An Industrial Crisis Is Brewing in Germany
(Bloomberg Opinion) -- In the darkest days of the 2009 recession, Germany’s industrial output was collapsing at an annual rate of more than 20%. An unfathomable implosion but one that thankfully ended almost as quickly as it started.
Some 10 years on, a crisis is brewing once again in the country’s industrial heartlands. The pain could prove more enduring this time.
So far the problems aren’t nearly as acute as in 2009; industrial production fell by a comparatively modest 4.2% in July. The worry, though, is that demand is being sapped by a mix of both cyclical and longer-lasting structural factors such as the demise of diesel and the shift to electrical vehicles. Trump’s trade wars and Brexit aren’t helping.
Germany’s industrial sector contributes more than one-fifth of GDP and is usually a huge asset. Right now this export engine is pulling the economy down. Signs of distress are everywhere. German manufacturing activity is at a decade low, according to IHS Markit’s purchasing manager’s index. The Ifo Institute estimates that more than 5% of manufacturing companies have cut working hours and about 12% expect to do so during the next three months. German machinery orders declined 9% in the first six months of the year, according to the VDMA association, which represents the country’s engineers. In chemicals and pharmaceuticals, domestic production fell 6.5% in the first half of the year, while domestic car output has fallen 12% this year. Auto exports have dropped 14%.
ThyssenKrupp AG, a former industrial jewel that makes everything from steel to submarines to car parts, is in crisis. It’s burning cash, weighed down by debt and has parted company with two chief executives in the space of 14 months. The chemicals giant BASF is cutting 6,000 jobs and has warned on profits.
Meanwhile, the German carmakers BMW AG and Daimler AG have issued profit warnings as tighter emission rules oblige them to keep spending heavily. Their suppliers are the ones really hurting though. At least three — Eisenmann, Weber Automotive and a subsidiary of Avir Guss — have filed for insolvency in recent weeks and investors are betting the pain will spread more widely.
The list of manufacturing heartache goes on. Debt-laden wiring and cable company Leoni AG is among the Germany’s most shorted stocks. The shares have lost two-thirds of their value over the past year and this is hardly unique.
The company that best illustrates this slow-burn crisis is Continental AG. Last week the tire and car parts titan announced a massive restructuring, which it said would affect 20,000 jobs over the next decade, or some 8% of the workforce. Explaining its decision, the manufacturer warned of an “emerging crisis in the automotive industry.” Demand is weak and technological requirements are shifting fast. In future it will need more software engineers but fewer people building components for gasoline and diesel engines.
Conti’s great rival Robert Bosch GMBH has a big diesel technology business and is preparing for upheaval too. Its chief executive officer Volkmar Denner told Sueddeutsche Zeitung last month that he expects autos production to stagnate. “That’s different from the past when it almost always went up. The tailwind is gone,” he said.
With luck these grim warnings will compel the government to reconsider its demand-sapping commitment to a balanced budget. Last week the head of the BDI industry lobby group urged Berlin to consider additional borrowing to fund public investment — a once unthinkable heresy but one that’s common sense when even 30-year German debt yields nothing.
However, unlike in 2009 when a domestic car scrappage scheme boosted demand, Germany can’t easily buy itself out of trouble this time. Tens of thousands of well-paid industrial jobs face obsolescence because of the demise of the combustion engine. Electric vehicle drivetrains have far fewer parts and the process is less labor intensive.
Germany’s economic power was built on the back of its excellent gasoline and diesel cars. Their inevitable demise puts the country’s position as the “engine of Europe” under threat.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Chris Bryant is a Bloomberg Opinion columnist covering industrial companies. He previously worked for the Financial Times.
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