German manufacturers caution against a significant economic downturn

Hans Beckhoff, owner of Beckhoff Automation, states that in the 44 years since his company commenced operations, he has not encountered an economic crisis comparable to the current one. Mr Beckhoff commented, “You can usually expect a crisis about once every five to eight years,” adding, “This time it’s a formidable crash, a really deep one.” Beckhoff Automation, a German firm, produces automated control systems utilized across various sectors, such as manufacturing and energy. The company is part of Germany’s renowned Mittelstand, a group of often highly specialized small and medium-sized enterprises. These businesses constitute 99% of German companies, contribute to approximately 59% of German employment, and are recognized as the “hidden champions” of the German economy. The resilience of German manufacturing has been partly attributed to the Mittelstand’s practice of prioritizing long-term business performance over the pursuit of immediate annual dividends. Nevertheless, the global economic landscape is undergoing rapid transformation, leading to increased pressure. Frederike Beckhoff, corporate development manager at Beckhoff Automation and Hans’ daughter, stated, “We’re still doing well, though the economic situation has really slowed down.” She added that “This year’s results won’t be anywhere close to what we achieved over the past three years.” In recent years, German companies have faced multiple challenges. These include significant increases in energy prices following Russia’s 2022 invasion of Ukraine, a rise in general inflation, and heightened competition from China. Businesses also express concerns regarding Germany’s deteriorating infrastructure, specifically its frequently criticized rail network, bridges, and roads. State-owned broadcaster Deutsche Welle characterizes all three as “aging and crumbling”. Additional businesses point to what they perceive as substantial bureaucratic hurdles at both national and European levels, alongside inconsistent policy decisions from Berlin, elevated labor costs, and insufficient staffing. Joachim Ley, chief executive of Ziehl-Abegg, a company that produces ventilation, air conditioning, and engineering systems, stated, “The last three years have not been easy in Germany.” He further remarked, “What we really need is reliable [government] decision making instead of 180-degree turns. Even if you don’t like decisions, you can at least plan and adjust if the decision is reliable. This back and forth is putting a lot of burden on companies in Germany.” Germany’s coalition government dissolved earlier this month, with a general election scheduled for 23 February, preceded by a confidence vote on 16 December. Among the policy reversals implemented by the government in recent years are the retraction of subsidy programs for heat pumps and electric vehicles. This action negatively impacted both domestic sales and net-zero objectives. Berlin chose not to provide a comment. While governmental policy inconsistencies have not benefited German companies, many identify China as a primary source of pressure, particularly for Germany’s car manufacturers, who are contending with two issues. Vehicle demand within China has diminished, and China itself now possesses a robust automotive industry characterized by an assertive export strategy. Dr Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, noted, “Since the start of 2021, the Chinese export of electric vehicles has gone up by 1,150%.” He elaborated, “That’s only EV [electric vehicles]. If you take all cars, including those running on fossil fuels, then you still get an increase of Chinese exports of 600%. During the same period, German exports increased by 60%. So there is obviously a shift in market shares happening here.” Consequently, Volkswagen, which is Germany’s largest private-sector employer, is contemplating domestic plant closures, a measure unprecedented in its 87-year history. This could lead to the loss of tens of thousands of German jobs. In October, the automotive manufacturer announced a 64% decrease in its third-quarter profits compared to the previous year, largely attributing this decline to a reduction in demand from China, a market historically crucial for Germany’s premium car brands. Mercedes-Benz recorded a 54% decrease during the identical period, and BMW has similarly issued profit warnings, with both companies also referencing diminished Chinese orders. Ms Beckhoff asserted that automotive manufacturers and the broader German manufacturing industry must enhance their competitiveness. She stated, “I really do think that productivity is something we have to take really seriously,” adding, “The wealth we enjoy here in most parts of Germany and Europe, we can’t take it for granted.” Mr Ley suggested that German manufacturers dependent on low-cost margins might face difficulties, but he expressed optimism for high-quality products featuring innovative attributes that leverage world-class engineering and intellectual property. Dr Klaus Günter Deutsch, who leads industrial and economic policy research at the Federation of German Industries (BDI), is of the opinion that “much will depend on whether we are able to pull the innovation levels much faster, better and more consistently across Europe”. It is evident that job reductions and organizational restructuring within Germany will be a challenging experience for German manufacturers like Volkswagen and the chemicals company BASF, which has also indicated impending cuts. Nevertheless, Mr Beckhoff considers this confrontation with reality potentially beneficial in the long run. He stated, “I think it is good for German industry that Volkswagen is running into some problems because it will increase motivation,” adding, “It’s finally understood that we really have to do something. What is it that Winston Churchill said? Never waste a good crisis!” Therefore, while a positive transformation in the manufacturing sector is anticipated in the longer term, the immediate future is expected to remain difficult. The incoming German government will face tough decisions. Economist Dr de la Rubia expressed, “I am still optimistic,” asserting that the necessity to modernize Germany’s infrastructure is now “so obvious” that any future government will be compelled to act. He predicted, “I think they will say, ‘okay, the crisis is really there and now we will make a big leap’. That is my hope and my conviction.” A consensus exists among many that this crisis might be precisely what Germany requires. In the post-war era, the nation demonstrated its capability to achieve an “economic miracle” despite significant challenges. While current circumstances may differ, it is not inconceivable that, through coordinated efforts, Germany could replicate such a feat.