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As Tensions Spiral in Ukraine, German Auto Parts Maker DMG Sees Threat to Bottom Line

  • Why it matters

    Why it matters

    The machine manufacturer is posting record financial numbers, but concerns about trade with Russia could dampen prospects for the German company formerly known as Gildemeister.

  • Facts

    Facts

    • DMG ‘s machine parts are used for autos and airplane engines.
    • Incoming orders for 2014 at DMG have reached $1.6 billion.
    • In 2012, DMG Mori Seiki opened a factory in northern California plant.
  • Audio

    Audio

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DMG Mori Seiki Photo 4
Source: DMG/Mori Seiki

 

On the stock market, neither a gratifying look back nor an optimistic look ahead count. On Thursday, machine maker DMG Mori Seiki saw its stock drop more than 8 percent to lead the losers’ lists on the MDAX index of German companies.

Markets fell across Europe and the United States on Thursday. For DMG – the company formerly known as Gildemeister – the collapse nearly wiped out gains for all of 2014.

Traders said the drop was triggered by profit-taking and investor fears that sharper European Union sanctions against Russia would hurt the machine tool builder headquartered in Bielefeld, Germany, and its subsidiary in Japan. According to its own reports, DMG Mori Seiki had profits in Russia of nearly €100 million ($134 million), about 5 percent of total company revenue.

“We will probably not reach our growth targets in Russia,” said Rüdiger Kapitza, chief executive officer, in an interview with Handelsblattt.

Revenue from Russia is not expected to drop, however, and new construction of a plant in Ulyanovsk, the birthplace of Lenin, “will continue as scheduled,” Mr. Kapitza said. The €50 million ($67 million) facility is expected to open in mid-2015.

DMG’s leader is concerned that Russian customers could turn away from German suppliers in the long-term. As exports to Russia are delayed by tighter controls “some customers will look for other vendors,” Mr. Kapitza said.

“But developments in Russia are a serious issue, that hold many uncertainties,” Mr. Kapitza said.

That would apply for the entire manufacturing industry. Currently no one can assess impacts of the crisis in Ukraine and tougher sanctions on Russia.

“The conflict with Russia hurts more than just bilateral trade,” the German engineering association VDMA said Thursday. “It hampers the demand in important sales markets for our industry.” The association of German chambers of commerce and industry predicts that exports to Russia will fall at least 10 percent for 2014.

DMG’s leader is concerned that Russian customers could turn away from German suppliers in the long-term. As exports to Russia are delayed by tighter controls “some customers will look for other vendors,” Mr. Kapitza said. Suppliers in China and Korea are already available, and it’s questionable whether German companies could win customers back.

There is hope for DMG, however. The machine tool builder has seen more demand in Europe with exports up 65 percent to neighbors such as Italy, France, Belgium and in Scandinavia. Also, many smaller markets – in Canada, Mexico, Venezuela or Vietnam, for instance – could be developed more intensively if business with Russia drops off.

Further cooperation with its subsidiary, Japanese machine tool manufacturer Mori Seiki, could help. The companies have been working closely since 2009, and the cooperation is reflected in the name change last year, from Gildemeister to DMG Mori Seiki.

 

DMG Mori Seiki Photo 5
Source: Metalworking News

 

Based on company information, the first part of 2014 ran according to plan. All important sales figures rose. Incoming orders reached €1.2 billion ($1.6 billion) – 13 percent more than the previous year. Sales increased about 6 percent to €1.03 billion ($1.38 billion). Overall earnings rose to €67.8 million ($90.8 million), up from the previous year’s €49.1 million ($65.8 million).

Given those numbers, Mr. Kapitza confirmed his prognosis for DMG for the rest of the year. The company is aiming for sales growth in 2014 to a record €2.2 billion ($2.95 billion). Incoming orders should reach €2.3 billion ($3.09 billion) and earnings rise about 20 percent, to €175 million ($234 million), he said.

Mr. Kapitza hopes to continue pushing DMG prospects at upcoming industry trade fairs and technology expos – including the mid-September International Manufacturing Technology Show in Chicago.

DMG’s better-than-expected financial report went down well with analysts. Berenberg Bank suggested a share price target of about €26 euros to buy: “Strong incoming orders show that DMG performs better than the global machine tool branch and that should grow about 3.7 percent this year.”

The company’s CEO also sees more market potential. “The fair price of the stock is €30,” said Mr. Kapitza.

 

Regine Palm is an editor at Handelsblatt. She can be reached at palm@handelsblatt.com.

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