China Seeking ‘Back Door’ to German Technology: Think Tank

A student holds flags of China and Germany before a welcome ceremony hosted by China's President Xi Jinping for German President Frank-Walter Steinmeier at the Great Hall of the People in Beijing, China. Dec. 10, 2018. (REUTERS/Jason Lee)

China is adopting a “back door” approach to improve its access to German technology due to the rising difficulty of acquiring enterprises in the industry, a study conducted by the Cologne Institute for Economic Research (IW) has revealed.

The study found that German license revenues from China more than tripled in 2022 compared to 2014, and doubled since 2020, clearly indicating “that Chinese companies are looking for a new way to get access to German technology,” Juergen Matthes, head of IW, told Reuters. “Tech licenses are one way for China to try to get in through the back door.”

With the German economy still reeling from the breakdown of ties with Russia, Berlin revamped its China policy, seeking for a “de-risking” approach that attempts to minimize over-reliance while recognizing the country’s importance as a vital market for many enterprises.

Resultantly, Chinese corporations’ direct investments and takeover efforts have come under investigation in Berlin in recent months.

A bid by China’s Cosco to invest in a Hamburg port terminal even sparked a political crisis last year before it was accepted at a smaller stake than expected.

Legal Ways to Obtain German Expertise

Chinese enterprises can obtain legal permission to exploit German technology through licensing agreements, the study alleged.

These licenses allow Chinese enterprises to legally make use of German technology. They might be exclusive or non-exclusive, which means that the licensor (the German firm) can grant a license to one or more licensees (Chinese enterprises).

Some examples of German technology that China is interested in, according to reports, include automotive, machinery manufacturing, chemical and pharmaceutical, and electronics and semiconductor technology.

While China is the world’s largest car market and has ambitious plans to become a leader in electric vehicles, autonomous driving, and smart mobility, the nation is also trying to upgrade its manufacturing sector and become more competitive in high-end products and services.

For this, China is seeking to acquire German technology and expertise in these fields, such as battery systems, powertrains, sensors, software, and design.

Although the majority of such agreements are considered unproblematic, and licenses can benefit both licensors and licensees by facilitating technology transfer, innovation, and collaboration, they can occasionally offer concerns.

This is particularly so if the licensor loses control of its technology or the licensee utilizes it for hostile or military reasons.

Security and Competitive Risks

For instance, if China obtains access to sensitive technologies that are vital for Germany’s security and defence, it could pose a threat to Germany’s sovereignty and interests. China may also use the licenced technology to advance its geopolitical agenda and influence in regions where Germany has strategic interests, such as Africa or Asia.

Experts are, thus, concerned and recommend that licensing be properly negotiated and monitored to ensure that they serve the interests of both parties while not harming the public interest.

But security risks are just one of the concerns, though, of China accessing German technology.

Some are worried that German enterprises risk losing their competitive edge through these license transfers. IW fears that Chinese competitors will be able to exploit the licensed technology to make cheaper or better products and services. This might end up in reducing German enterprises’ market share and revenues, as well as their ability to innovate and develop new technology.

Allowing Chinese access may also result in the loss of intellectual property rights. In China, where the rule of law and enforcement are frequently weak or uneven, German companies may face legal challenges or conflicts regarding ownership and protection of their intellectual property rights, IW warned.

Some also worry that China will use industrial espionage or cyberattacks to steal or harm German technology.

It is no surprise, then, that Germany has begun to respond to China’s licensing ploy by investigating various options for tighter regulation of such deals, particularly in sensitive sectors where the technology can have military or geopolitical ramifications.

Audit Law Reform

The German economy ministry is seeking to change the investment audit law, which currently only covers direct investments and takeover bids by foreign businesses, according to the Handelsblatt newspaper.

The reform could include stricter licensing contract conditions, such as limiting the technology license’s length, scope, and transferability.

Germany is also pursuing a “de-risking” policy on China, which aims to avoid over-reliance on the Chinese market and diversify its economic partners and supply chains. Germany is seeking to strengthen its cooperation with other countries and regions as well, such as the European Union, the United States, Japan, India, and Australia, on trade, investment, innovation, and security issues.

Nevertheless, Germany sees China as a key market and partner for many of its companies. Therefore, the European nation is trying to balance its economic interests with its political values and security concerns in its relations with China.

According to The Observatory of Economic Complexity forecasts, the bilateral trade between China and Germany in 2023 is expected to be around $274 billion (€250 billion), which is slightly higher than the trade volume of $269 billion in 2021. The trade balance is likely to be negative for Germany, as China’s exports to Germany are projected to exceed its imports from Germany by about $11 billion.