Optimistic Despite China's Woes

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  • Why it matters

    Why it matters

    Strong growth in Europe and United States boosts German DAX companies more than China’s downturn hurts them.

  • Facts


    • Analysts recently raised 2015 profit estimates for 17 of the 30 DAX companies.
    • For 25 DAX companies analyzed by Handelsblatt, 56.6 percent of sales were generated in Europe, 20.9 percent in America and only 16.1 percent in Asia.
    • Good news for BMW and Daimler as the worldwide car industry in the United States heads for its strongest year since 2001.
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Last month, all German companies on the DAX blue-chip index lost value – more than €100 billion ($113 billion) – as China’s weakening economy hit German exporters.

Just three examples: Continental dropped 13 percent, Henkel 15 percent and ThyssenKrupp 20 percent.

But those dismal notes reflected only one month and one region of the world. Outside Asia, Germany’s largest companies stand to post record gains this year.

In fact, more German firms than ever raised revenue projections for the year, including pharmaceutical giant Bayer, chemical specialist Lanxess and the Fresenius health-care group as well as 56 others on the top stock indexes.

As a result, analysts recently raised 2015 profit estimates for 17 of the 30 DAX companies. The strongest numbers are expected at Lufthansa, Lanxess, the Munich RE insurance group and car manufacturer Daimler, all up more than 5 percent.

Earnings forecasts are also going up on the MDAX listing of the next 50 German companies, especially for the Bilfinger building group and chemical manufacturer Evonik.

German products are in huge demand in Great Britain, France and the Netherlands, which all ranked above China for exports.

For the second half of the year, analysts are sticking with optimistic growth predictions, regardless of the economic dimming in China. Last week, the Kiel Institute for the World Economy confirmed its 1.8 percent growth forecast for 2015 and raised the outlook for next year to 2.1 percent growth.

Continental, the tire and auto parts maker, has raised its annual forecast twice this year despite China’s economic crisis.

“We can absorb the downturn in China in the second half year because of production in Europe and the USA,” said chief executive Elmar Degenhart.

Continental generates only 20 percent of its sales in Asia, with China accounting for about 11 percent. Europe has the lion’s share, 53 percent, followed by the Americas at 22 percent.

With other big German companies, the picture is much the same, according to Handelsblatt’s research. Among 25 DAX companies it analyzed, 56.6 percent of sales were generated in Europe, 20.9 percent in the Americas and 16.1 percent in Asia. Africa and other regions accounted for the remaining 6.4 percent.

Infineon Technologies, the semiconductor manufacturer, had the highest share of sales in Asia at 49 percent. All other companies had smaller portions of sales in Asia, including chemical manufacturer BASF, consumer and industrial goods maker Henkel and the software firm SAP.

Seven companies had little if any business in Asia, including Deutsche Telekom, the pharmaceuticals producer Merck and energy companies E.ON and RWE.

Even if China’s economy cools more than expected, profits of companies active in Asia won’t decline for some time  – unless there’s a complete bust, Handelsblatt’s research indicates.

Europe’s largest software manufacturer SAP, for instance, is still seeing strong demand for cloud computing products in China. And Linde, the industrial gas company, has long-term delivery contracts that assure income up to 15 years and beyond.

For brand manufacturers such as Henkel and German carmakers, Europe and the Americas are compensating for weak sales in Asia.

And they’re not alone. Heidelberg Cement generated more than 60 percent of its sales in the Americas and Europe.

The car industry is heading for its strongest year since 2001 in the United States. For BMW and Daimler, the country accounts for 15 percent of their total sales.

Industrial companies like engineering giant Siemens are also benefiting from growth on the other side of the Atlantic. Many are increasing their production facilities there due to low energy costs.

And these companies need “German machines and equipment,” said Volker Treier, with the German Chambers of Industry and Commerce.

Many of Germany’s mid-size machine manufacturers had a good start to the second half of 2015. In July, domestic orders were up 43 percent and foreign orders grew by 5 percent.

“We had an unusual number of big contracts at home and in Europe,” said Ralph Wiechers, president of the machine manufacturers association. From European partner countries, orders surged 51 percent over the previous year.

Some of that growth has come from Europe’s stricken peripheral countries, which are also showing strong signs of economic recovery. Companies in Spain, for instance, boosted production in July by 5.2 percent over the previous year, the biggest increase in 15 years.

Nearly all the analyzed DAX companies are profiting from their solid business in Germany and Europe. For Adidas, BMW, Merck and SAP, Europe accounts for more than 40 percent of sales. For Henkel, Siemens, BASF and Volkswagen, among others, the share was more than 50 percent.

Foreign trade figures confirm the trend. In July, German companies exported goods valued at a record €107 billion, up 6 percent over the previous year, thanks largely to growth in Europe and the Americas.

In the first six months alone, the companies exported a quarter more goods to the United States. German products are also in greater demand in Great Britain, France and the Netherlands, which all ranked above China for exports.

Rob Dobson, an economist from the Markit financial information company, noted that August produced the best euro-zone results in four years. Other analysts expect the trend to continue.

“Industrial countries will remain the most important motor of world economic growth,” said Anna Stupnytska, an economist at Fidelity.

The Bundesbank, not known for its over exuberant optimism, even titled its latest monthly report: “The upswing continues.”

The upshot is that the centers of power are shifting for many export strong German companies, such as BASF, Linde, Volkswagen and others. Less demand from Asia is being offset by more from the Americas and Europe – where the companies already make most of their money.


Ulf Sommer covers companies and financial markets in Frankfurt. To contact the author: sommer@handelsblatt.com

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