Will COVID-19 turn Germany’s export-oriented economy into a weakness?

Cargo ship MV Bavaria sails into the sea after loading Canadian waste at the Subic Bay Freeport Zone, Olongapo city, north of Manila, Philippines, 31 May 2019. [JUN DUMAGUING/EPA]

The COVID-19 crisis is hitting Germany and with it the export-oriented medium-sized companies and world market leaders. EURACTIV’s media partner WirtschaftsWoche surveyed these companies, who spoke of “opened flanks”, but also of “hope and optimism”.

Is Germany’s economic strength becoming a weakness?

The University of St. Gallen counts around 450 world market leaders in this country with more than 50% of sales each coming from abroad. A survey by WirtschaftsWoche shows nearly all these companies have introduced travel restrictions in recent days and switched to teleworking and video conferencing.

But how do they assess the COVID-19 crisis’ consequences on their financial year? And how are they dealing with the turbulence in the important markets of China, the US, and Italy? There are pessimists, optimists, and profiteers.

What impacts do you expect from the coronavirus on your overall economic development for the current year?

The confident and the profiteers.

One of the first German winners of the coronavirus pandemic was Teamviewer. The Stuttgart-based company offers solutions for video conferencing and remote access to computers.

The insurance company Allianz is also pleased with “a broadly diversified business model and products that are in demand in every economic situation,” while colleagues at reinsurer Munich Re do not expect the outbreak of the coronavirus to have a significant impact on their business either. “However, our business unit ‘Epidemic Risk Solutions’ has seen a sharp increase in demand from companies for our epidemic/pandemic insurance products since the outbreak of the novel coronavirus,” the added.

Sports goods manufacturer Adidas is also “extremely confident about future growth prospects.” Hessian medical technology and health care giant Fresenius (sales of €3.5 billion) sees “no significant limitations at present,” but says this “with all due caution.”

The Frankfurt-based forklift truck manufacturer Kion is confident “that production and delivery backlogs as a result of the extended New Year holidays in China and the current coronavirus situation in Italy can be made up later this year.”

Even smaller companies are emphatically optimistic.

For example, Wolfgang Spreitzer, the executive board member for the Actuators Division of relay manufacturer Gruner AG in Wehingen, Baden-Württemberg, explains: “If this situation were not to worsen further, meaning a halt of demand, economic development would be no better or worse than in 2019 or 2018.”

Peter Wimmer, the executive board member for Innovation & Products at the Tuttlingen-based medical technology company Binder said that “production is still running smoothly”. He also emphasised the opportunity for his company, saying it “is involved in corona research on a large scale. Research is carried out on the virus itself using our freezers and in a second step, our CO2 incubators are used in large pharmaceutical companies to develop a vaccine.”

Deutsche Post DHL was more hesitant: “If the macroeconomic situation returns to normal, there could also be positive effects for logistics companies,” said the Bonn-based logistics group. “If the current situation lasts longer or deteriorates in the coming months, the negative effects for the group are likely to outweigh the positive ones,” the company added.

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The losers

However, other companies have already felt the negative effects of the crisis.

For instance, the Lufthansa Group is one of the first to feel the negative effects of the Corona crisis. It is currently examining “the implementation of shortened working hours. Initially, however, it is a matter of finding ways to keep all employees on board even during the crisis,” a spokesperson said.

Lufthansa had already offered its employees “the use of voluntary individual personnel measures” in recent weeks, including unpaid leave, an advance on annual leave, and “the expansion of part-time work”.

The group has cancelled the payment of dividends to its shareholders. This step is intended to help ensure solvency. The group is also taking out additional loans and is contributing its aircraft fleet as collateral. In the event that the crisis gets worse or lasts longer, Lufthansa is even considering the possibility of government aid.

Mark Hiller, the managing partner of the aircraft seat manufacturer Recaro Aircraft Seating from Schwäbisch Hall, Germany, is suffering for similar reasons. The pandemic “leads to massive losses in sales and thus to enormous cost pressure.” As a consequence, there are “in individual cases programme deferrals.”

The Ludwigshafen-based DAX group BASF, which has a €59 billion in revenue also noticed a deterioration: “This year we are already experiencing a high level of uncertainty in the global economy in the first two months. With the coronavirus, a new factor has been added that is significantly hampering growth at the beginning of the year, especially in China,” the company announced.

The chemical company expects “that the negative effects of the coronavirus will have a significant impact worldwide, particularly in the first and second quarters of 2020,” under the assumption that “the virus will not spread globally.”

More concretely, the BWF Group (revenue: €285 million), a manufacturer of filter materials and felt from Offingen in southwestern Germany, expects “a double-digit percentage decline in turnover and earnings.” The Essen-based energy group Evonik with €15 billion in revenue announced at the beginning of March in its balance sheet PC that it expects a loss of around €30 million in the first quarter.

Several market leaders are not ruling out reducing working hours.

Jörgen Hofmann, CFO of the foam cutting machine manufacturer Albrecht Bäumer from the Siegerland region between Bonn and Frankfurt, said that “we expect to feel the effects until summer 2020 and currently do not expect to be able to compensate for the negative consequences in any way by the end of the year,” which could lead to “partial or total plant closures” in the worst case.

“Shortened working hours will definitely be introduced,” fears the firm E-T-A, with €90 million in revenue, a manufacturer of power distribution systems based in Altdorf near Nuremberg.

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How do you deal with the US closing the border?

Nearly all market leaders have introduced teleworking and travel restrictions.

In addition, the ban on entry into the US, which US President Donald Trump imposed on Europe on 12 March, is not a major problem for many companies because they have local offices, including, for instance, large corporations such as Siemens (which employs more than 50,000 people in the US), Volkswagen, Allianz (“hardly any direct effects”), Munich Re (“no negative effects”).

The Gütersloh-based washing machine and dishwasher specialist Miele also has its own sales company in the US with almost 500 employees and believes that “the effects of the temporary entry ban are therefore limited.”

But even less known medium-sized companies are prepared.

The corrugator manufacturer BHS from Weiherhammer, near the Czech border, generates around a third of its €575 million in revenue in the US and maintains a production site and a service branch in the country. Service and installation personnel are also on site. This makes it possible “to continue to serve all customers. Unfortunately, the flexibility for our internal planning of field service personnel is now somewhat limited”, the company said.

“The American president is always good for surprises”

However, the situation is different for some machine and plant manufacturers.

For the Albrecht Bäumer company, for which the US is also the largest sales market, the entry ban means “that we are currently unable to send any fitters, have to cancel commissioning, delivery and repair appointments.”

Machine manufacturer Haver&Boecker (revenue: €515 million) from the northwestern town of Oelde is forced to reduce its recently launched “USA offensive,” due to the entry ban, and two “larger projects” in the US for the Swabian plant manufacturer Lingl, are affected.

They assume “that it will not stop at these 30 days and that other countries will also close their borders. In fact, we expect half of the EU countries to close their borders in two weeks.” Still others, like Bausch+Ströbel, packaging machine manufacturers for the cosmetics and pharmaceutical industries, hope for “special permits.”

The ban also has concrete consequences for Recaro CEO Mark Hiller, the world market leader in aircraft seats. The company must now hold its spring management meeting, originally planned at the site in Fort Worth, Texas, in Stuttgart. Hiller writes that he “sent a US colleague, who works two-thirds of the time in Schwäbisch Hall and one-third at his home in the US, on a plane to the US yesterday”.

Heribert Rohrbeck, head of Bürkert Fluid Control System, a measurement and control system specialist for gases and liquids with a €532 million revenue, accepts the situation with fatalistic humour.

“We have a strong local presence in the USA and are, therefore, not particularly affected by this arrangement. Moreover, the American president is always good for surprises,” it said.

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What is your current situation in China and Italy?

The optimists

Volkswagen announced that “almost all” VW plants in China are producing again, “albeit at a lower level,” due to decreases in customer demand.

However, deliveries to the plants are working, mainly because the employees in the logistics chains and purchasing departments have been doing the “hard work” in recent weeks as the supply chains were functioning, although not on the usual routes everywhere.

VW now ships certain components by plane instead of by ship. The Brenner Pass between Austria and Italy in South Tyrol is also jammed.

The optimism in China is widespread among Germany’s market leaders:

While BASF’s major production sites in China have resumed operations since 17 February, Merck, which employes 4,100 people in China, announced that it has “now resumed most of our business operations in China.”

Besides, Continental has gradually resumed its production at Chinese plants since 10 February. And ZF Friedrichshafen’s 40 plants based in China have “resumed production or are in the ramp-up phase,”  although the production volumes are “not yet at 100%.” For Covestro, “operations have largely returned to normal. The supply chains are largely intact again and the production facilities have resumed normal operations”, while “all GEA locations around the world are open and operating at normal levels for the most part; this is also the case in China and Italy.”

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Smaller SMEs also emphasise the return to normality.

Grebe Holding, a manufacturer of industrial coating materials in Weilburg, Hesse (revenue: €211 million), had to close its production site in Tianjin for five weeks.

However, the loss was “bearable.”

Since 2 March, production has resumed at a 40% level, and Grebe intends to increase capacity utilisation to 70% to 80% by the end of March. Hawe Hydraulik SE also observed “a significant increase in business” in China and expects “a strong catch-up effect of the sales losses from January and February.”

The Pessimists

But not all German market leaders are so optimistic about business in China.

Agricultural machinery manufacturer Claas, for example, is currently struggling with a declining agricultural machinery market in China which pre-dated the corona crisis. Production there is “delayed in the new year and then started with a reduced workforce. The losses “cannot yet be estimated precisely.”

Numerous companies point out that their business activities in China have been “considerably impaired” (Ottobock) or “negatively affected” (Fuchs Petrolub), while Bürkert CEO Heribert Rohrbeck said that “two months on the market” in China had been missing.

Emka, a North Rhine-Westphalian manufacturer of locks, hinges and sealants for switch and control cabinets (revenue: €285 million), calls the current economic situation in China “tense.”

Emka companies in China had to close for between four and six weeks.

“Although the Chinese state covers the costs for social security and taxes, we bear the lion’s share of the costs.” Emka is “currently a considerable distance away from the forecast annual profit. A quick revival would be helpful.”

The filter material and felt manufacturer BWF estimates its sales losses to date in China and Italy in 2020 at €15 to €20 million.

It is not yet foreseeable whether and to what extent these losses can still be recuperated in the course of 2020.

“A certain amount of compensation can result from our technological diversification into different business areas. In the event of a broad recession, however, all divisions are likely to feel the consequences,” according to BWF.

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