Amidst the ruins of a city destroyed by World War II, Karl Haeusgen’s grandfather invented a hydraulic pump that he was so proud of that he founded a company to sell it. Back then there were no revenue projections or five-year growth strategies. The plan was survival: “It was just about seizing opportunities,” said Mr. Haeusgen.

Seven decades and three generations later the family business, Hawe Hydraulics, ships approximately 2,500 parts around the globe. Instead of struggling for sales, however, Mr. Haeusgen must analyze the geopolitics of an increasingly polarized world.

“A lot of my business, if not more, depends on how Biden and Xi get along,” he said. “I sometimes wish I could run a restaurant and not have to worry about global politics.”

With China and North America as Hawe’s biggest trading partners, Mr. Haeusgen does not have that luxury. As tensions between Beijing and the West rise, Hawe officials are working to hedge the company’s dependence on the huge Chinese market.

Long the pinnacle of Chinese trade in Europe, Germany is increasingly caught in the diplomatic struggle between the world’s two largest economies – wooed by China but urged by Washington to move further from Beijing, even as Treasury Secretary Janet Yellin arrives in China on Thursday for talks seeking common economic ground.

How Hawe and other medium-sized German companies navigate these new global forces will be critical to the country’s future prosperity. Although Germany’s success in the 20th century as the economic powerhouse of Europe is often seen through its biggest brands – such as Volkswagen, Mercedes and Siemens – it is small and medium-sized enterprises that are the backbone of its economy.

These companies, known in German as the “Mittelstand”, are struggling to create a model for the future as the country’s socio-economic order begins to falter under the weight of stalled modernization and ruptures in global politics.

Some executives like Mr. Haeusgen embrace transformation, try new strategies and markets. Other businesses, however, are wary of abandoning a model that for decades enabled Germany to prosper but challenged change.

The tensions are felt even on Hawe’s factory floor.

“I just can’t see it. What is the alternative to China?” said Holger Rebbe, floor manager.

Hawe’s handling of international affairs is not only concerned with its 2,700 employees. The economies of some German cities depend on it.

In Kaufbeuren, a brightly painted Bavarian town nestled under the Alps, Hawe is a major employer. In the tiny village of Sachsenkam, 60 miles to the west, Hawe provides 250 jobs – the next largest employer is the local brewery, with a staff of 17.

“It’s like we’ve been successful for too long,” said Stefan Bosse, the mayor of Kaufbeuren, who wants to attract other businesses to diversify the employers his city relies on. “Now, little by little, we see: ‘Oh, – this is not given. This can also be compromised.”

The archetypal Mittelstand company is based in a rural German town, making equipment that few have heard of, but that is crucial to goods worldwide – like a screw needed for every airplane or passenger car.

These companies provide the majority of Germany’s economic output, according to some studies. They employ 60 percent of its workers, and make up 99 percent of its private sector – a higher percentage than in any industrialized nation in the world.

“The German business model, especially Mittelstand, is extremely good at doing one thing: Slowly but steadily perfecting one product,” said Mathias Bianchi, spokesman for the German Mittelstand Association. “Because that worked so well for years, they didn’t need to adapt to changes. But now, they have to adapt to the new economic reality.”

Even as the technological revolution and climate change have added stress in recent decades, Germany’s model has marched on profitably.

But the pillars it relied on to do so — cheap Russian natural gas and the Chinese market — are collapsing.

Moscow’s invasion of Ukraine forced Germany to wean itself off the gas that provided its industry with cheap power. China’s move toward self-reliance means that a market that once seemed like an endless source of growth is not only less certain, but a rival.

Highlighting socio-economic transformation for the country, promised by Chancellor Olaf Scholz’s coalition government, has become a source of national anxiety.

Like its population, Germany’s entrepreneurs and entrepreneurs are aging — the average Mittelstand association member is 55.

Some resist adapting to new technologies and cling to a loyalty-based system that has created lifelong employees — and customers. (Hawe’s first customer in 1949, a forklift manufacturer, continues to buy from it today.)

The government also has a poor record of getting rid of outdated practices – such as its labyrinthine, paperwork-based bureaucracy. In 2017, it promised to digitize its 575 most used services, such as company registrations, by 2022. A year after that deadline, Mr. Bianchi said, only 22 percent of those services are online.

Such failures make businesses wary of transformation plans that the government says will be expensive now, but will make Germany a diversified, digitalized and climate-neutral economy.

“Our companies don’t see it at the moment,” Mr. Bianchi said.

A an inquiry of Mittelstand companies published on Tuesday by the analytical company Kantar showed a sobering statistic: More than half of the surveyed companies did not want to expand in Germany, and a quarter considered moving.

Even among companies like Hawe, the speed of geopolitical changes has been striking.

The day after Vladimir V. Putin’s forces invaded Ukraine, Hawe decided to end operations in Russia. It was an easy decision. Russia was not an important market.

Still, Mr. Haeusgen said, the move came as a shock: “This was something that had never happened before – that, as a consequence of a political event, we closed an operation.”

On the Hawe factory floor, the anxieties it set in motion still linger.

Marita Riesner, inspecting parts, said her heating costs had increased to 740 euros ($803) a month from 120 euros ($130). She and her neighbors grow vegetable gardens to ease the pain of inflation as the country sinks into recession.

“I was a very positive thinker before,” she said. “But these days, I’m sweating it. There seems to be a lot going wrong.”

If geopolitical events were to disrupt trade with China, Mr. Haeusgen said, the consequences could eliminate more than half of Hawe’s jobs in Kaufbeuren. Currently, he said, 20 percent of Hawe’s business comes from China.

Some business groups have raised alarm in recent years over Germany’s vast exposure to China – before the risks were taken seriously by former Chancellor Angela Merkel’s government, which strongly encouraged German-Chinese trade.

Today, some policymakers privately worry that an event like a Chinese attack on Taiwan would be an inevitable disaster for Germany’s economy. The government is now pushing for “de-risking” by finding alternatives to trade with China.

Berlin plans to publish a new strategy paper this month to outline how it will move forward with its relationship with China. It is expected to consider pressure from Washington, Germany’s security guarantor, to distance itself from China.

But major brands such as Volkswagen and BASF insist that China, as the world’s second largest economy, is too important a market to give up. Such German-based multinationals are responsible for a 20 percent increase in foreign direct investment in China this year.

German officials say their strategy will be to maintain ties with China, but counterbalance that by strengthening ties with other nations, such as India or Vietnam.

The Mittelstand is doing the same: Hawe is investing heavily in India, where it plans to build a new plant, and other companies are looking to North America.

In Kaufbeuren, Hawe’s head of department, Markus Schuster, says that diversification brings new challenges.

“It used to be that we did the majority of sales with three customers from China,” he said. “Now we have many, many smaller customers scattered all over the world.”

Instead of making a few parts on a huge scale, as cheaply as possible, Hawe needs to make a wide variety of parts for a set of customers, as quickly as possible.

That means finding cost reductions, while developing automation systems to allow for flexible production, he said. He showed a team of robots engaged in an intricate dance, drilling and polishing metal parts.

Mr. Haeusgen believes that trade with China will remain a cornerstone of Germany’s economy. And he will continue to travel to China with other Mittelstand leaders for talks to resolve trade differences and mend ties.

The new socio-economic model for Germany may be less about setting up pillars than about managing an increasingly complicated, international juggling act.

“Being able to live with and manage uncertainty and deal with complexity becomes, I think, a core strength,” Mr. Haeusgen said. “The way my grandfather did it won’t work today.”

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