German Industry

Secrets of a Boom Year

  • Why it matters

    Why it matters

    After quite a few relatively stagnant years for profits amid Europe’s debt crisis, this could be the year that German listed companies finally break through. That could offer opportunities for investors, too.

  • Facts

    Facts

    • An unexpected boost has come from the euro zone, which grew more than twice as fast as the US economy in the first quarter.
    • Europe is still the main sales market for German export-oriented companies, accounting for about 50 percent of earnings on average.
    • Some chief executives have been reluctant to raise their forecasts anyway, pointing to macroeconomic and political uncertainties.
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    Audio

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festal night
Fireworks over Germany's industrial heartland. Source: Getty Images

Matthias Zachert couldn’t believe his eyes when he saw the numbers. The head of German special chemicals group Lanxess had rarely seen such rapid growth. He reported that demand was “abnormally high in some cases, as in Asia.” This resulted in a record quarter for Lanxess, with sales up 25 percent to €2.5 billion ($2.78 billion), while pre-tax profit soared by 72 percent to €160 million.

The Cologne-based company’s experience is similar to many other German corporations this year. Business is booming: Handelsblatt has calculated that the 30 companies listed on the blue-chip DAX stock index have recorded average sales growth of 10 percent, while pre-tax profits have risen by an average of 16 percent. If banks and insurers such as Deutsche Bank and Allianz are included, profits of DAX-listed companies were up about 10 percent on average. In total, the 30 companies on the index earned €37 billion before interest and taxes in the first quarter, an record figure.

Part of the explanation lies in some suprisingly strong growth numbers that are propping up German exporters: “DAX companies are currently benefiting from the economic recovery in Europe and the positive developments in the Chinese market,” said Mathieu Meyer, a managing partner at accounting firm EY.

A new and unexpectedly positive boost has come from Europe.

Companies on the MDAX index, which lists 50 German mid-cap stocks and also includes Lanxess, have recorded even stronger growth. Manufacturers operating globally – those who achieve more than 60 percent of their sales abroad – have benefited from the continuing strength of their Asian and US businesses. Defense and automotive supplier Rheinmetall, forklift truck maker Kion and its bigger competitor Jungheinrich all presented strong quarterly figures.

It marks something of a turn for Germany. Though the economy has continued growing and many companies recovered strongly in 2010 after a slump during the financial crises of 2008-2009, profits have largely stagnated since then. So far, 2017 is shaping up to be different, though some CEOs have warned this will depend largely on the rather uncertain global political situation.

A new and unexpectedly positive boost has come from Europe. The euro zone grew more than twice as fast as the US, the world’s largest economy, in the first quarter. Gross domestic product increased by 0.5 percent compared with the previous quarter, while US growth came to just 0.2 percent. The economy grew in all EU countries apart from Greece, with Finland, Germany and Spain recording the highest growth. France and Italy, both important markets, also grew.

That has impacted Germany’s export-oriented companies, as Europe is still their main sales market and accounts for about 50 percent of their earnings on average. Automotive and chemical companies have unanimously reported growth in business on the continent, which for a long time had tended to act as a brake on manufacturing firms that instead relied on growth from Asia and the United States.

“We still see considerable risks with regard to macroeconomic development and the political environment.”

Kurt Bock, BASF CEO

This is certainly the case with carmaker Daimler. The Stuttgart-based group outperformed all other DAX companies in the first quarter, increasing pre-tax profit by 89 percent to €3.9 billion, with sales up 11 percent at €39 billion. Although Daimler recorded significant growth in all its core markets, China and Europe stood out in particular. The group’s core business with its Mercedes Benz brand achieved new sales records in both regions: Sales rose by 8 percent in Europe and 43 percent in China. Rival automaker Volkswagen also presented some of the best quarterly results in its history, brushing aside the Dieselgate scandal from last year.

Technologies giant Siemens has also seen a substantial improvement in its European business, with growth in many neighboring countries surpassing that in Germany. Moreover, the group even recorded growth in South America, which has suffered an ongoing recession.

Growth in the chemicals sector is being driven not only by positive currency effects, as was the case last year, but by a real rise in demand. Chemicals group BASF saw turnover rise 19 percent to €17 billion and pre-tax profit climb 37 percent in the first quarter. Here too, business in Europe and Asia was particularly strong. The same effect has been felt by Lanxess and by Covestro, the former plastics business of chemicals and pharmaceuticals group Bayer, which is also listed on the MDAX.

Yet there are some reasons to be cautious. In the chemicals sector, the unexpectedly strong growth in sales volumes has been partly attributed to the fact that customers, particularly in Asia, are bringing orders forward in anticipation of a rise in chemical prices driven by global economic growth. For that reason, Lanxess chief Mr. Zachert has kept his hopes for this year in check. Although he has raised his 2017 forecast following a strong start to this year, he also said: “We expect growth rates to be more moderate as the year goes on, particularly in Asia.”

Kurt Bock, chief executive of BASF, is also wary. “We still see considerable risks with regard to macroeconomic development and the political environment,” he said, referring to protectionist tendencies in a number of foreign markets, uncertainty about future US foreign, economic and trade policy under President Donald Trump, Britain’s forthcoming departure from the European Union and the unresolved debt crisis in southern Europe. Given the uncertainty, Mr. Bock has not yet dared to revise his forecast upwards: BASF has maintained its prediction of sales growth of around 6 percent and a rise in EBIT of up to 10 percent, irrespective of very high figures for the first quarter.

But it’s a different story with analysts. Even though their profit forecasts over the last five years repeatedly proved too optimistic and had to be revised downwards during the course of each year, analysts recently raised earnings forecasts for 20 of the 30 DAX companies anyway – including for car manufacturers BMW, Daimler and VW, sportswear group Adidas, semiconductor specialist Infineon, Siemens and utilities E.ON and RWE.

Only time will tell whether the analysts are proved right. But following a strong start to 2017 and a promising beginning to the current quarter, there is a good chance that this year could really be a record year for German industry.

 

Bert Fröndhoff covers the pharma industry and Ulf Sommer reports on companies and financial markets for Handelsblatt. Siegfried Hofmann is Handelsblatt’s chemical and pharmaceutical industries correspondent. To contact the authors: froendhoff@handelsblatt.comsommer@handelsblatt.com, hofmann@handelsblatt.com

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