The De-risking Paradox: Europe’s Corporations are Deepening the Ties Brussels Seeks to Loosen

Introduction

When European Commission President Ursula von der Leyen introduced the concept of ‘de-risking’ in spring 2023, European China policy appeared to have entered a new phase. Positioned explicitly against the U.S. rhetoric of economic decoupling, de-risking was framed as a pragmatic compromise. Economic engagement with the world’s second-largest economy was to be preserved, while excessive dependencies in strategically sensitive sectors were to be reduced. The promise was clear: the EU would maintain geopolitical resilience without abandoning an open, rules-based trading order.

Yet policy language and industrial behaviour do not move in tandem. While debates in Brussels continue to revolve around strategic autonomy and supply chain diversification, major European firms have reacted to growing geopolitical uncertainty by deepening their local embeddedness in China. Under the label ‘In China for China’, companies such as Volkswagen and BASF are investing heavily in fully localised production, research, and development structures. These ecosystems span entire value chains and are designed to function largely independently from European headquarters and suppliers.

For these corporations, this deep localisation strategy functions as a rational hedge against sanctions and political volatility. At the macro-political level, the effects look different. By transferring capital, technological capabilities, and future profit streams ever more deeply into the Chinese economy, European companies reduce short-term operational risks while fundamentally transforming the nature of Europe’s exposure. Risk is not eliminated; it is structurally relocated. As critical industrial assets become anchored in China, the room for manoeuvre that de-risking seeks to restore for Brussels begins to narrow. This dynamic exposes a state of complex interdependence: geopolitical sovereignty is no longer determined solely by statecraft, but is actively constrained by the autonomous survival strategies of transnational corporations.

Nowhere is this gap between ambition and practice more visible than in the automotive sector. The case of Volkswagen illustrates how de-risking, when shaped by corporate strategies of localisation and self-sufficiency, may constrain rather than strengthen Europe’s ability to exercise sovereignty within interdependence.

Narrative vs practice: the divergence between political theory and industrial reality

The official rhetoric of the EU has undergone a profound transformation in recent years. For decades, European China policy was shaped by the paradigm of ‘change through trade’. Today, a security-oriented perspective dominates. Since its pivotal 2019 Strategic Outlook, the European Commission officially and simultaneously frames China as a ‘cooperation partner’, an ‘economic competitor’, and a ‘systemic rival’. Within this context, the concept of de-risking has emerged as a guiding narrative. Its stated objective is to enhance economic resilience by reducing one-sided dependencies in strategically sensitive sectors such as rare earths and battery technologies. Brussels has repeatedly stressed that this approach does not imply a withdrawal from the Chinese market, but rather a precautionary strategy of diversification – aimed at preserving Europe’s capacity to act in the face of potential economic coercion and safeguarding technological sovereignty.

Industrial practice tells a starkly contrasting story. Instead of a measurable reduction in exposure to China, recent foreign direct investment data indicate that leading European firms – particularly in the automotive and chemical sectors – are significantly expanding their local presence. The gap between the political objective of diversification and actual corporate behaviour can be described as a form of entrepreneurial self-sufficiency. Instead of retreating, firms are embedding themselves more deeply within the Chinese economic ecosystem, even as geopolitical tensions intensify.

Central to this development is Volkswagen’s ‘In China for China’ strategy. It refers to the construction of fully localised value chains designed to operate independently from European suppliers. Theoretically, this divergence illustrates Robert Keohane and Joseph Nye’s classic distinction within complex interdependence: while Brussels creates policies to mitigate immediate sensitivity – such as reducing the costs of supply chain disruptions in critical raw materials – it largely neglects the deepening structural vulnerability created by corporate localisation. By committing large amounts of capital into immovable assets and locking future revenue streams into the Chinese market, European firms are creating a dependency where the costs of exit are prohibitive. Consequently, while the EU creates safeguards against resource shortages, it lacks a strategic response to the absence of viable alternatives to the Chinese market itself.

This exposes a flaw in the EU's definition of ‘risk’: while Brussels focuses on reducing dependencies on critical inputs (like rare earths), it overlooks the systemic risk of market and innovation dependency. For industrial heavyweights, deep revenue exposure and the increasing reliance on Chinese technological ecosystems are not merely commercial metrics, but geopolitical vulnerabilities that limit political action just as effectively as a shortage of raw materials. As a result, dependency is not eliminated but reconfigured: firms trade short-term operational stability for long-term structural immobility and a gradual loss of technological sovereignty.

At the macroeconomic level, however, the implications shift. While the European Commission seeks to reduce vulnerabilities within the internal market through policy instruments such as the Critical Raw Materials Act, European companies are committing capital and technological expertise to China on a scale that severely constrains political options in the event of a crisis. In effect, the sovereignty that de-risking is meant to restore is constrained by the autonomous survival strategies of transnational networks, creating a gap between political intent and industrial reality.

At first glance, Volkswagen’s ‘In China for China’ strategy appears fully compatible with the logic of de-risking. By localising production and innovation, European firms arguably reduce cross-border dependencies and insulate their Chinese operations from geopolitical spillovers. From this perspective, localisation appears as a rational form of risk containment rather than a contradiction to European policy. However, this interpretation conflates operational risk with geopolitical vulnerability. While localisation effectively reduces exposure at the firm level, it simultaneously increases the structural exposure of European capital, technology, and future profit streams to the Chinese political system. Risk is not eliminated; it is structurally relocated beyond the reach of European policy instruments.

This divergence raises a fundamental question regarding the architecture of de-risking: can and should multinational firms be expected to align themselves geopolitically? From a managerial standpoint, companies are not geopolitical actors; they follow a logic of economic survival. Expecting them to independently internalise the EU’s strategic coherence at the expense of their own global competitiveness – especially when China serves as an indispensable technological ecosystem – misunderstands the nature of transnational commerce.

Yet, in sectors that underpin Europe’s industrial base, these corporate decisions are not geopolitically neutral. By shifting the gravitational centre of capital and innovation to China, firms may unintentionally increase Europe’s macro-political vulnerability, transforming a relationship of mutual interdependence into one of asymmetrical leverage. Demanding alignment from the private sector is therefore futile unless the EU addresses the structural roots of this imbalance. If political sovereignty requires a genuine counterweight to Chinese influence, the EU must provide incentives within the Single Market that go beyond mere compensation. The objective should be to ensure that maintaining a robust industrial footprint in Europe remains as economically rational as localising in Hefei – thereby enabling corporate assets to function as a strategic lever rather than a systemic liability.

The Volkswagen case study: from market presence to systemic integration

The transformation of Volkswagen AG in the People’s Republic of China (PRC) illustrates the shift from traditional, export-oriented engagement towards deep structural integration. For decades, the company functioned as a cornerstone of German–Chinese economic relations. More recently, rising geopolitical uncertainty has pushed its corporate strategy beyond conventional forms of risk mitigation. At its core lies an ambition to achieve extensive operational self-sufficiency under the ‘In China for China’ framework. This approach seeks to internalise the entire value chain – from initial vehicle design to software engineering and battery cell production – within Chinese territory. However, Volkswagen is merely the frontrunner of a broader structural shift. Across the automotive and chemical sectors, champions like BASF and BMW are similarly reacting to geopolitical uncertainty not by retreating, but by consolidating their presence within local Chinese value chains.

The establishment of the Volkswagen China Technology Company in Hefei exemplifies this strategic reorientation. Supported by multi-billion-euro investments, it represents the Group’s largest research and development hub outside Germany. More than 3,000 engineers and developers now work at the site, with the explicit aim of shortening development cycles and reducing time to market by approximately 30 per cent. This acceleration is not simply an operational goal, but an existential necessity for survival within the hyper-competitive Chinese ecosystem, which increasingly functions as a technological 'fitness centre' for the global automotive industry. This localisation of innovation marks a qualitative turning point. Technological development is no longer primarily conducted in Europe and transferred to China; it is increasingly generated within a largely autonomous Chinese ecosystem that operates with growing independence from global corporate standards.

This process of vertical integration is further reinforced through partnerships with domestic technology leaders, including minority stakes and strategic cooperation agreements in the fields of electric vehicles (XPENG), battery production (Gotion), and artificial intelligence (Horizon Robotics). While policymakers in Brussels continue to highlight the risks associated with technology transfer and industrial espionage, Volkswagen has intensified cooperation with Chinese partners in order to remain competitive in rapidly evolving areas such as electromobility and digitalised driving systems. From a corporate standpoint, this engagement reflects the intense innovation pressure characterising the Chinese market. From a political perspective, it carries different implications, as European control over critical intellectual property and strategic expertise is gradually reduced.

The resulting paradox for the European China policy is increasingly evident. By insulating its Chinese operations from external shocks, Volkswagen has created a corporate structure that is largely unaffected by potential European trade restrictions or sanctions. In the event of geopolitical escalation, its Chinese operations could continue largely independently of European supply chains. Resilience, in this sense, comes at a cost. As the economic core of the Group becomes more deeply intertwined with developments in China, any political distancing between Brussels and Beijing would carry existential implications for one of Europe’s most important industrial actors. This is especially true given that the Group remains structurally dependent on its Chinese operations for a substantial share of its global revenue and repatriated dividends. Strategic autonomy at the European level is thus constrained not by external pressure alone, but by the localisation strategies pursued by European firms themselves.

Rather than achieving diversification across markets and production sites, capital and innovation are becoming increasingly concentrated within the PRC under the ‘In China for China’ framework. This trend coincides with internal restructuring in Europe, as Volkswagen debates job reductions of up to 35,000 positions by 2030 and plant closures in Germany. The resulting asymmetry enhances China’s political leverage, but this leverage is not absolute. A systemic analysis reveals a condition of reciprocal vulnerability. Deep corporate localisation inherently generates entanglement with the domestic Chinese workforce and economy. The thousands of high-tech jobs and tax revenues created by European R&D centres represent a critical stability factor for China’s own economic transition. Consequently, any radical political rupture or expropriation of European assets would inflict severe domestic costs on the PRC. This mutual entanglement functions as a strategic safeguard: the structural embeddedness of European firms constrains Brussels' ability to deploy economic sanctions, but it equally limits Beijing's capacity for unchecked economic coercion. The dominant corporate response to geopolitical risk thus creates a structurally asymmetric 'mutual hostage' architecture – a trajectory that transforms the logic of political de-risking from unilateral independence into the active management of structural interdependence.

The geopolitical costs of corporate resilience

The strategic reorientation of European corporations produces unintended frictions that contradict the de-risking agenda. Specifically, three forms of structural lock-in emerge: capital immobility, innovation ecosystem dependency, and internal asymmetry.

Regarding capital immobility, the physical embedding of assets and the structural reliance on local revenue streams drastically reduce their political fungibility. In a scenario of geopolitical escalation – such as tensions in the Taiwan Strait – the EU would face severe constraints in deploying sanctions without inflicting disproportionate damage on its own champions. Crucially, however, this dynamic is increasingly symmetrical: as Chinese greenfield investment in Europe expands to secure market access – a key outward component of Beijing’s ‘Dual Circulation’ strategy – these assets similarly function as informal hostages for Beijing, complicating unilateral coercion for both sides.

As for innovation dependency, the ‘In China for China’ model creates a reversed causality. European firms now localise to tap into cost-effective talent pools and rapid advancements within the PRC. Over time, this shifts Europe from a position of technological superiority to one of structural reliance on Chinese ecosystems to maintain global competitiveness. By transferring critical R&D capacities into an institutional setting characterised by a political economy shaped by significant state coordination and strategic industrial policy, Europe’s future technological trajectory becomes inextricably linked to the very systemic competitor it seeks to de-risk from.

Finally, the third form of structural lock-in manifests as internal asymmetry. While multinationals hedge exposure locally in China, the establishment of self-sufficient value chains frequently coincides with the downsizing of production sites in Europe. Consequently, the European industrial base – particularly its less agile SMEs – loses productive depth and innovative capacity, thus disrupting Europe’s multi-tiered industrial ecosystem. When Europe’s leading firms deepen structural dependence despite political warnings, Beijing can also exploit divisions among Member States, playing individual capitals against Brussels. 

Ultimately, Europe faces the hard reality of structural immobility. Unlike the divestment from Russia, an exit from China is not merely a loss of assets but a disconnection from a critical innovation node. This prohibitive cost creates a ‘sovereignty trap’: de-risking dissolves into rhetoric, while material interdependence deepens to a point where strategic autonomy is no longer lost, but functionally paralysed.

Conclusion: the need for a coherent geo-economic architecture

The widening gap between the political ambition of de-risking and the industrial reality of localisation exposes the limits of governance in an economy shaped by deep transnational interdependence. Crucially, this paradox is not a uniquely European anomaly. While European corporations reduce their vulnerability through an ‘In China for China’ strategy, Chinese actors pursue a mirrored approach under the ‘Dual Circulation’ framework.

By aggressively expanding foreign direct investment in the European Single Market, firms are securing market access and establishing themselves as indispensable local players. Consequently, corporate strategies of self-sufficiency – whether pursued by Chinese challengers or European incumbents like Volkswagen – transform into a more nuanced and entrenched system of ‘mutual hostage’. This reciprocal embeddedness underscores the sheer economic gravity of both markets: European firms now depend on China’s innovation ecosystem to maintain global competitiveness, while Chinese challengers rely on Europe’s high-margin environment to offset domestic price wars. As long as Europe’s domestic market remains burdened by high energy costs and administrative barriers, this deep integration will continue to appear not just attractive, but economically rational.

To prevent this dynamic from fracturing Europe's industrial base, the response must target the internal asymmetry identified earlier. Instead of relying solely on defensive trade barriers, the EU must aggressively improve domestic conditions for its Small and Medium-sized Enterprises (SMEs), which lack the capacity to hedge against these risks through localisation. This requires moving beyond subsidies to structural reforms: lowering industrial energy costs and completing the Capital Markets Union to finance local innovation. Without these tangible improvements, regulatory oversight alone will inadvertently accelerate the relocation of capital abroad, reinforcing the very dependencies de-risking seeks to contain.

More broadly, the EU faces the challenge of asserting strategic autonomy in an environment where the boundary between economic activity and state security is increasingly blurred. For the private sector, the takeaway is not to shun China altogether, but to operationalise ‘strategic ambidexterity’. Firms should be incentivised to avoid single-country R&D lock-ins and maintain core intellectual property within the EU jurisdiction. Simultaneously, they should be motivated to work with the EU to leverage their local contribution in China as a political shield in times of tensions and conflicts. True resilience lies in the capacity to operate in China’s ecosystem without allowing the corporate headquarters in Europe to be structurally hollowed out. Ultimately, European sovereignty in an era of complex interdependence will be determined by the Union’s capacity to balance these structural interdependencies so effectively that the costs of geopolitical escalation become prohibitive for all sides.

The views expressed in this article belong to the author(s) alone and do not necessarily reflect those of European Guanxi.

ABOUT THE AUTHOR

Samuel Weber studies Political Science, History, and Chinese Studies at Heidelberg University. An exchange year at Shanghai Jiao Tong University deepened his interest in China, with a particular focus on Chinese policy-making and its economic implications, as well as EU–China relations and development cooperation.

This article was edited by Robin Millet and Zheng Guan.

Featured Images:  From left to right: António Costa (President of the European Council), Li Qiang (Premier of China), Ursula Von Der Leyen (President of the European Commission) / Wikimedia Commons / Free for use