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ZF Friedrichshafen, a Germany-based subsidiary of Zeppelin-Stiftung that manufactures car parts, has announced plans to build an airbag production and research and development (R&D) centre in Wuhan, China.
Why it matters
In a word: Wuhan. In the space of a few months in 2020, the Chinese city went from being somewhere that few in the West had ever heard of to being synonymous with a virus that was to, quite literally, bring the world to a standstill. While this association with Covid-19 was simply bad luck on Wuhan’s behalf, no city would want to attract such negative publicity.
Pre-Covid, the city of 12 million inhabitants had everything going for it. It was renowned as one of China’s main hubs of education and tourism, which in turn ticked the boxes regarding two key foreign direct investment (FDI) drivers: talent and quality of life. Its FDI story had been quietly impressive. While not as high profile as China’s coastal behemoths, Wuhan had enjoyed its fair share of FDI successes, attracting hundreds of foreign companies, especially in pharmaceuticals, ICT and manufacturing (predominantly automotive and household appliances). Big names drawn to Wuhan included Citroën, Ericsson, General Motors, Honda, HSBC, IBM, Nissan, Siemens and Walmart.
Then came Covid, with Wuhan making headlines all over the world for being the ‘birthplace’ of the virus. Would these negative connotations dent its attractiveness for students, tourists and foreign investors?
Glenn Barklie, chief economist at Investment Monitor, says: “Wuhan, the epicentre of the Covid-19 outbreak, has never been a leading destination for inward investment in China. Foreign investment is heavily concentrated in Shanghai and Beijing. Combined they account for 39% of total FDI projects into China. The overall decline in foreign investment is felt in almost every Chinese city. Wuhan has been slightly less impacted than the more favourable destinations of Shanghai, Beijing, Shenzhen and Suzhou, to name a few. However, FDI levels have still fallen.”
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This would suggest, then, that the damage caused to Wuhan by its association with the Covid-19 virus has been minimal. Of much greater concern is the wider FDI slump throughout China.
“Investments anywhere into China are most welcomed,” says Barklie. “The country is experiencing a dramatic downturn in inward investment levels. In 2022, the number of FDI projects into China was half the level it was in 2019.”
These figures would hint that China is suffering some collateral damage from its response to the Covid-19 pandemic. The country continued with an onerous zero-Covid policy long after many other countries – buoyed by successful vaccination campaigns – had abandoned lockdown policies. China's strategy saw its supply chains damaged, with its Asian neighbours taking advantage. China's trade war with the US has also taken a toll on the country's FDI attractiveness.
That said, China is still one of the key FDI destination countries in the world, even if it is struggling to maintain the momentum it has created over the past couple of decades. German companies in particular had been drawn to the country, but is this love affair on the rocks?
"Germany is the second-largest source market for FDI into China behind the US," says Barklie. "However, investment levels have plummeted. In 2022, the number of German outbound projects destined for China was half the level it was in 2019. The automotive sector has been slightly less impacted, however; it remains the leading sector for German investments in China. The majority – 61% – of German investments in China are in manufacturing or R&D operations."
So what to make of ZF Friedrichshafen's $166m (€151.82m) investment in Wuhan? "On ZF Group’s official press release I note it states: ‘The Wuhan R&D centre will gradually share the R&D work and testing capabilities of R&D centres in other parts of the world to achieve full local-to-local R&D capabilities’," says Barklie.
"Although the project is certainly demonstrating confidence in the Chinese market, it could also be interpreted that ZF is hedging its bets. It is not the first company to install a China-plus-one (or many) policy. Reducing supply chain risks has become quintessential in production practices across several industries. The automotive sector has been one of the most impacted by supply chain delays given its use of hundreds or even thousands of components. So ZF diversifying its R&D capabilities makes sense to allow it flexibility for wherever the market leads."
ZF Friedrichshafen's airbag production and R&D centre in Wuhan will involve an investment of $166.37m and will take up 67,000m². The company plans to have a total workforce of 1,200 employees. It will be ZF Friedrichshafen's largest airbag production location in the Asia-Pacific region, and annual output is expected to exceed 3bn yuan ($417.67m).