Profit Warnings

Anxiety on the Executive Floor

If my numbers are correct, we might not need to switch this one on.
  • Why it matters

    Why it matters

    New predictions of lower global growth have many senior executives in Germany worried about a possible downturn in profits, especially if the slowdown in the Chinese economy proves to be more than short-lived.

  • Facts


    • Prices on Germany’s benchmark DAX index are still about 13 percent below their peak in April.
    • In a new survey, a majority of German business executives believe profits will decline in the next 12 months.
    • Most economists’ predictions are more optimistic, because their models show that a weaker economy in emerging markets will lead to lower oil and commodities prices.
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Profit warnings are poison for stock markets. Just ask BASF.

The world’s largest chemicals giant on Tuesday cut its annual forecasts for this year, after an unexpected 10-percent drop in third-quarter profits to €1.6 billion. BASF now predicts a year-over-year decline in revenue and profits for 2015.

The stock price fell nearly 5 percent on opening in Frankfurt, trading at €72.92 at 9:40 a.m. local time and leading a downturn in Germany’s blue-chip DAX index, which was down about 0.5 percent on Tuesday morning.

Chief Executive Kurt Bock blamed the falling profits on a “summer lull” that was larger than usual, and on a weakening global economy: “Major markets like Brazil are in a recession or face lower growth rates, such as China,” he said.

BASF is hardly the only one feeling these effects. For weeks now, analysts and companies alike have been trimming their annual forecasts for major German companies. A whole range of sentiment indicators have also been flashing warning signs of late.

The global downturn has also put a break on Germany’s buoyant growth numbers in the first half of this year – third quarter growth is expected to be sluggish. Europe’s largest economy, it seems, is not immune to the weakness in emerging markets after all.

The key question for economists is: Are we seeing a temporary blip, or the start of a longer-run downturn? Doubts are clearly starting to creep in.

“Major markets like Brazil are in a recession or face lower growth rates, such as China.”

Kurt Bock, CEO, BASF

“The German economy is no longer a sure-fire success,” warned Martin Wansleben, head of the German chamber of Commerce and Industry, the DIHK. “Confidence is fading throughout the entire economy,” he added, noting that companies are increasingly concerned about demand for their products abroad.

Not surprisingly, given such warnings, German stocks have suffered. The DAX index is about 13 percent below its peak in April, despite some recovery in stocks in the last week.

A new survey reveals a deep-seated sense of anxiety on executive floors. For the first time in years, a majority of executives in German companies assume that profits will decline in the next 12 months, according to consulting firm Warth & Klein Grant Thornton.

The number of German managers with a positive outlook declined by almost half in the latest quarterly survey, which Handelsblatt has obtained.

“If the current economic downturn in China proves to be more than a temporary correction and possibly even intensifies, it will be a serious blow to a number of businesses,” said Klaus-Günter Klein, CEO of Warth & Klein Grant Thornton.

Many companies are predicting declines in the asking price for products and, most important of all, virtually no profits for the coming year.

“Key markets have not grown as quickly as predicted,” said Mr. Bock of BASF.


Kurt Bock, CEO of BASF, isn’t the only one worried. Source: Imago


The concerns have spread across a number of sectors. Drägerwerk, a producer of medical technology, cut its annual forecast as business continued to worsen in the Asia Pacific region, especially in China. Fashion company Hugo Boss joined competitors Gerry Weber, Tom Tailor and Ahlers in abandoning their annual targets, blaming the downturn on the worsening business climate in Asia and sluggish business in the United States.

In the last three months, analysts have lowered their profit estimates for major stock players like BMW and RWE by more than 4 percent. They’ve slashed predictions by more than 10 percent for embattled heavyweights Volkswagen and Deutsche Bank.

For the latter two companies, these predictions could be just the tip of the iceberg. In light of the recent diesel-emissions scandal, VW announced that it set aside €6.5 billion ($7.2 billion) in reserves in the third quarter. The scandal is also having a broader impact on the bottom lines of parts suppliers.

And Deutsche Bank made investors nervous when it announced that a revaluation of its assets would lead to a record loss of €6.2 billion in the third quarter. More expenses could be on the way as Germany’s largest bank is set to announce a major strategic overhaul on Thursday.

All of this is having an effect on the economy as a whole. The summer, it seems, wasn’t kind to the German economy.

“The German economy is no longer a sure-fire success. Confidence is fading throughout the entire economy.”

Martin Wansleben, German Chamber of Commerce and Industry

“Industrial production is largely moving in a lateral direction, exports have not managed to remain at the very high level reached previously, and the momentum previously achieved with new industrial orders has been lost,” reads a sobering analysis from the Bundesbank, Germany’s central bank, in its latest monthly report.

“All indicators suggest that earlier expectations of an upturn in the industrial economy have not been met,” the Bundesbank added.

August was a particularly brutal month, with German industry receiving 1.8 percent fewer orders and industrial production down by 1.2 percent over the previous month. To make matters worse, German exports fell by 5.2 percent.

Those bleak numbers have made predictions that economic output would rise by half a percent in the third quarter, as indicated by the Berlin-based DIW’s economic barometer just one month ago, no longer seem realistic. The German government now expects growth of 0.3 percent in the third quarter.

The summer lull has also made predictions of a 1.8-percent expansion in Germany’s economy this year, a number forecast by a range of economic institutes back in the spring, seem too rosy. A number of groups are expected to revise their numbers back down in the coming months.

A whole series of economic confidence indicators have been flashing warning signs of late. The Ifo Business Climate Index, perhaps the most important early indicator for the German economy, took a turn for the worse on Monday, declining by 0.3 to 108.2 points. The 7,000 companies polled for the index viewed the current situation less favorably than in the previous month.

Industrial firms are the biggest cause for concern. The Ifo sub-index for the manufacturing sector declined for the third month in a row.

“The emerging economies are showing signs of weakness, and the sky is no longer the limit in the United States, either,” said Ifo expert Klaus Wohlrabe.

Even though business confidence fell in October, Ifo has found that companies are searching for more employees than at any point in the last four years. The Munich-based research institute, one of the country’s largest economic think tanks, runs a monthly survey on employment exclusively for Handelsblatt, based on questions put to 9,500 companies. In October, Ifo’s employment barometer rose by 0.5 to 109.1 points, the highest value since January 2012.

“Employment figures will continue to develop positively,” said Mr. Wohlrabe.

Another economic indicator, Commerzbank’s Early Bird index, declined in September for the second month in a row. “The warning signs for the German economy are getting stronger,” warned Commerzbank chief economist Jörg Krämer.

In addition to the economic crisis in Russia, the recent economic slowdown in China has been worrisome for German managers, and companies are not expecting to see any significant growth in exports.

“We are in the midst of a downward trend,” said Reinhold Festge, president of the German Engineering Federation, the VDMA.

Germany’s most important industry has gone a step further: The VDMA now expects this year’s period of flat growth in production to extend into 2016.

Some of this is related to the Volkswagen emissions scandal: Car parts supplier Leoni cancelled its earnings forecast for 2016 on predictions that pretax earnings for the third quarter would be about €30 million lower than anticipated.

Leoni is one of more than 200 companies worldwide that are dependent on VW because they deal directly with Europe’s largest automaker. VW is the most important customer for four of five German parts suppliers.

The downturn in global trade is especially hard to take for many companies. The RWI Container Throughput Index, an indicator of trade flows, continued a downward trend in September after largely declining over the last year.

“This points to an extraordinary weakness in global trade,” said Roland Döhrn, head of the Department of Economic Growth and Business Cycles at the RWI economic research institute.

Such a decline is toxic for companies and an economy as dependent on exports as Germany.

Take China: No other country in the euro zone suffers as much as Germany when the Chinese economy falters, for three reasons: close German-Chinese trade relations, the high level of German direct investment in the People’s Republic and the German economy’s substantial commitments in China.

The 30 companies listed on the DAX index alone maintain 672 subsidiaries in China, according to management consulting firm EAC. On average, China accounts for 7 percent of the revenues of all German companies and 13.3 percent of the revenues of the 30 DAX-listed companies.

In its last fiscal year, the carmaker Daimler earned 18.7 percent of its income in the People’s Republic, while China accounted for 32.2 percent of VW’s income.

“China is becoming more and more important for Germany’s flagship enterprises,” said Daniel Berger, EAC partner in Shanghai. At the same time, he added: “The extent of the Chinese economy’s free-fall has only grown.”

It’s not all doom-and-gloom, however. Compared to the grim mood in many companies, some economists are actually still quite optimistic. One reason is that their models predict an even weaker economy in emerging economies will lead to a further decline in oil and commodities prices.

Although this is of little use for the auto and luxury goods manufacturers most strongly affected by the downturn in China, cheap energy could further stabilize the domestic economy.

However, if weakness in the industrial sector adversely affects the domestic labor market, the mood could take a turn for the worse in Germany. For now, it still seems likely that the lean period will be short-lived. But that could still change.


Axel Schrinner and Ulf Sommer are editors for Handelsblatt based in Düsseldorf, covering the economy and companies respecitively. Christopher Cermak is a financial editor for the Handelsblatt Global Edition in Berlin. To contact the authors:, and

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