen does a State of the Union speech on September 15th. And I know that she will weave in a China story. And we have to see what the language is all about. I will be in Brussels next week, so maybe I can sort of inspire some people. I get some inside knowledge of how this is going to work out.
And then EU Trade Commissioner Šefčovič, Mr. China, in the commission, will fly and meet He Lifeng in Beijing in the early days of October. And then basically comes the big one, it’s 15th, 16th, European Council. That’s where the Chancellor, the French President, and everyone, Meloni, they all show up two days, and China will be part of these two days. And then we have to see what kind of courage they have and what kind of concessions the Chinese have done in order to actually do something that the Europeans remain open.
My sense is the Chinese, in particular in run-up of a Party congress in 2027, in fall 2027, normally the Chinese don’t want to have chaos or trade wars or any of that. So, they just want stability. And Xi Jinping is anyhow in a situation where he’s possibly not going to exchange a quarter and a third of his Central Committee. He might go for a half of it. And during this period of time, there will be a lot of attention from the president on in-house, you know. So, he wants quiet and peace. That’s why I believe Busan will be extended. And I think there will be some Chinese concessions towards Europe.
And again, the discussion will move on, on the renminbi. Again, it’s partly driven by the central bank, but also partly by local government leaders to say, “Listen, guys, we have to have a stronger Renminbi. We are a net exporter as a nation, but as Chinese individuals, we are net importers. So in a way, we have to basically give our companies more financial firepower to go global. At the same time, we have to sort of use this as a weapon in order to flush out those guys that we also don’t want in our domestic industry,” meaning overcapacity. I think the renminbi will gradually, and the Chinese don’t make big jumps, I think, will expand in value. So my bet is on the renminbi.
Andrew: Very interesting. Yeah, that’s one I wanted to get in more on, that issue of the currency. Maybe next time you come on, we can talk a little bit about it. I think it’s getting more and more attention as a key element of the imbalance in terms of China’s trade surplus. I mean, it’s kind of obvious in a way, and yet also it doesn’t quite feature in a lot of these discussions.
Joerg: I mean, if you have a trade surplus of 1.2 trillion US dollars, you know, where’s the money going? I mean, if you repatriate this, there must be a huge demand for renminbi, meaning it has to drive up the renminbi, you know. Surprise, surprise, it’s never coming. I mean, Logan Wright from Rhodium does fantastic work on this one. So I guess that now companies are being asked to repatriate the money into the motherland. And that might be sort of the initial start of a softly appreciating currency.
Andrew: Yeah. Actually, that seems like a little bit of optimism, unexpected optimism from your side, Joerg, that maybe the Chinese are ready to move on that side. And that could be something they put on the table in these conversations with the Europeans.
Joerg: Yeah. Well, I’m deeply influenced by my Russian wife. Of course, there’s a saying in Russia that says, “An optimist is a badly informed pessimist.”
Andrew: I like it. I like it. I know we’re right at time. If I can just ask you one final question, you’ve been very generous with your time, so I don’t want to take up too much more. And I know in a way this is kind of a silly question because there is no in-state. It’s not like we get to some equilibrium level between Europe and China, U.S. and Europe, US and China, where everything’s just kind of static, and everybody’s happy. These are evolving systems, and they always will be.
But what would you see as sort of best-case sort of temporary equilibrium? Where would you like the relationship, the economic relationship between China and the U.S. to be in a few years that you think both sides could live with?
Joerg: I think your podcasts make it very clear is that whoever believes it’s going to get better is a dreamer. It’s not going to get better. I think the baseload in this country is more or less very anti-Chinese. Donald Trump is basically putting the lid on, and he’s giving TikTok the go-ahead and so forth. I think this will disappear. We have to see how the midterm elections with a possible change of leadership in the House as well as in the Senate might play out.
He’s in office for the next two years. Xi Jinping will do everything to have a good relationship with Donald Trump. He’s an ideal president for him. He’s severing the ties with allies. He’s questioning the situation in Taiwan. he has no ammunition anymore to the extent that the Chinese have to fear it. So in a way, you know, they will not provoke Donald Trump too much. Busan 2.0 will come, of course, but then the game is going to change afterwards, and that is something where the Chinese, as Logan writes, have peaked, and might go into a more challenging situation and with the debt burden, with the fast aging, and so forth, and the U.S. might recover. The U.S. has an incredible recovery ability. They do everything wrong until they get it. We Europeans don’t have that, unfortunately. We are slower and more studious in a way. But it is something where it’s race against time.
By the way, one of your podcasts, I learned about the demographics, but there was one figure I picked up elsewhere. You know, 250 years ago, we’re here in an anniversary year, in 1776, 8.2 million Chinese were born. And last year, it was 7.9 million Chinese. Just imagine what it does to a country that goes down this fast. So, in a way, there’s a wonderful book that I can recommend is what aging and demographics do to innovation. And that will hit China badly. And that basically would leave us on the desk with my recommendation to the chancellor— Keep our borders open for smart people.
Smart people in particular that used to go to the United States but are rejected. Now there’s this exodus back to the Chinese university and jobs. But I know exactly that, you know, a lot of millionaires, lots of people want to actually leave China. And in Europe, we have to keep the door open with red signposts saying, you know, welcome, welcome, because we need these engineers, we need these venture capitalists and everything. So, we have a unique opportunity in Europe to take advantage of the fact that the U.S. doesn’t want Chinese and the Chinese basically politicize so much, and the tax man’s breathing down their necks that maybe all of a sudden, you know, Germany might not look that bad after all.
Andrew: Well, I don’t know whether that is ending on an optimistic or pessimistic note, but certainly the future is going to be very complex. And I think there are opportunities for different countries, different companies to take advantage of all the different ways these play out. And that’s a really smart recommendation. I hope that for Germany’s sake, the chancellor listens to you. So, we’ll see how that plays out. But Joerg, thank you so much for the time today. This has been fascinating. As always, really appreciate your insights today.
Joerg: Thank you, guys. Wonderful to be on your podcast and let’s do it again at another time. And again, I’m a big fan of yours.
Andrew: Thank you so much. We really appreciate it. Great to see you. Great to talk to you. And Cory, thank you as well, man.
Joerg: Thank you, Cory.
Cory: Thanks so much, everyone.
Andrew: All right. And thanks for listening, everybody. We’ll see you next time. Bye, everybody.
