The US is luring a record amount of capital investment from German companies attracted by its strong economy and lucrative tax incentives, just as conditions in their home market and China, their largest trading partner, are worsening.
German companies announced a record $15.7bn of capital commitments in US projects last year, up from $8.2bn a year earlier, according to data compiled by fDi Markets, a subsidiary of the Financial Times, dwarfing the $5.9bn pledged in China.
The amount heading for the US made up about 15 per cent of total commitments in 2023 in either greenfield or expansion projects overseas, compared with 6 per cent the previous year.
The investment boom covers the first year since the Biden administration passed the Inflation Reduction Act and the Chips And Science Act, which offer more than $400bn in tax credits, loans and subsidies with the aim of rebuilding US manufacturing and accelerating the energy transition.
German companies announced 185 capital projects in the US in 2023, of which 73 were in the manufacturing sector. The largest project was a $2bn investment by Volkswagen’s Scout Motors electric vehicle subsidiary in Columbia, South Carolina. Some types of foreign investment, such as M&A and other forms of equity investment, are not tracked by fDi Markets.
Senior executives at BASF and Siemens Energy — two of Germany’s largest companies — said a combination of pragmatic US government industrial policies, a strong long-term market outlook and increasing focus on supply chains was driving US investment.
“We see this huge investment potential with the new buildout of energy infrastructure in the US,” said Tim Holt, an executive board member of Siemens Energy, which this month announced plans to build a $150mn power transformer plant in Charlotte, North Carolina.
“In the past we have pretty much exported transformers from Germany, from Austria, from Croatia and from Mexico into the US. But given the market size and that we needed to do an expansion, we looked and we said the new factory is a good investment case given the market outlook.”
Holt said the Covid-19 pandemic, geopolitical tensions and supply chain disruptions at the Suez and Panama canals highlighted the need for diversification of manufacturing.
There are signs the investment boom is continuing. A survey of 224 subsidiaries of German companies in the US published on February 8 by the German American Chambers of Commerce found 96 per cent planning to expand their investments by 2026.
BASF, the world’s biggest chemical group and a major investor in China, is also expanding its US operations.
Michael Heinz, BASF’s chief executive in North America, told the FT the market size, prospects for growth over the next decade and government incentive programmes made it a “very attractive market”.
The company plans to invest €3.7bn between 2023 and 2027 in North America, which includes major expansions of petrochemical plants in Geismar, Louisiana, and in Cincinnati, Ohio.
BASF is a key example for investors and politicians concerned about creeping deindustrialisation in Germany, having announced a “permanent” downsizing of its headquarters in Ludwigshafen, with thousands of job cuts and plant closures following the surge in European energy prices when Russia invaded Ukraine.
Europe’s largest economy has been especially badly hit by the loss of cheap Russian gas, which for decades allowed it to remain a centre of heavy industry and manufacturing.
A study last year found that nearly a third of German industrial companies were planning to boost production abroad rather than at home — a figure that had doubled from the previous year.
“Europe is increasingly suffering from overregulation, slow and bureaucratic approval procedures and, above all, high costs for most production factors,” said Heinz.
“There is no doubt, that the European industry is challenged. It won’t be clear-cut, but energy-intensive industries in Europe will likely shrink rather than grow in the medium term.”
He said Germany and the EU as a whole needed to generate sufficient green electricity at competitive prices, build the right infrastructure for electricity and hydrogen, and develop less bureaucracy and faster approval procedures to remain competitive.
BASF is also a massive investor in China, where almost half of its planned global capital expenditure is planned until 2027. The company is currently building a €10bn state-of-the art petrochemical plant in Guangdong, which the company has said will largely rely on green energy that would not yet be available at necessary scale in Europe.
BASF has been criticised for making a big bet on an autocratic state by critics who are wary that German industry is repeating the mistake it made in relying too heavily on Russia. This month, BASF said it would sell stakes in its two joint ventures in Xinjiang — where Beijing has been accused of widespread human rights abuse. This followed allegations of the use of forced labour, highlighting the risk of investing in China as both the US and EU regulators are heightening scrutiny into Xinjiang supply chains.
A report last week by the German Chamber of Industry and Commerce forecast that the US would supplant China as the nation’s top trade partner by 2025 at the latest.
