German companies look overseas as home opportunities fade
By Chris Bryant in Frankfurt and Stefan Wagstyl in BerlinAuthor alerts
An employee holds a control panel as escalators are assembled at the ThyssenKrupp AG factory in Hamburg, Germany, on Tuesday, Dec. 10, 2013. ThyssenKrupp AG, Germany's biggest steelmaker, is seeking to focus on its elevator, auto-parts and marine services business after selling a plant in Alabama. Photographer: Krisztian Bocsi/Bloomberg©Bloomberg
BASF, the world’s largest chemical maker by sales, is in the middle of a big upgrade of its main production site near the river Rhine in Ludwigshafen.
But chief executive Kurt Bock says Germany’s relative share of BASF’s total investment is set to decline, in part because of comparatively lower growth expectations in Europe, but also as investment conditions are more attractive elsewhere.
This outflow of investment is causing angst among the German establishment about the country’s longer term prospects, at a time when Berlin confronts the prospect of a new recession amid a wider eurozone slowdown.
BASF is considering investing more than €1bn in a new US facility that would help the company benefit more from the shale revolution that has led to far lower gas prices in the US than in Germany.
“North America is now much more profitable than Germany. If you had told me five or 10 years ago that would happen, I would have told you: never ever,” he said. “That tells you quite a bit: in Europe we are under intense pressure to improve our productivity."
Chancellor Angela Merkel last week added her voice to calls for improvements to the German investment climate, as export and factory data in August fell to their lowest level since 2009. But, so far, her coalition government is sticking to its pledge to balance the budget in 2015, thereby ruling out any big boost in public spending.
Instead, it will focus on measures to encourage private investment. That could be a challenge as companies are struggling to find reasons to invest at home. The combined private and public investment level is languishing below the levels needed for replacement. “Germany is eating its capital,” has become a common refrain in Berlin.
The share of gross fixed capital formation in gross domestic product is just 17 per cent, well below the 21 per cent average for industrialised countries. This stores up long-term problems for Germany: an ageing domestic population must raise its productivity or face a fall in living standards as retiring baby boomers cause the workforce to shrink.
EBM-Papst, a family-owned maker of industrial fans, began a €50m expansion of its main plant in Mulfingen earlier this year. But Rainer Hundsdörfer, chief executive, is frustrated by the poor state of the main road along which the company's trucks must trundle to a nearby production site. The road has not been repaired for years.
“Companies aren’t responsible for fixing public infrastructure, that’s what we pay taxes for . . . and if [the state does not] act, then Germany will become unattractive as an investment location and companies will invest elsewhere,” he says.
As a proportion of GDP, corporate investment in machinery and equipment has declined since 2011 and remains below the pre-crisis peak. Hopes of a recovery this year have been dashed by the geopolitical upheaval and several policy shifts at home that have worried business. These include the introduction of a minimum wage and pension increases for older mothers and long-service workers.
German utilities, which traditionally are big investors, have been squeezed by competition from subsidised renewable energy and have reacted by cutting capital expenditures.
RWE, Germany’s second biggest utility by market capitalisation, expects to cut capital spending from €4.5bn last year to around €2bn annually by 2016, or what it terms “maintenance level”. Eon, Germany’s biggest utility by market capitalisation, is also slashing investment at home and focusing overseas, for example in Brazil and Turkey.
“All this has put new burdens on Germany business both right now and for the future,” Ferdinand Fitcher, of the DIW economic institute, said on Thursday.
With profits high and borrowing costs at a near-record low, German companies have embarked on a spree of transatlantic technology acquisitions, following a period when German dealmaking was relatively muted.
Siemens agreed to pay $7.6bn for Dresser-Rand to build a stronger footprint in equipment for the US oil and gas industry. SAP said it would spend $8.3bn on Concur, the US travel expense software group. ZF Friedrichshafen agreed to acquire auto parts supplier TRW for $11.7bn and Infineon, the German semiconductor group, plans to buy International Rectifier for $3bn.
There are lots of things the government should support – it’s not just the roads, but also the data networks . . . Perhaps we have a lull [in the economy] now but with innovation and creativity we can get past it.
- Rainer Hundsdörfer, chief executive, EBM-Papst
German companies have also invested in new production capacity overseas to tap better growth prospects in the US and China. Announcing a $1bn expansion of its sports-utility vehicle plant in South Carolina in March, Norbert Reithofer, BMW chief executive, revealed it would surpass Dingolfing, northeast of Munich, to become the company’s largest plant.
But while German FDI has risen in the past decade, it amounts to below 2 per cent of GDP and cannot alone explain the domestic reluctance to invest. Domestic bank deposits owned by German companies almost doubled in the decade to January 2014 to €418bn, according to European Central Bank data. Companies have sat on their cash for want of opportunities and due to the grim outlook for growth in Europe.
“My impression is that German companies are carrying out investments to modernise their plants but they are not doing big domestic capacity expansions,” said Ralph Wiechers, chief economist at the VDMA engineering association. “Without significant growth why would you expand? There is a wait-and-see mentality.”
Mr Hundsdörfer at EBM Papst doesn't believe in "spending money that you don’t have". But he says there are times when both companies and the state must invest.
“There are lots of things the government should support – it’s not just the roads, but also the data networks . . . and education is also an important area . . . Perhaps we have a lull [in the economy] now but with innovation and creativity we can get past it.”