Earlier this month when presenting quartly results, Harald Krüger, the chief executive of BMW, chose to lead with the good news, telling shareholders that the German luxury carmaker again sold a record number of vehicles in the second quarter.
Then he followed with a less-than-cheery announcement that the company’s pre-tax profit had dropped by nearly 3 percent – primarily because of weak sales in China.
The country used to be a dream market for the German carmaker, with sales surging 20 fold over the past decade, but sinking demand forced BMW to reduce production this spring.
The long boom in China is over, creating problems not only for BMW but also for a number of leading German companies, including rival Volkswagen, auto parts supplier Continental and chipmaker Infineon, as well as consumer goods maker Henkel and industrial giant Siemens.
No European country is as affected by the slowdown in China as Germany, because of the strong German-Chinese trade relations, high German direct investment in the country and heavy exposure to China by Germany’s leading companies. The 30 firms listed on Germany’s blue-chip DAX stock index alone have 672 subsidiaries in China, according to the EAC consultancy. The only DAX company without business ties to China is the energy firm E.ON.
On average, China accounts for 7 percent of German industry’s total revenues, but many companies are much more reliant on the giant Asian economy. Carmaker Daimler, for example, booked 10.2 percent of its total sales in China last year, BMW 18.7 percent and VW a whopping 32.2 percent. On average, DAX firms last year relied on China for 13.3 percent of their sales, worth some €132.1 billion, or $146 billion, according to calculations made by Handelsblatt and EAC.
“China’s importance for Germany’s leading companies continues to grow,” said Daniel Berger, an EAC partner in Shanghai. “But China’s free-fall has also increased.”
The weak yuan will make German products more expensive for Chinese consumers and put German companies at a disadvantage to their Asian rivals.
That poses a serious problem: After years of riding China’s unprecedented boom, German companies, especially the country’s carmakers, appear headed for a hard landing – even though the once red-hot growth rates are just simply cooling down. Shareholders are watching DAX stocks plunge, as weak Chinese economic data and the devaluation of the yuan have caused double-digit percentage losses for the stocks of German firms including Infineon, BASF, Daimler, BMW and VW over the past four weeks.
Not surprisingly, many export-oriented German firms are feeling the pain of China’s slowdown. Siemens, for example, saw a 16-percent drop in orders from the country in the first half of the year. Kurt Bock, head of chemical giant BASF, complained of a “unhappy development” in its Asian business without mentioning numbers.
So far, the Chinese slowdown has affected the sales and profits of German machine makers. “But if the situation doesn’t improve soon – which I don’t think it will – then it will also hit mechanical engineering,” said Anton Börner, the president of the German foreign trade association. “They see the outlook for 2016 certainly darkened.”
The devaluation of the yuan has further worsened conditions – “a clear negative for firms exporting to China,” said Andrew Garthwaite, chief strategist for the investment bank Credit Suisse.
The weak yuan will make German products more expensive for Chinese customers and put German companies at a disadvantage to their Asia rivals. Not only chemical makers like BASF and Lanxess will suffer, but also renewable energy firms, which already have a hard time competing with Chinese rivals on price.
“German companies are increasingly finding themselves on par with their Chinese competitors, which are fighting hard for market share,” Mr. Berger said.
After buying the German firm Putzmeister, for instance, Chinese construction equipment maker Sany no longer relies on German technology for its cranes, diggers and bulldozers.
Sinovel and Goldwind dominate the lucrative wind turbine market and Chinese state conglomerates CNR and CSR no longer require foreign technology to build their high-speed trains.
The result is clear: Companies like Siemens are left out in the cold. The Munich-based industrial giant has failed to break into China’s offshore wind energy market.
Others, like health company Fresenius, are suffering from state-mandated price cuts in China.
Yet despite all its weakness and risks, the Chinese economy is still growing by 6 percent and far away from a downturn similar to the one that engulfed Europe in 2008 and 2009.
Most German firms are still seeing respectable, if slower, growth in China. As the country turns from an emerging economy to an industrialized giant, it will have a competitive landscape similar to that in other Western countries.
But that also means Geman companies can no longer depend on China to compensate for weakness they have in other global markets.
Ulf Sommer is a reporter in Düsseldorf. To contact him: firstname.lastname@example.org