German industry tools up to face global slowdown
Philippine Daily Inquirer
First Posted 18:46:00 07/19/2008
BERLIN -- FALLING ORDERS, A STRONG euro and high oil prices have put Germany’s manufacturers in a tight spot, but they are responding to the challenge and are better placed to handle the global slowdown than their euro zone peers.
The recent news flow from the manufacturing sector has made for grim reading: Orders fell for the sixth month in a row in May, when industry output and manufacturing sales also fell.
Add to the slew of weak data news that industrial conglomerate Siemens plans to cut some 4 percent of its workforce worldwide, and the picture appears to darken.
However, the Siemens example shows that German companies are taking steps to shape up. Widespread restructuring in recent years prepared German manufacturers well for the global economic slowdown—a trend many are responding to with fresh cost cuts.
“Germany will not be sheltered from this global trend,” said Citigroup economist Juergen Michels. “(But) German manufacturers are better positioned than the rest of the euro area.” Faced with intense global competition, many trade unions have accepted job security assurances over pay gains in recent years. Germany has seen virtually no real wage growth in the last two years—a factor which helped industry gain an edge.
Michels said the past experience of trading with the strong deutschmark had also prepared firms for life with a strong euro, which makes exporters’ goods more expensive outside the euro zone. The euro hit a record high above $1.60 on Tuesday.
Made in Germany
German manufacturers’ reputation for producing quality products gives them another edge over their rivals. Expanding economies like China have sucked in the capital goods German firms engineer to expand their infrastructure in recent years.
German exports to China rose by 19 percent year-on-year in the first quarter of 2008 and the Chinese market remains robust.
China’s economy grew by 10.4 percent on the year in the first half of 2008, sources familiar with the data said on Tuesday.
Exports have helped drive Germany’s economic expansion in recent years and the “Made in Germany” brand has enabled German manufacturers to cope with the strong euro by competing on quality rather than price alone.
“As for ‘Made in Germany,’ we’re the world’s leading exporter (of goods), so clearly it must stand for something,” Wolfgang Franz, head of the ZEW economic research institute told Reuters. “But we face tough competition,” he added.
In Japan, core machinery orders rose by 10.4 percent in May, highlighting the competition German manufacturers face from abroad, even if Japanese firms tend to boost their spending in the April-June period, the first quarter of Japan’s fiscal year.
German printing press maker Heidelberg said this month it would shift some production from Germany to the United States to counter the loss of market share to Japanese competitors like Komori, which benefit from a weak yen.
Heidelberg also plans to cut jobs, while boosting output in China and Slovakia—the kind of restructuring efforts other German manufacturers are also pursuing to cope with the global slowdown, and with which Chancellor Angela Merkel has sympathy.
“Big companies are tending to cut jobs. Sometimes this is necessary if competitiveness is to be maintained,” Merkel told newspaper Bild am Sonntag in an interview.
No escape?
The German economy grew by 1.5 percent on the quarter in the first three months of 2008, its strongest expansion since 1996.
But economic data has pointed to a sharp slowdown since then as export demand weakens and consumers old down their spending.
German manufacturers’ reputation for producing quality goods and their ability to handle the euro’s strength better than their euro zone peers puts them at an advantage but they cannot escape a drop in demand.
“Germany could be more resilient than other countries as long as the main shock was just the higher euro—but now that it is also oil and subdued consumer spending it (Germany) is also affected,” said Bank of America economist Gilles Moec.
He pointed to weakness in France, Germany’s biggest trading partner, where consumer morale fell to a record low for a sixth month running in June. Households across Europe are taking fright at rising prices, boost by the increased cost of oil.
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