"With a sound risk management, China still offers great opportunities for German companies"
Investing in BremenDr. Florian Kessler about the trade war, sanctions and new Chinese legislation
The entry of Chinese companies in Hamburg's docks or the German heat pump market, following the sale of Viessmann, the heating and refrigeration system manufacturer, has caused quite a stir in recent months. China is Germany's most important trading partner. However, the trade war between the USA and China, the war in Ukraine, sanctions and new Chinese laws are changing the way business is done. Dr. Florian Kessler knows how to deal with all this.
Together with his Chinese wife, He Xin, Kessler founded WZR China, a law firm with ten employees, based in Beijing. After 20 years in China, where, in addition to running his own business, he was also professor and former executive officed at the German Foreign Chamber of Commerce in Beijing, he and his family are returning to the banks of the Weser. In future he will look after his clients, German and Chinese medium-sized businesses, from both Bremen and Beijing.
A conversation about current geopolitical developments in China and their effects on how business is conducted.
Dr. Kessler, you run a law firm but your main areas of activity include helping companies look for sites in China, providing support for building factories, HR management or relocations. Isn't that actually more like management consultancy?
Kessler: In China, legal support goes hand-in-hand with management consultancy. This is because China's legal and economic system works very differently from Germany's. In China, companies rely much less on state institutions to help enforce their rights.
For this reason, they have to minimize risks in advance, to such an extent that the possibility of legal proceedings is almost totally excluded. This needs a practical approach and solutions which go far and beyond purely legal aspects and which would be unthinkable without a detailed understanding of the Chinese legal system and local customs. This is why, working as a legal advisor in China, I must also be able to offer strategic and commercial solutions and courses of action in addition to legal advice.
The last few years have been stormy for companies involved in trading with China. The USA-China trade war, sanctions, interruptions to supply chains, restrictions on admission: all of these are geopolitical factors that have a direct effect on daily business. Can companies in China today still manage to act independently of the geopolitical situation?
Kessler: No. Companies with businesses in China have to take geopolitical developments into consideration. Many of my clients have subsidiaries in different countries, including China, the USA and Europe. Due to increased risks, some companies have decided against making new investments in China for the time being. Other companies are trying to minimise cross-border transactions and logistics routes, by, for example, supplying goods to the Chinese market from sites within China itself. In this case, they are investing in greater vertical integration. At the same time, they are trying to become more independent of China, by producing components in plants in Eastern Europe, for example. For these reasons, we are seeing greater regionalisation in supply chains and sales markets.
You mean, the process we talk about as "de-risking"…
Kessler: Exactly that. However, we're also seeing the reverse situation. Chinese businesses are expanding their presence in Europe and attempting to set up their own manufacturing and sales networks here, because exactly the same situation applies to them. The Chinese Government's economic strategies, such as "Dual Circulation" and "Made in China", are, at their core, nothing less than a policy of "de-risking" with the aim of making China less economically dependent on foreign technology.
Does this make China attractive as a location, as it was previously, or should businesses move into other countries: "China plus One" (e.g. production facilities in Vietnam)?
Kessler: If a company wants to sell in China, there's no alternative to having a local presence. However, provided they have a judicious risk management strategy in place, businesses can still get to grips with China. From a European perspective, the market is still enormous and the Chinese middle class continues to grow. Nevertheless, local companies that regard China primarily as a cheap manufacturing location for exports may need to look for an alternative, for example, to prepare for future interruptions to supply chains or similar. In these cases, the alternative is China plus One.
Will destabilising factors such as sanctions, rights and laws continue to increase or have they now plateaued and we will just have to learn to live with this situation?
Kessler: For the time being, I think the current level of uncertainty will remain as it is. Global tensions have significantly increased the challenges faced by foreign companies in China. However, I don't believe the situation will deteriorate further. Leaving the political sphere to one side, many things in China have actually become easier on an operational level over the past few years. The bureaucratic process for setting up a company now takes half the time it did previously.
To what extent will changes to legislation such as the new anti-espionage law or data protection laws affect business opportunities?
Kessler: When it comes to the anti-espionage law, companies must be more careful about how they behave in China and the extent to which they carry out research about their Chinese business partners. Companies also face significant challenges in the area of data protection because China's legislation in this regard is shaped more strongly by national security policies than it is in Europe. For example, a relatively complicated administrative procedure for the trans-national transfer of personal data from China was introduced in June this year. It remains to be seen how well this process will actually work.
China continues to develop at break-neck speed. Foreign companies now face much more home-grown competition. From your viewpoint, are there now markets it's simply not worth exploring because the competition is so great?
Kessler: Many German companies arrive with a product that is so good that there simply isn't an alternative in China. This gives them a competitive advantage. However, I've also seen some companies operating a two-track pricing strategy in China, simply to get a foothold here. In other words, they bring a competitively priced entry-level product to market to gain a market share. If the customer is happy with that, they can then offer a more expensive product.
You often hear it said that it's becoming harder to get company assets out of China – do you agree?
Kessler: Clients often ask me that, however, we haven't often had problems with this in practice. If we take assets out of China, it's usually in the form of dividends. That really isn't a problem provided you have the right documentation and pay taxes in the proper way. Allocating services between the parent company and the Chinese subsidiary, or using licensing agreements, are other options.
"I'd like to make a contribution to the economic development of my home town."
You've just mentioned that Chinese companies are increasingly considering it important for them to set up their own production facilities in Europe. What does this mean for Germany as a location, and for Bremen, in particular? Will this also present us with new opportunities?
Kessler: In the first wave, Chinese companies purchased German companies to get a foothold here. This is much less common nowadays. Many Chinese companies have gathered experience over the years and are becoming more confident about setting up their own subsidiaries in Europe. Now they want to reinforce their own supply and sales networks. I see an opportunity to become part of this second wave and facilitating greenfield investments that create long-term jobs. For example, in our own law firm, we now have a dedicated member of staff whose job it is to provide support for Chinese companies.
And this also brings opportunities to Bremen. I'd like to contribute to my home town's economic development by acting as a bridge between Chinese and German businesses. I'm looking forward to anchoring myself professionally in Bremen and spending more time with my German clients again, and maybe even working together with Bremeninvest on future projects.
Many thanks for the interview!
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