Manufacturing production index (base 2015)
Germany’s export-oriented economy was in the past the reliable locomotive for pulling Europe out of crises. As the continent emerges from the pandemic slumber, Germany is running late.
German manufacturers are struggling to produce cars and machinery, due to a shortage of parts and manpower. They face rising energy prices that make their electricity bills even higher. And they must invest hundreds of billions of dollars over the next few years to meet new clean energy standards.
The era of easy foreign trade and rapid globalization has given way to geopolitical tensions, transport bottlenecks and increased pressure to produce locally. Chinese companies, Germany’s largest customers, are turning into competitors. Demand for German luxury cars hangs in the balance as the world moves towards electric vehicles.
German industrial production in August was about 9% below its 2015 level, compared to a 2% increase for the eurozone as a whole, according to the European Union statistics agency. In Italy, whose producers are closely linked to German ones, industrial production has increased by about 5% compared to six years ago.
The International Monetary Fund recently lowered its forecast for German economic growth in 2021, to 3.1%, from 3.6%. The German economy is expected to recover more or less in line with France and the UK through 2022, only to lag behind from 2023.
The malaise is fueling a debate between business and political leaders over whether the German economy needs a restart and how it should be. The three parties negotiating a new coalition government after the September elections want to increase public investment, wages and streamline planning procedures, which could increase domestic sources of growth and make companies less dependent on foreign demand.
If implemented, these plans would represent the most comprehensive economic review in recent years. Some economists think they also carry significant risks.
The weakness of the German economy precedes the Covid-19 pandemic. German industrial production and exports began to stagnate in 2017, posing a problem for an economy where about 30% of jobs and production are tied to foreign demand, about four times the share in the United States.
The last time Germany’s growth lagged significantly behind that of its European neighbors was in the late 1990s and early 2000s, before a series of unpopular economic revisions revived the country’s competitiveness. For some years, Germany has been the largest exporter of goods in the world.
Hans Eichel, a former German finance minister who presided over some of those reforms in 2003, said that today “the external environment is more difficult than 20 years ago. China is also looking more and more at domestic demand.”
At Wilo, a pump manufacturer in northwestern Germany, sales increased by more than 50% in the eight years to 2017, to 1.4 billion euros, driven mainly by new markets such as China. Since then, its sales, most of which come from outside Germany, have been roughly constant.
To defend against trade disruptions and protectionism, CEO Oliver Hermes reported that the company is moving manufacturing and managers closer to its customers. It is establishing a second location in Beijing and plans a third in the United States, and will add more manufacturing sites in China and India.
The shift towards more localized manufacturing could mean “fewer exports from Germany,” Hermes said, which means fewer jobs in his country. The company recently said it would close a factory in eastern Germany, cutting or moving 120 jobs.
Like other German auto suppliers, Mann + Hummel, a manufacturer of air filtration systems based in southern Germany, faces a difficult transition as gas and diesel engines are phased out. Its sales fell about 9% last year as global auto sales slowed during the pandemic.
“Supply chain challenges and trade disputes put a strain on our model,” said managing director Kurk Wilks. Commodity prices are rising, the Chinese economy is not growing that fast, and there are labor shortages, especially in the United States: “Beyond the price increases, the problem is material shortages, some raw materials or shipping and transportation, “he said.
The company warned it could lose sales and market share if cleaner technologies like electric motors replace gas and diesel engines, which are its know-how. The company has announced plans to close several manufacturing facilities.
Last summer, a decline in German car production due mainly to a persistent shortage of chips was the predominant reason for the overall decline in industrial production during that period.
German car production has dropped by more than 50% since 2017, to around 200,000 cars per month. In the nine months to September, it decreased slightly from the previous year period, compared to an approximately 10% year-over-year increase in global light vehicle production over the same period. Germany’s share in global automotive production dropped from about 7% to 5% from 2015 to 2020, according to industry statistics.
The German auto industry, by far the largest in Europe, supports around 800,000 jobs in the country and accounts for 5% of total economic output. Three quarters of the cars produced in Germany are exported.
German manufacturers have invested in electric vehicles, but they require far fewer components than traditional ones. According to analysts at Deutsche Bank, by 2030, 30% to 50% of all new car registrations in the European Union will have to be electric cars if the continent is to meet its carbon emissions targets.
The economy is one of the topics in the negotiations between the center-left social democrats, the green environmentalists and the pro-market FDP to form a coalition government. On October 15, the three parties revealed preliminary plans to increase public investment, especially in climate protection, high-speed internet, education, research and infrastructure.
“It will be the largest industrial modernization project in Germany in the last 100 years, and it will really help our economy,” said Olaf Scholz, the leader of the Social Democrats and likely future German Chancellor.
After tightening their belts to improve competitiveness, German businesses and the country’s public infrastructure are suffering from under-investment, economists argue. Germany’s net investment rate has been about 0.5% of economic output since the turn of the century, compared to about 1% for Italy and 1.5% for the United States, according to World Bank. German net public investment fell below zero due to the depreciation of existing assets.
Some economists argue that Germany’s small domestic market means that domestic demand alone, even that driven by investment rather than consumption alone, will never support the engineering-based firms that often export 80% of their products.
“Germany will always be … an export country,” said Gordon Riske, CEO of Kion Group, a forklift manufacturer based in Frankfurt. “For us in particular, the revenue comes from outside Germany, and we have to invest where the customers are.”
Although the winners of the September elections presented the green transition as an economic opportunity, business groups and analysts say it will add costs and endanger jobs. Higher CO2e prices of electricity and investments in cleaner production processes and research will eat up already falling profits, they warn, especially in an economy focused on production and starved of energy.
The country’s green energy transition will require investments of € 5 trillion until 2045, or 5.2% of Germany’s annual economic output, on average, each year, according to a study published in October by KfW, the state development bank. . This is much more than the roughly € 2 trillion spent to reunify West Germany with formerly Communist East Germany in the two decades following 1990.
“The entire business model of Germany is at stake,” said Oliver Bate. , CEO of the German financial services group Allianz. “If we fail the energy transition, our economic core will get in trouble and an economic crisis will become inevitable.”
Germany’s workforce grew by nearly 4 million during Chancellor Angela Merkel’s 16-year term as the strong growth sucked in older workers and immigrants. It is now expected to decline by the same amount over the next decade. Experts say the fresh reserves of workers in Germany and Eastern Europe may be largely depleted.
Markus Mann, an entrepreneur in rural West Germany whose company produces wood pellets for use as fuel, said he recently sent out a “Wanted” poster to his 80 employees, promising a € 500 reward for new referrals. personal. He raised the salaries of his staff by 3.5%, about double the usual annual increase. Unemployment in the region is 2.8%. “I need to offer a reward,” he said.
The three parties in the coalition want to halve the time it takes authorities to approve new investment projects, which is currently a serious obstacle for businessmen like Mann. Government bureaucracy costs German companies about 55 billion euros a year, about half the total amount invested in research and development, according to the German federal statistical agency.
Tesla Inc. has not yet received approval for a $ 6 billion factory near Berlin, which is expected to create 12,000 jobs. The automaker has been building the plant for nearly two years and has delayed its opening since July. The company recently built a factory in Shanghai in less than a year.
Thirty years ago, Mann recalls, he borrowed money from his father to build a wind turbine near his home, about 30 miles from the nearest town. The government approval took three months, and the official appraisal was four sheets of A4 paper long and cost about the equivalent of 5,000 euros today.
Most recently, Mann asked for permission to replace his old turbines with new ones that produce 40 times more energy. This time, the approval process lasted seven years and cost almost 300 thousand euros, for an investment of about 5.5 million.
A spokesperson for local authorities said that because the new turbines are much larger than the old ones, they could have a greater environmental effect, and therefore required more testing.
ElringKlinger, an auto parts manufacturer in southern Germany, has started producing batteries and fuel cells, part of the industry’s shift towards cleaner technologies. The new manufacturing processes are highly automated, CEO Stefan Wolf said, “which means we need far fewer employees than building internal combustion engines.” Total employment fell by around 7% between 2018 and 2020, to around 9,700.
“We have very high labor costs, very high energy costs, and in the past five years, we have seen a huge increase in bureaucracy,” Wolf said. “Germany may soon be the sick man of Europe again.”
