Global Economics

Germany's Achilles' Heel: Falling Exports


German factories have long depended heavily on global orders. And as the crisis spreads overseas, shipments are sharply curtailed

In Eisenh?ttenstadt, a traditional industrial city near the Polish border, residents are preparing for the worst. ArcelorMittal, the world's biggest steel producer, has reduced the hours of 1,600 of its 2,700 employees at its Eisenh?ttenstadt plant and plans to eliminate 300 positions altogether.

"When we cough, Eisenh?ttenstadt gets pneumonia," says J?rgen Schmidt, an engineer. If he is right, the city must be very sick indeed.

Schmidt has been working here for the last 15 years, and things have gone uphill for most of that time??ntil two months ago, when everything suddenly changed. "It was like someone applying the emergency brakes on a fast train," he says.

ArcelorMittal's customers, especially carmakers, have cancelled orders en masse. They have even stopped taking delivery on finished products. Demand has declined by one-third. After a repair in late November, one of the company's blast furnaces was simply kept shut down. "Maybe it'll start up again in the spring," Schmidt says optimistically.

But the news from around the world paints a grimmer picture. One country after the next is officially reporting the beginning of its recession, the value of all securities on the world's markets has virtually been cut in half, to about $26 trillion (??20 trillion), and companies are planning massive layoffs: 5,000 jobs at Dow Chemical, 5,300 at Credit Suisse, 12,000 at AT&T, 14,000 at the mining conglomerate Rio Tinto, 16,000 at Sony and up to 35,000 at Bank of America. Citigroup has plans to eliminate 53,000 jobs.

What is most astonishing is the incredible speed with which the crisis is spreading from one company to the next.

Shrinking demand for cars affects more than just automakers like Daimler or VW. The suppliers of plastic parts suffer, as well. They, in turn, order less granulated plastic from chemical companies, which in turn reduce their production of naphtha, a product made by distilling petroleum.

In this way, the deterioration in the automobile market ultimately affects oil companies like Exxon, Shell and BP, not to mention the countless skilled tradesmen, couriers and caterers who work for all of these companies and also suffer from the decrease in orders.

Few industries have been spared. The crisis affected the car and truck industry first, because consumers can easily rationalize postponing a new car purchase, knowing that their existing cars are usually sufficient. The chemical industry, as a key supplier to the auto and construction sector, is next. Dow Chemical, for example, has already cut back production at its plant in Stade outside Hamburg by half.

Machine building, Germany's most important industry, will not be spared either??lthough the crisis will hit it with some delay. Companies in the sector still have a backlog of orders to process, which could keep them busy for months or even years.

The effects of the recession are the most severe in those businesses that have already seen better days, including video rental stores, clothing retailers, department stores and the semiconductor industry. In these businesses, every crisis accelerates structural change, no matter how much the government??s in the case of chip producer Qimonda??ttempts to offset the decline.

The core issue in Germany revolves around the future of a domestic economy that depends more heavily than most on the global economy. Does this make Germany especially vulnerable?

"Exports are the Achilles heel of the German economy," says Berlin economist Henrik Enderlein. Will its strength in foreign trade end up being Germany's downfall? Or will the unique profile of German industry enable it to escape the crisis largely unscathed?

Feeling the Pinch

No other country in the world has profited as much from the worldwide interconnectedness of markets since the fall of the Berlin Wall. In the last 15 years alone, the percentage of the total economy devoted to exports has grown considerably, from 24 to 47 percent. This could make the impending plunge all the more precipitous.

The ports are a case in point. In Hamburg, for example, the booms of many cranes are left idle, with many container ships arriving at the port's terminals only half-full. In the northern German port of Bremerhaven, the country's most important transshipment point for cars, business is stagnant. Parking lots at the port are crowded with 90,000 new cars, one-third more than usual.

The World Bank expects global trade to shrink in 2009 for the first time in a quarter century. German companies are already feeling the pinch, now that the volume of orders from abroad has declined by almost one-fourth compared with November 2007.

France, the Netherlands and Great Britain, Germany's main markets, are equally beleaguered. Meanwhile, demand is also declining across the euro zone, the 15 countries that have adopted Europe's common currency, which is the destination for two-thirds of German exports.

According to the draft of the government's annual economic report, the downward slide among key trading partners as Europe slides into a recession poses "a unique challenge," as Germany finds itself confronted with "a crisis in international demand." Consumption has also declined in overseas markets.

The Americans, deeply in debt, can no longer afford products made in Germany. All hopes had been pinned on the so-called BRIC nations (Brazil, Russia, India, China), but they too are facing difficulties. In India, the terrorist bloodbath in Mumbai has made investors nervous. China is planning a $600 billion (??460 billion) bailout program to counteract the downturn there, and Chinese airlines are rethinking billions in orders for Airbus products. In Russia, the ruble is rapidly losing its value, causing the country's currency reserves to melt away.

The synchronicity of these events is what gives the crisis its unprecedented broadness and depth. Things could get even worse for the German export industry if the mountain of American debt causes the dollar to lose a significant amount of value. When that happens, German companies will find themselves with far fewer customers for their expensive products.

One of the greatest risks is that countries, following a typical pattern in times of crisis, will tend to seal off their markets. Russia, hoping to protect its domestic industry, plans to increase duties on imported cars. "My greatest fear is that we will see a wave of protectionism," says Berlin economist Michael Burda.

This would pose a considerable problem for the German auto industry. In addition to exporting a large share of the vehicles assembled domestically, German carmakers now produce almost one in two cars in factories abroad.

Auto Sales Take a Hit

Normally, this puts German manufacturers in a much stronger position than their French or Italian competitors, which are focused far more heavily on a single market, Europe. In a crisis, Mercedes, BMW and VW are normally able to effectively offset fluctuations in demand. But plummeting sales around the globe will also affect the Germans.

At an employee meeting last Tuesday Bernd Osterloh, the head of VW's works council, pointed out the potentially devastating effects on the company. Experts, Osterloh reported??o a sea of glum faces??ave already lowered their original predictions for worldwide auto sales in 2009 from 62 million to 49 million vehicles.

The greatest risk to German manufacturers is that their business model is based solely on growth. In addition to having increased capacity by building new factories, they have raised productivity in existing plants by five to 10 percent each year. If sales do not grow at the same rate, or even decline, the carmakers will be forced to lay off employees.

Opel faces difficulties as a result of the existential crisis at its parent, General Motors. BMW has already slashed more than 8,000 jobs, and jobs could soon be in jeopardy within the VW Group. If the crisis continues, the Wolfsburg-based company will likely terminate some of its 18,000 temporary workers and its 25,000 contract workers.

Martin Winterkorn, the chief executive of Volkswagen, expects auto industry sales to take a hit in 2009. In a meeting with senior executives, he said that the company should prepare for a 20 to 25 percent drop in car sales worldwide. Although VW would not be as strongly affected, Winterkorn said, it too could expect to see sales decline by 10 to 12 percent.

Winterkorn knows exactly how difficult it is to sell a car these days. Whenever VfL Wolfsburg, the local Bundesliga football team, has a home match Winterkorn invites 10 VW dealers from the visiting team's city and asks them for their blunt accounts of how business is going for them. On Dec. 7, when a club from Hanover was the visiting team, the mood was dismal. "Nothing is moving," the dealers told Winterkorn. There are days, they said, when "not a single customer shows up in the showroom, and when the phone doesn't ring at all."

Many car dealers, even BMW and Mercedes-Benz dealers, are about to go out of business. Daimler has already paid its dealers more than ??53 million ($70 million) to make up for their losses. In the long run, however, carmakers will be just as unable to keep cash-strapped dealers afloat as their ailing suppliers, which are finding access to capital increasingly difficult. Banks have either stopped lending altogether or are lending under less attractive terms. Even the automotive banks within the industry, used for decades as a means of stimulating sales, are in trouble.

The current economic crisis, which has its roots in the subprime mortgage crisis in the United States, is now eating its way through the entire German economy, and yet it has been only 13 weeks since the collapse of the investment bank Lehman Brothers.


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