China targets German carmakers' primacy amid Huawei fight

Berlin

CHANCELLOR Angela Merkel of Germany and Chinese Premier Li Keqiang settled into the back seat of a driverless Volkswagen van, fastened their seat belts and went for a spin around a disused airport landing strip in central Berlin.

"There is nothing like seeing in practice what's possible," Dr Merkel beamed when they returned.

That was July 2018, when economic cooperation between the two countries looked limitless - combining Germany's powerful car industry and China's technology giant Huawei.

Eighteen months later, Germany is embroiled in a debate over whether to allow Huawei to help build its 5G next-generation mobile network. But with German carmakers, including Audi and Daimler, already working closely with Huawei, it may be China who gets to sit in the driver's seat.

Whatever Germany decides will shape its relations with China for years and reverberate across the continent. It will send a powerful political signal on how united or fractured Europe will be in the digital age of rivalry between Washington and Beijing.

Germany, like all of Europe, is under tremendous pressure to ostracise Huawei by the US government, which fears that it is a Trojan horse that would allow the Chinese to spy on or control European and US communication networks. The pressure remains even after President Donald Trump signed an initial trade deal with China on Wednesday.

"The West should have a joint solution to 5G because we view the world the same way," Richard Grenell, the US ambassador to Germany, said on Thursday in an email.

But for Germany, that decision is especially fraught. Relations with the Trump administration are infused with threats of tariffs against German carmakers and mounting distrust that Europeans have come to believe may permanently reshape, if not rupture, a once ironclad trans-Atlantic alliance.

China, on the other hand, is elbowing its way onto the European stage as a new strategic player and an increasingly indispensable economic partner. By far the largest market in the world, it has become the biggest source of growth for Germany's main carmakers and the key to their dominance of the luxury car market.

It is a position that China has not been shy to weaponise.

"If Germany were to make a decision that led to Huawei's exclusion from the German market, there will be consequences," Wu Ken, China's ambassador to Germany warned last month. "The Chinese government will not stand idly by." Konstantin von Notz, a lawmaker and member of the digital affairs committee in the German Parliament, put it this way: "The Chinese have made clear that they will retaliate where it hurts - the car industry."

For months, German lawmakers have danced around the issue of whether effectively to exclude Huawei from the bidding process. The issue is expected to be debated in Parliament again in the coming weeks. As a decision approaches, Dr Merkel has found herself caught between worried German carmakers, who accompanied her on a dozen junkets to Beijing, and her own wary intelligence community.

Fundamentally, she is opposed to banning the Chinese company.

"It is not about individual companies, but rather security standards," the chancellor said in November. "It is about the certification we will carry out. That should be our guiding benchmark." But a rebellion is brewing in Germany's foreign policy and intelligence community - scared of US threats to limit intelligence sharing - and even among some of the chancellor's own lawmakers, who want to submit a proposal to Parliament with tougher security criteria that would, in effect, keep Huawei out.

Dr Merkel's critics say the current certification process, which merely demands that companies sign a pledge not to spy, is inherently flawed because it relies on trust.

At her party's annual conference in November, the chancellor's Christian Democrats disinvited Huawei as a corporate sponsor and passed a motion demanding that only companies "which demonstrably fulfil a clearly defined catalog of safety requirements" should be allowed to bid. One key requirement would be to rule out state interference.

The motion did not name Huawei or China but the implication was clear.

"Under Chinese law, companies are obliged to cooperate with the Chinese Secret Service," said Norbert Röttgen, a conservative lawmaker who co-wrote the motion against Dr Merkel's Huawei policy. "When you deal with Huawei, you also have to accept that you might be dealing with the Chinese Communist Party." Cars that can steer themselves may make driving safer but they also open up opportunities for government surveillance and control.

"Car companies gather loads of personal data from the drivers of their cars, and they face an enormous risk of an angry public outraged to find their data used by the Chinese Communist Party," said Mr Grenell, the US ambassador.

German carmakers like Volkswagen, Daimler and BMW continued to record sales gains in China and take share from rivals like Ford, even as the overall market has slumped.

"See, last year, 28 million cars were sold in China, seven million of those were German," Mr Wu, China's ambassador to Germany, added in his remarks in December, making what many in Germany interpreted as a veiled threat.

"Can we just declare German cars unsafe, because we make our own cars?" he said. "No, that would be protectionism." As Germany's carmakers have become more deeply dependent on China, they also have become more beholden to the Chinese government.

Chinese consumer preferences, and Chinese government policies, increasingly determine what models the carmakers build and what kind of technology they develop.

China also has become the stage where German carmakers develop and test new technology, often with Huawei.

Audi, the luxury car unit of Volkswagen, announced a "strategic cooperation" with Huawei on developing autonomous driving technology during Mr Li's visit to Berlin. Daimler, which is 9.9 per cent owned by Chinese investor Li Shufu, uses Huawei high-performance computing. BMW and others partner Huawei on research and development.

No car company is more closely entwined with China than Volkswagen. The company has been operating in China since the early 1980s, when the Communist government first began opening to the West.

Today, Volkswagen earns almost half its sales revenue in China and has 14 per cent of the Chinese car market.

"If we were to pull out of China", Herbert Diess, the chief executive of Volkswagen, told the Wolfsburger Nachrichten newspaper in December, "a day later, 10,000 of our 20,000 development engineers in Germany would be out of work". But German carmakers deny that their dependence on Chinese sales has turned them into advocates for Chinese interests.

"We don't want political developments to spill over into product development," Bernhard Mattes, president of the German Association of the Automotive Industry, said in an interview in Berlin.

But he conceded: "We are not operating in a politics-free space, that is clear." Huawei has understood as much. Its German headquarters are in Bavaria, alongside BMW and Audi and many other companies deeply embedded in China. The company has been a generous sponsor of all mainstream parties, including Bavaria's governing conservatives.

Markus Söder, Bavaria's conservative leader, has publicly defended Huawei's right to bid, while also lashing out at the United States.

"To say upfront that I rule it out because another partner in the world doesn't like it," he said, is "a bit of a problem".

In July 2018, when Dr Merkel and Mr Li stepped out of the driverless van at Berlin Tempelhof, once the site of the Berlin airlift and a powerful symbol of Germany's alliance with the United States, the symbolism was not lost on some.

"The truth is that, if the American security guarantee was what it used to be, we wouldn't be having this debate," said Mr von Notz, the lawmaker. "But it isn't. And now we need to find a way to defend our freedom and rule of law in this digital world." NYTIMES