Germany Is Hardening Its Supply Chains Against Chinese Control

How times have changed. A few short years ago, Germany shied away from any mention of business in connection with geopolitics. Now, the country, which heavily depends on raw materials from China, has set up a fund for raw materials that will help German firms process and recycle raw materials. It promises to make German industry less vulnerable to supply chain disruptions, especially from hostile states—and it may even do its part for the environment.

Like most modern economies, Germany relies on imports of rare metals, and that means a lot of imports from China. Between January and November 2022, about 66 percent of Germany’s rare earth imports came from China, Germany’s Federal Statistical Office reported. In the case of the frequently used rare earths lanthanum, neodymium, praseodymium, and samarium, 75 percent of Germany’s imports came from China, and with scandium and yttrium, the figure reached nearly 95 percent. “We’re more dependent on rare earths from China than we ever were on Russian gas,” said Matthias Wachter, head of defense, space, and raw materials at the Federation of German Industry (BDI).

In the globalized world built over the past few decades, such imports were no big deal. It was quite the opposite; they were a matter of excitement. If one country lacked a natural resource or product, another country filled the gap, and everyone benefited. Efficiency and specialization were the name of the game.

But when COVID-19 struck, German and other Western industries became uneasy about such dependencies. So, too, did policymakers and ordinary citizens, who lived through the disastrous effects of their countries’ dependence on personal protective equipment produced in China.

“If we don’t get these raw materials from China, the German industry, and by extension the German economy, would be seriously harmed,” Wachter said. “And it’s also a matter of national security.” The F35 aircraft, for example, “requires more than 900 pounds of rare earth elements,” the U.S. Defense Department reported. “Each Arleigh Burke DDG-51 destroyer requires 5,200 pounds, and a Virginia class submarine needs 9,200 pounds,” and rare earth elements are also used in “Tomahawk missiles, a variety of radar systems, Predator unmanned aerial vehicles, and the Joint Direct Attack Munition series of smart bombs.”

Sweden already knows what it’s like to be cut of from Chinese-processed raw materials: Since 2020, China has been blocking exports of graphite, a crucial component in electric vehicle batteries, to Sweden. About 75 percent of the world’s graphite is currently mined in China.

The conclusion, Wachter said, is that “we have to reduce our dependence on China. But the industry can’t do it alone.” By launching the raw materials fund, which has a volume of 1 billion euros (approximately $1.1 billion), Germany’s government seems to agree. Like some other Western countries, Germany does possess rare earths. In 2080, for example, geologists reported that they’d discovered pockets of indium, gallium, and cobalt in the Harz mountains. But because processing rare earths is expensive, and because people don’t want such processing plants in their backyards, it has been convenient to let China provide the metals.

The new fund will be managed by KfW, a government-owned development and investment bank. KfW was launched in 1948 to administer the Marshall Plan’s money in Germany, and since then it has become a nifty outfit that takes on structural tasks on behalf of the German government and finances projects in developing economies. In 2018, for example, the Merkel government fended off an offer from China’s State Grid a 20 percent stake in the energy firm 50 Hertz by instructing KfW to buy it.

The euros will be provided to companies through loans and equity investments. “With equity in projects at home and abroad, from mining to further processing and recycling, we are taking a step that other countries have already taken successfully,” Franziska Brantner, a Green Party member of the Bundestag and state secretary at the Federal Ministry for Economic Affairs and Climate Action, said in a statement.

German industry is thrilled. “China sets prices so low that Western initiatives are typically not competitive,” Wachter said. “The fund will help companies get started, but the risk still lies with the companies, as should be the case in a market economy.”

To be sure, one billion euros is modest compared to what Beijing can make available to raw-minerals firms in China and beyond. When it comes to rare earths, China has the largest known reserves, followed by Vietnam, Russia, Brazil, India, Australia, Tanzania, the United States, and Greenland. Last year, S&P Global noted:

Although many countries are increasingly aware of these minerals’ importance, Chinese firms have been the most active in these pursuits. Emerging markets across Africa and Latin America are their next stops. … Heeding urgings from the industry, the Chinese government is likely to take more supportive actions, as it views these sectors as integral to the country’s core strategy. This alignment of interest will facilitate the development of China’s influence over these minerals and the industries that rely on them as more Chinese firms secure access and expand production capacity.

The fund also won’t be able to change the fact that Germany has relatively limited rare earth resources itself. “Germany is clearly not in a position to become self-sufficient in rare earths, and we’ll continue to need imports,” Wachter said. “But we can incentivize the processing of smaller amounts here at home.” What’s more, like other Western countries, Germany has a whole lot of batteries and gadgets containing rare earths that can be recycled, which is part of what the fund will incentivize.

The conclusion from German politicians and the industry that dependence on China for raw materials is risky signals a change far more significant than the much-heralded military Zeitenwende, a historic turning point. Though some industrial behemoths, particularly the country’s carmakers, still appear to believe in globalization as usual, and most especially business as usual in China, many other companies have concluded that the good old times of borderless trade and countries specializing are over.

German industry signaled as much on Sept. 13, when the German navy ship Baden-Württemberg sailed through the Strait of Taiwan. The Baden-Württemberg was on its way from Incheon in South Korea to Manila in the Philippines, and as Boris Pistorius, Germany’s defense minister, explained, “International waters are international waters. It’s the shortest route, it is the safest route given the weather conditions, and it’s international waters, so we’re going through.”

Even though sailing through the free waters of the strait should not be perceived as provocative, Beijing typically chooses to see it as such. In years past, the fear of causing offense in Beijing would have dissuaded German defense ministers from having their vessels sail through the strait. This time, too, Beijing warned Berlin that any such journey would be a bad idea. But backed by Pistorius, the Baden-Württemberg sailed through.

What’s more, the ship’s passage was backed by German industry. “German industry supports the Federal Government in its efforts to maintain the already eroding rules-based international order,” BDI top executive Wolfgang Niedermark told German newspaper Handelsblatt, adding that rules only work if they’re enforced consistently and without exception. “Germany must also take responsibility for this,” he said.

Times have definitely changed. What has not changed, however, is the accelerating climate crisis. If Germany’s new raw materials fund manages to help German industry reduce its dependence on China, it will have done its job. And if it manages to accelerate the recycling of raw materials—which means less CO2 will be spewed into the atmosphere during the extraction of raw materials—it will be an undeniable win-win.