German exporters look more to the Asian market

DITZINGEN, Germany – Germany has long sat at the centre of Europe economically, but Europe is no longer as central to Germany as it used to be.

With large parts of Europe still in a rut and struggling to cope with a debt crisis, Germany is increasingly deploying its money and energy outside the euro area to continue its robust growth.

The shift in focus, while still in its early stages, has potentially profound economic and political implications, because it comes at a critical time when the rest of Europe is counting on Germany to remain the locomotive of the Continent’s economy.

German companies, instead of concentrating their investment and business overwhelmingly on countries like France and Italy, as they formerly did, are now putting a growing proportion of those euros into places like Poland, Russia and Brazil. Corporate Germany is especially keen on China, which is already the biggest market for the German carmaker Volkswagen and soon could be for its compatriots Mercedes-Benz and BMW.

Germany’s government is following suit, committing more diplomatic resources to its newer trade partners, particularly China. The Chinese prime minister, Wen Jiabao, brought an entourage of 13 ministers and 300 managers when he visited Chancellor Angela Merkel in June.

Germany remains deeply entwined with the euro zone, which is still its largest source of trade by far. But Western Europe’s share of the German pie is shrinking.

German companies, for example, still exported much more to France last year than to China: 91 billion euros ($129 billion) v. 54 billion euros. But the gap is closing fast. And in 2009 German manufacturers for the first time invested more in China – 11.6 billion euros – than they did in France, which, along with Italy and Spain, is drawing markedly less German industrial investment than a few years ago.

And as Germany becomes less dependent on European markets, there are signs that it is also becoming less forgiving of its ailing neighbours like Greece, Portugal and Italy, adding to the pressures already straining European unity.

“It reinforces a shift that we have seen in recent years for Germany to become rather more focused on its own national interests rather than sacrificing for some defined European interest,” said Kevin Featherstone, an expert on EU politics at the London School of Economics. “Germany is not giving up on Europe, but it is certainly frustrated.”

German politics are in line with the interests of German businesses like Fresenius, a health care company in Bad Homburg, near Frankfurt. Last year Fresenius recorded a 20-per cent increase in Asian sales, to 1.3 billion euros. That compared with relatively flat sales of 6.5 billion euros for Europe as a whole.

Fresenius’ chief executive, Mark Schneider, is counting on big growth from China, which he noted was trying to create a universal health care system that would ensure its people access to kidney dialysis and infusion therapies – perhaps of the sort that Fresenius provides.

“Think Massachusetts with 1.3 billion people,” Schneider said.

The company’s corporate investment in Western Europe is still rising in absolute terms, Schneider said, but “capital spending and employment is not rising as much as we are seeing in emerging markets.”

Last year, the euro zone’s share of German exports fell to 41 percent, from 43 percent in 2008, while Asia’s share rose to 16 percent from 12 percent, according to Bundesbank figures.

There are also signs that Germany’s prosperity is no longer helping the rest of Europe the way it did a few years ago. That includes debt-saddled Italy.

“Italy used to produce a lot of goods that would feed the German industrial machine,” said Jens Sondergaard, an economist at Nomura in London. But much of that German business is now going to Eastern Europe or elsewhere, where costs are lower and companies are increasingly able to match Italian quality. As a result, Italy’s exports to Germany were 3.2 billion euros lower in 2010 than in 2008.

Where Germany puts its money is crucial to the euro area economy. The country accounts for more than a third of trade between the EU and the rest of the world. And while Germany has an overall trade surplus, France, Spain, Italy and the euro area as a whole have large deficits.

Here in Ditzingen, near Stuttgart, a family controlled maker of machines that use lasers to work metal, has grown into a global powerhouse. The company, Trumpf, employs more than 2,000 people in southwestern Germany, where unemployment is less than 5 percent, and an additional 6,000 at other locations around the world.

As with many other German companies, its sales in China and other developing markets have made up for declines in traditional export markets that followed the recession in 2009.

“In three to five years China will be our biggest market,” said Mathias Kammuller, a member of the company’s management board and head of the machine tools division.

In 2009, Trumpf opened a 14,957-square-metre factory in Taicang, near Shanghai. Less than two years later the company ran out of space and expanded the plant by 9,941 square meters. There are so many companies from southwestern Germany in that part of China that it is known as “Little Swabia.”

“We are not producing in China to be less expensive or to export to Europe,” said Nicola Leibinger-Kammuller, the president of Trumpf, who is married to Mathias Kammuller. “We are producing for the Chinese market.”

China is by far the biggest market for Germany’s crucial machine-tool industry, as manufacturers equip their factories with precision technology from Bavaria or the Ruhr Valley.

The success of German exports in emerging markets reflects its manufacturers’ strength in making things that go into the products that a modernizing economy needs, like trains, steel factories and electronics assembly lines.

“Our newest plants are in Russia, China and India,” said Heinrich Weiss, chief executive of the SMS Group, a company in Dusseldorf that builds and equips steel and aluminium plants. “Western Europe and the United States are very quiet.”

Germany’s declining dependence on the euro area economy appears to have given Merkel more leeway to be assertive with her European allies. She has clashed repeatedly, for example, with President Nicolas Sarkozy of France on matters including Greece and Libya.

When Merkel was first elected chancellor in 2005, she rarely invited German executives to accompany her on trips to Russia, China, or anywhere else for that matter. Now she frequently leads de facto trade missions abroad, particularly to Asia. At the end of May, she made a three-day trip to India and Singapore, with a retinue of top executives in tow.

Merkel has used her influence to open doors and help companies deal with the hazards of developing markets, which remain much riskier than Europe. Managers have urged Merkel to criticize poor protection of intellectual property rights in China, and she has obliged. At one meeting with German and Chinese executives, she wondered aloud whether parts of a new Volkswagen model had already been counterfeited.

Some analysts warn that Germany is focusing too much on developing markets and setting itself up for a shock if China slows down. China is also trying to build up its own expertise in autos and machinery, and become a competitor as well as a customer. Business people are aware of the risk.

Still, said Leibinger-Kammuller of Trumpf, “it is riskier not to be there.”

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