Why Are European Companies Still Doubling Down on China Manufacturing? What German Industry Sees Is Not “Reshoring,” but the New Normal of Efficiency Competition

European companies continue to bet on manufacturing in China, showing that German industry faces “efficiency restructuring” rather than “geographic relocation”

European companies have not automatically exited China in line with policy slogans; instead, in many sectors they have continued to maintain or even expand manufacturing and supply chain footprints. The significance of this phenomenon for German industry goes far beyond the simple idea that “dependence on China remains very strong.” More importantly, it shows that global manufacturing is entering a new stage of competition: companies are no longer comparing only labor costs and tariffs, but are comparing automation capabilities, supply chain density, coordination of energy and raw materials, and the overall efficiency from R&D to mass production.

For German manufacturing, this shift carries a clear warning. In the past, Germany’s industrial strengths were built on high-quality engineering capability, precision manufacturing, stable supply chains, and a powerful system of intermediate goods exports. But when China’s manufacturing sector redefines “low cost” as “high efficiency” through automation, scale, and local supporting industries, German companies are facing not a single market choice, but a reordering of global manufacturing models.

Behind the event: Why European companies have not clearly withdrawn from China

According to an EU Chamber of Commerce survey in China, a considerable share of the European companies surveyed either continue to maintain their existing China supply chains or further localize production; only a very small number have chosen to move factory procurement outside China. At the same time, some companies are adopting a “dual-track strategy” — expanding in China while also building alternative supply sources in other regions.

This means that so-called “de-risking” has not directly changed companies’ operating logic. For manufacturing firms, there is always a gap between policy language and business reality. As long as China continues to offer higher production efficiency, faster delivery, and a more complete industrial ecosystem, companies will continue to view it as a key manufacturing base rather than merely a sales market.

The deeper reason: what is really at work is automation and the industrial ecosystem

The most noteworthy aspect of this trend is not that China is still cheap, but that the cost structure of Chinese manufacturing is changing.

In the past, China’s manufacturing advantages mainly came from labor prices and large-scale industrial clusters. Now, automation is becoming the new core variable. Surveys and industry observations point to a common fact: an increasing number of factories are weakening the decisive role of labor costs through robots, automated production lines, and digital management. In other words, low wages are no longer the only answer, and are perhaps no longer even the most important answer.

Cases cited by Roland Berger show that some Chinese factories have already achieved round-the-clock production through high levels of automation, and can flexibly switch between multiple vehicle models and product lines. For manufacturing, the importance of this kind of capability is not simply “machines replacing people,” but rather bringing capacity, quality, speed, and flexibility into the cost model at the same time.

This is exactly what German industry must take seriously.This is precisely where German industry must pay close attention. German manufacturing has long excelled in high precision and high reliability, but in fields such as mass consumer goods, auto parts, electronics, and industrial materials, competition has already shifted from “who can do it better” to “who can do it well enough, faster, and keep reducing costs.”

What this means for German industry: competitors are redefining industry standards through China’s manufacturing system

For German companies, the significance of Chinese manufacturing is no longer merely as a sourcing option, but as a competitive template.

In many industries, German firms are facing not only domestic Chinese rivals, but also international competitors that use China’s supply chain as the global production base. This is crucial: the competitive pressure is no longer coming from outside; it has been internalized through globalized supply chains. In other words, German companies are not competing with one country, but with a global cost structure strengthened by China’s manufacturing system.

This brings three consequences:

1. The price band for mid-to-high-end manufacturing is being compressed Even if German firms maintain technological leadership, it is becoming increasingly difficult to preserve the same level of technology premium as before. Products must now demonstrate both performance advantages and overall manufacturing efficiency advantages.

2. Supply chain decisions are shifting from “risk diversification” to “efficiency optimization” Many companies will not leave China simply because of geopolitical uncertainty; instead, they will retain China as a primary manufacturing node while establishing limited backup capacity in other regions.

3. The logic of industrial investment returns is being rewritten If Chinese factories can deliver higher returns in automation, speed, and cost, then European local factories must prove their value through higher levels of industrial software, robotics integration, and flexible manufacturing.

The dual pressure on German automotive and equipment manufacturing

What Germany most needs to watch is not the transfer of a single industry, but the simultaneous squeeze on its two core sectors: automotive and industrial equipment.

In the automotive sector, China is no longer just a consumer market; it is also becoming a high-density arena for competition in manufacturing systems. EV platforms, smart manufacturing, and robot-intensive assembly lines are all reshaping the industry’s cost curve. If German automakers continue to rely on the traditional global division of labor, they may face pressure from two directions: on one hand, local Chinese competitors will keep squeezing prices through local supply chains and faster iteration; on the other hand, multinational peers will increasingly use China as a high-efficiency manufacturing platform.

In the equipment manufacturing sector, German companies are especially likely to feel structural challenges. Machinery, automation equipment, and industrial components have long been strengths of German industry, but when Chinese manufacturing bases force equipment upgrades through higher levels of automation, German companies become both beneficiaries and competitors: on the one hand, German industrial equipment may continue to find demand in the Chinese market; on the other hand, Chinese firms will also more rapidly improve their own equipment integration capabilities and move up into higher-end segments.

European industrial chains will move toward “multi-node布局,” but China remains the core nodeFrom the perspective of Europe’s industrial supply chains, this trend will not simply lead to a wholesale return, but is more likely to result in “selective dispersion” — companies will establish alternative production capacity in certain links and certain regions, but will not easily abandon China, a highly mature manufacturing hub.

The reason is straightforward: manufacturing is about system efficiency, not isolated political posturing. As long as China still has industrial clusters, supplier density, skilled technical workers, logistics efficiency, and rapid delivery capability, it will be very difficult for companies to fully replace it with other regions in the short term.

This is a practical reminder for EU industrial policy. Simply pushing supply chains to relocate does not automatically enhance Europe’s industrial competitiveness. What truly needs to be made up is the automation capability of the local manufacturing system, energy cost control, digital collaboration, and industrial coordination efficiency. Otherwise, even if European companies move some production out of China, they may simply be shifting manufacturing costs to other regions that are more expensive, but not more efficient.

Long-term judgment: over the next 3 to 10 years, the focus of competition will shift from “whether to produce in China” to “who can complete industrial automation upgrades faster”

In the coming years, German industry may see a clearer reality: whether companies stay in China will no longer be the only issue; the real question is whether companies can build, on a global scale, a manufacturing network that balances efficiency, flexibility, and resilience.

This means three long-term trends are worth watching:

• Automation will continue to reshape manufacturing cost structures, and labor costs will no longer be the only dominant factor.
• The competitiveness of Chinese manufacturing will increasingly come from system efficiency, rather than from price advantages alone.
• German industry must accelerate the depth of implementation of Industry 4.0, otherwise high-end manufacturing will also face pressure to be repriced.

For Germany, the real challenge is not “whether companies leave China,” but whether Germany’s local manufacturing system can create new efficiency advantages in energy, automation, digitalization, and supply chain coordination. If not, German industry may still have a technical reputation, but it will gradually lose dominance in cost and speed in global manufacturing competition.

In this sense, European companies’ continued investment in Chinese manufacturing is not a simple reversal of “de-risking” policies, but evidence that global advanced manufacturing is further evolving into an era dominated by efficiency. If German industry wants to maintain long-term competitiveness, it must understand this change as a systemic restructuring, not a geopolitical fluctuation.