German defence industry says it will need government help to reduce dependence on China

By Sabine Siebold

BERLIN (Reuters) - German arms producers will need help from the government if they are to reduce their dependency on Chinese materials and still be able to compete with U.S. companies, Germany's defence industry association said.

Hans Christoph Atzpodien, head of the Bundesverband der Deutschen Sicherheits- und Verteidigungsindustrie (BDSV), said the U.S. defence industry had, under government pressure, widely shed their dependency on Beijing in recent years.

German arms producers have not been forced to follow suit, but are bound to come under pressure to do so sooner or later, Atzpodien said.

"If we don't follow their (U.S.) example, we will eventually come under pressure (to do so)," he told Reuters in an interview this week.

Berlin's awareness of the situation has increased but the domestic defence industry is still waiting for concrete steps to be taken, he said.

"One could consider establishing national reserves for resources that are especially crucial," he said, alluding to existing oil and gas reserves.

"One could also follow the American example and use public money to reduce dependencies (on China) in the making of defence products, paying a premium for goods that have been manufactured without Chinese raw materials."

CHINA STRATEGY

U.S. President Joe Biden unveiled steep tariff increases on an array of Chinese imports, and Germany is also concerned by the flood of cheaper imports from China.

Berlin outlined the need to reduce strategic dependencies on Chinese goods in its first China strategy announcement last year, citing "unfair practises" and political differences. The U.S. overtook China as Germany's most important trading partner in the first quarter of this year, according to Reuters' calculations based on official data.

Anxiety about alleged Chinese spying - dismissed by Beijing - has also grown, with three German nationals arrested last month on suspicion of handing over technology with military applications.

Atzpodien warned that German arms producers' business would be at risk if war broke out between China and Taiwan, which China says is part of its territory.

He said that such a war could trigger sanctions on Beijing that German companies would have to comply with, or China would cut exports of raw materials used by the defence industry.

Under such scenarios, U.S. arms makers would have an advantage as, having reduced their dependency on China, they could offer their products "sanctions-free".

The German defence industry depends heavily on Chinese raw materials such as rare earths, with Beijing mining 69% of rare earths globally and processing 86%, according to official figures.

China also dominates the mining of other resources crucial for the defence industry, with a share of 74% for graphite and 78% for wolfram, according to the figures. China also accounts for more than 90% of global magnesium processing - essential for the production of aluminium - and more than 80% of germanium.

(Reporting by Sabine Siebold, Editing by Friederike Heine and Timothy Heritage)