BERLIN/LONDON Confident or complacent, German business executives are bullish about their chances of profiting from China's transition to an economy fired by consumption rather than investment.
As China deliberately dampens its long boom in capital spending, Germany will no longer be able to count on windfall gains from exports of the high-quality machinery for which it is renowned.
What's more, Chinese manufacturers are likely to pose a growing competitive threat to Germany in some sectors as they abandon low-value-added production and march up market.
Yet German entrepreneurs express confidence that their time-honoured recipe of constant innovation will continue to pay off.
After all, Germany has managed to increase its share of global manufacturing exports to OECD countries since 1995 even as China's ascent has eroded the shares of France and Italy.
"There's a lot of competition from China, but thank God the Chinese are not as innovative as we are - they are known for copying things rather than bringing new developments onto the market, so they tend to be a step behind us," said Sabine Herold, co-managing director at DELO Industrial Adhesives, based near Munich.
Europe is not as directly exposed as commodity producers to the changes unfolding in China, which aims to wean itself off resource-intensive heavy industry and low-skilled assembly of imported components and raw materials.
But the potential repercussions are considerable. China is Germany's fifth biggest market, taking 6 percent of its exports. By comparison, France ships 3.4 percent of its exports to China, Britain 3.3 percent and Italy 2.3 percent.
With capital goods accounting for over 40 percent of German exports, Beijing's determination to depend less on investment seemingly bodes ill. But as some doors close, others open.
Take DELO, whose adhesives are used in mobile phones, smart cards and electronic components. The firm employs 350 people and makes 60 percent of its 52 million euros in annual sales abroad.
"We notice that our products are no longer just being used in production in China but that these bonded products are also sold to the Chinese market as well. In that sense China is already a growth market for us," said Herold.
As Chinese living standards rise, so does demand for protein. That's good news for firms such as Broekelmann + Co Oelmuehle GmbH + Co, based in the western city of Hamm, which processes oilseeds into edible oils and feedstuffs.
"We're not feeling the slowdown in China," Bertram Broekelmann, the firm's managing director, said. "China is a huge market and it needs to import more and more food because consumption, including high-quality products, is increasing."
And machines will still be needed to make and pack those high-quality food products and consumer goods such as pharmaceuticals.
So whereas demand for some types of machinery might fall, there should not be a big impact on overall volumes, according to Ulrich Ackermann, head of the foreign trade department at the VDMA engineering industry association.
"For German machine builders who have the right machines to make products for Chinese consumers, it's a big opportunity. We have those machines," said Markus Rustler, managing director of Theegarten-Pactec, a manufacturer of confectionery packaging machines based in the eastern city of Dresden.
The challenge for Germany will be to fend off competition not only from other economies specialising in capital goods, such as Japan, South Korea and Taiwan, but also from China, which has been steadily upgrading its industrial structure.
Medium-technology manufactures such as cranes, refrigerators and gas turbines now account for nearly 40 percent of Chinese exports, up from 25 percent in 1995, according to economists at Royal Bank of Scotland.
German industry has resisted China's rise to date by focusing on high-performance products, often custom-made, that command correspondingly high prices.
This strategy is likely to continue to pay off for machine tools, according to InterChina Consulting. It expects the domination of the top end of the market by German and other foreign manufacturers to last another couple of decades.
"For China to develop a competitive machine tool industry, important structural and social/behavioural changes are required, which will be difficult and require many years," Long Nanyao wrote in a recent report by the consultancy.
In contrast to Germany, Italy has suffered at the hands of China in traditional consumer sectors such as clothing and footwear, where cheap labour counts for more than technological content and domestic manufacturers have been slow to upgrade.
Italy has also been feeling the heat in more advanced, capital-intensive sectors such as electrical machinery, said Giorgia Giovannetti, a professor at the University of Florence.
"I wouldn't go so far as to say China is driving the deindustrialisation of Italy. But I would say that China really puts some competitive threat and so firms have to wake up to it," she said.
To sharpen their competitive edge, Chinese firms are taking over European rivals to obtain the technology needed to raise their game - another critical element of the new economic model.
Construction equipment typifies the trend. China's two sector leaders, Sany Heavy Industry and Zoomlion, have both bought expertise in concrete pump manufacturing by acquiring Putzmeister of Germany and CIFA of Italy respectively.
"As we look back 10 years from now, what we will see is that a significant number of companies that are fundamentally China-domestic today will be calling themselves global companies but with Chinese characteristics," said Gordon Orr, a director in Shanghai with consultants McKinsey & Co.
The risk for Germany is that in areas less specialised than precision engineering Chinese firms will be able to harness home-grown or acquired technology to economies of scale in a way that Germany, a country 15 times smaller, simply cannot match.
This combination of good-enough technology with massive production capacity was the reason - not alleged dumping by China - for the shakeout in Germany's solar power sector, according to one German executive.
He fears a similar "structural crisis" could be in store for parts of the Mittelstand - Germany's galaxy of small and medium-sized firms - that underestimate the China challenge.
Yet this is not the prevailing mood. Germany is the world leader in machinery and has seen off other cut-price Asian rivals in the past.
"The main thing is that Germany remains at the forefront of technology," said Stefan Muetze, an economist with Helaba in Frankfurt. "There are lots of indicators, including research and development, suggesting that Germany is very competitive, so we can rest easy for now."
(Editing by Mike Peacock)