America is No.1, Can We Save German Steel? and Bye Bye Chinese Tech? plus Kim Loves Nukes

Welcome to our latest newsletter edition! We're bringing you the top stories of the week, from the struggles of the EU market to North Korean missiles.

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USA Becomes Germany's Top Trading Partner

In the first quarter of 2024, the USA emerged as Germany's most significant trading partner, surpassing China. This shift continues the trend observed in the latter half of 2023. The Federal Statistical Office reported a significant decline in imports from China, which fell by 11.7% to €36 billion compared to the same period last year. German exports to China also decreased slightly by 1.1% to €24 billion.

Overall, Germany's trade volume with China amounted to €60 billion from January to March, while trade with the USA reached €63.2 billion. Experts suggest that China might lose its position as Germany's top trading partner for the entire year of 2024 due to its economic downturn, including the real estate crisis, geopolitical risks with the USA, and weak industrial investments. Additionally, German companies are increasingly avoiding Chinese suppliers.

Despite these changes, China remains Germany's largest supplier of goods, accounting for 10.9% of all imports in the first quarter of 2024. Germany imported goods worth €331.2 billion during this period, with the Netherlands and the USA following as significant suppliers. Notably, China supplied 85.4% of imported photovoltaic systems, 86.3% of portable computers, 60.5% of smartphones, and 45.4% of lithium-ion batteries. German exports to China primarily consisted of cars, car parts, and machinery.

Source: Tagesschau

Can Europe Compete in the Global Market?

The European Union faces significant challenges as it competes economically with the USA and China. Experts warn that Europe is falling behind due to sluggish growth, budget crises, high energy costs, and bureaucracy. The European Commission has lowered its economic forecasts, predicting a GDP growth of 0.8% for the Eurozone and 1.0% for the EU in 2024.

High energy prices, driven by the Russian invasion of Ukraine, have burdened European companies, although inflation has stabilized recently. Despite this, Europe is lagging in technological advancements and investment in research and development compared to the USA. The European economy is less dynamic, growing at only 0.5% last year, while the USA saw a 2.5% growth.

Initiatives like the "Next Generation EU" program aim to boost the economy, with countries like Spain, Portugal, Italy, and Poland showing significant growth. Italy's "Superbonus 110" program, which encourages private investment in climate-friendly construction, exemplifies these efforts. However, this has led to increased national debt, with Italy recording a deficit of 7.4% of its GDP last year.

The fragmented European capital market is another challenge, with varying regulations across the EU hindering competitiveness. Proposals for a capital market union aim to create a more integrated and attractive investment environment.

German businesses view the EU as a crucial market, but many believe its attractiveness has declined due to high taxes, bureaucracy, and insufficient investment incentives. The "Green Deal" project aims for climate neutrality by 2050, but businesses call for reduced bureaucracy to facilitate this transition.

There is hope for the Mercosur trade agreement, which could create a massive free trade zone between the EU and South America, benefiting over 720 million people. However, the agreement faces opposition, particularly from European farmers concerned about cheap agricultural imports.

The US "Inflation Reduction Act" has diverted significant foreign investments, including from Germany, to the USA. For Europe to remain competitive, policies must focus more on growth and efficiency, promoting innovation, labor supply, and investment in research and education.

Source: Tagesschau

Thyssenkrupp Faces Continued Losses and Internal Struggles Under CEO Miguel López

Thyssenkrupp remains in financial turmoil as CEO Miguel López lowers profit and revenue forecasts yet again, as pressure from the Chinese market mounts. Despite some operational improvements in the second quarter, the company’s stock experienced a significant dip.

In the first half of the 2023/24 fiscal year, Thyssenkrupp reported a net loss of €392 million, with full-year losses expected to be in the low hundreds of millions. This has led to the second downward revision of both profit and revenue forecasts in recent months.

López is pushing for a partnership with Czech billionaire Daniel Kretinsky’s energy holding EPCG to form a steel joint venture, warning of dire consequences for the Duisburg steel site without such alliances. However, IG Metall and employee representatives criticize López for lacking transparency, prompting a demonstration call against his negotiation tactics.

The company anticipates lower annual revenue compared to the previous year due to declining prices and sales volumes in the steel and materials trading sectors. Adjusted EBIT for the second quarter fell to €184 million from €205 million, primarily due to the loss of one-time gains in the auto supplier sector, despite efficiency measures and gains in the steel and marine businesses.

The stock dropped over 7% on Wednesday before recovering somewhat. Investor sentiment was also impacted by delays in orders for Thyssenkrupp’s hydrogen subsidiary, Nucera, due to unclear regulatory guidelines.

Thyssenkrupp's future hinges on resolving financial issues and internal conflicts, while stabilizing its market position through strategic partnerships and operational improvements.

Source: Manager Magazin

Germany Poised to Remove Chinese Components from 5G Network by 2026

Germany is nearing a decision to eliminate Chinese critical components from its 5G core network by 2026, driven by national security concerns. The proposal, supported by the foreign, economy, and interior ministries, aims to phase out equipment from Huawei and ZTE. The digital ministry, however, has not agreed, citing industry opposition.

The interior ministry's plan involves a two-step process: removing all Huawei and ZTE components from core networks by January 1, 2026, and reducing dependency on Chinese parts in access and transport networks by 2029.

Germany's review, ongoing for over a year, aligns with increasing US and EU scrutiny of Chinese tech firms. The ruling coalition is divided, with the SPD and Greens in favor of the ban, while the FDP's digital ministry resists. Deutsche Telekom, the largest mobile operator, argues that a 2026 ban is unrealistic.

This move marks Germany's shift towards reducing reliance on specific countries following geopolitical tensions, notably Russia's invasion of Ukraine. Compared to allies like the UK, which banned Huawei from 5G networks in 2020, Germany has been more hesitant but is now taking a firmer stance.

Source: South China Morning Post

German Naval Ships Head to Indo-Pacific in Strategic Move Amid Rising Tensions

In a significant move reflecting Germany's strategic shift, the German frigate Baden-Wuerttemberg and combat supply ship Frankfurt am Main have set sail for the Indo-Pacific. This deployment signals robust support for allies facing China's aggressive actions and a commitment to maintaining regional stability.

The mission includes participating in the U.S.-led Rim of the Pacific (RIMPAC) exercise, the world's largest maritime drill, off Hawaii. The German vessels will join fleets from Canada, the U.S., Japan, India, France, and European air forces. Italy and France will contribute aircraft carriers, enhancing the collective European military presence.

German Vice Adm. Jan Christian Kaack emphasized the growing concern over China's behavior. Defense Minister Boris Pistorius suggested that the ships might pass through the Taiwan Strait, echoing similar allied operations, and will monitor U.N. sanctions against North Korea.

This deployment reflects Germany's 2020 Indo-Pacific guidelines aimed at strengthening international cooperation and upholding the rules-based international order. The move marks a shift from Germany's previous naval missions, reflecting a more assertive stance in response to heightened geopolitical tensions.

The mission also serves economic interests, showcasing European defense equipment to Southeast Asian markets. This aligns with broader European efforts to support U.S. commitments in NATO and the Indo-Pacific, reinforcing transatlantic and interregional alliances.

Germany's naval deployment underscores its strategic engagement in the Indo-Pacific, addressing security threats while fostering international partnerships and economic opportunities.

Source: Nikkei

Will South Korea Win the Subsidy Race?

Despite significant investments in modern chip factories, the USA and the EU remain reliant on imports from Asia. South Korea, in particular, is offering substantial subsidies to bolster its chip industry, aiming to surpass Taiwan and challenge China. While the USA and the EU are expected to increase their share of advanced chip production, the majority will still come from Asia.

According to a study by the Semiconductor Industry Association (SIA) and Boston Consulting, the USA and the EU are likely to increase their share of chip wafer production below ten nanometers, crucial for advanced computer applications and artificial intelligence (AI). However, the main share of chip manufacturing will remain in Asia, with South Korea poised to increase its global market share significantly by 2032.

South Korea's generous subsidies, surpassing even those of the EU, aim to stimulate both state and private investments in chip production. President Yoon Suk-yeol has pledged to drive investments of $55 billion through tax incentives and initiatives like the "Superbonus 110" program, aiming to build the world's largest chip cluster by 2030.

Microsoft's recent engagements with South Korean chip giants Samsung and SK Hynix highlight the country's importance in the AI-driven era. Discussions focus on integrating Microsoft's AI applications into Korean products, leveraging South Korea's expertise in household appliances, TVs, and smartphones, while tapping into Microsoft's leadership in AI technology.

South Korea, a key source of semiconductor supply, is looking to strengthen its position by developing new chips for AI applications. Samsung and SK Hynix are exploring collaborations to produce next-generation chips for AI applications and data servers, aiming to bridge the gap with competitors like Nvidia.

While South Korea aims to challenge Taiwan's TSMC for market leadership, it faces challenges in the race for the most advanced chip generations. However, South Korea's ambitious "Semiconductor Design Cultivation Program" aims to position Korean companies as contenders for market leadership in AI processors, targeting companies like Nvidia.

Though ambitious, South Korea's determination underscores its aspirations to compete at the forefront of the global chip industry.

Source: Handelsblatt

German Foreign Office Strongly Condemns North Korea's Ballistic Missile Launches

In response to reports of North Korea's launch of multiple ballistic short-range missiles on May 17, 2024, a spokesperson for the German Foreign Office issued a statement on May 18, strongly condemning the action. The spokesperson emphasized that North Korea's repeated missile tests and deliveries of ballistic missiles to Russia violated relevant United Nations Security Council resolutions, posing a significant threat to security both on the Korean Peninsula and in the wider region.

The spokesperson stated, "We condemn in the strongest terms today's illegal launch of multiple ballistic short-range missiles by North Korea." Furthermore, they highlighted the potential danger posed by Russia's deployment of North Korean missiles in Ukraine to European security, indicating a need for an appropriate response in collaboration with partners.

Germany, along with its partners, urged North Korea to cease further missile launches and halt illegal weapons deliveries to Russia, while also calling on the country to comply with its international obligations. The statement stressed the importance of North Korea accepting dialogue offers from the United States and South Korea to engage in substantive negotiations regarding the dismantlement of its nuclear and missile programs.

The spokesperson emphasized, "North Korea is obligated to fully, irreversibly, and verifiably terminate its programs for the development of weapons of mass destruction and ballistic missiles." This call underscores Germany's commitment to ensuring compliance with international norms and fostering diplomatic solutions to regional security challenges.

Source: Auswärtiges Amt

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