German Connection

French industry has a preference for Germany

French President Emmanuel Macron attends the “Tech for Planet” event at the “Station F” start up campus ahead of the One Planet Summit in Paris
I can see Germany from here. Source: Reuters

When auto component supplier Faurecia last month announced a new research initiative for lightweight structures with the Franco-Belgian chemical giant Solvay and Airbus fuselage maker Aerotec, it teamed up with the German Institute of Textile Technology Augsburg.

The project is part of a trend to expand French manufacturing production or development by teaming up with German partners, or even buying them up. It goes much against President Emmanuel Macron’s wish to revitalize the economy at home.

French business is investing twice as much in Germany as German companies are in France. They acquired 93 German companies last year, compared to the 25 acquisitions German firms made in France. The French companies show a marked preference for Germany for making machinery and equipment, said Vincent Charlet of think tank La fabrique de l’industrie.

The French economy has lost 500,000 manufacturing jobs in the last 10 years, while Germany has gained 300,000. Production capacity in France now is lower than it was in 1998, while elsewhere in the euro zone, it has shown strong growth. This decade, manufacturing production has been stable in France in terms of relative value added, but the long-term trend has been clearly downward (see graphs below).

Manufacturing industry Germany France United States US OECD China industrial G SXX Laendervergleich Handwerk

“The question arises as to whether France’s industry has already lost critical mass and is facing an irreversible decline,” said Denis Ferrand, head of the economic research institute COE Rexecode. “French industry has perhaps already passed the point of no return.”

A third of French companies prefer to manage their activities in third countries from Germany rather than from France, according to data from the French statistics agency, Insee. French companies also prefer to work with German researchers at the Fraunhofer Institutes rather than the French copies set up by former President Nicolas Sarkozy.

While France has been losing manufacturing jobs, its gains have been in softer sectors like restaurants, hotels and transportation. Unit wage costs were too high, research and development were neglected, vocational training had few sponsors, smaller family companies didn’t develop export markets and industry as a whole simply failed to produce high-quality goods.

“France produced Spanish quality at German prices,” is the way Patrick Artus, chief economist at investment bank Natixis summed it up. (In the meantime, Spain, in contrast to France, has caught up in quality.)

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The French auto industry appears to be an exception as both Renault and Peugeot maker PSA have rebounded. PSA invested €700 million in domestic production, and Renault plans to spend €1 billion to make its factories in France state of the art. Both carmakers are registering record sales in global markets. But those gains obscure a deeper trend. In 2000, some 3.5 million vehicles were produced each year in France, and now it is only 2.2 million as production shifted abroad. France imports more cars than it exports, with the deficit reaching 390,000 units in 2017.

Mr. Macron’s elimination of the wealth tax, reduction of corporate and capital gains taxes, cutting of social security taxes, and added incentives for startups have so far failed to stimulate growth. A new package of measures went before parliament last week – streamlined bureaucracy, export support, reduced charges for worker participation, moving public sector research nearer to industry, and other proposals to support small and medium-sized industry.

It will take time for these to produce results and to disprove a disastrous scenario unfolding before the eyes of the head of France’s state-backed investment bank, BPI. Nicolas Dufourcq’s nightmare is that ever more French manufacturing companies “build up capacities in Germany, while cutting jobs in France.”

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Thomas Hanke is Paris correspondent for Handelsblatt. Darrell Delamaide adapted this article into English for Handelsblatt Global. To contact the author: hanke@handelsblatt.com.

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