No Funding

The Export Champions Banks Won't Bet On

main 109139093 source DPA picture alliance Benjamin Beyt – Wirtgen asphalt tarmac machine road construction
It's a global best seller, but that doesn't convince the banks to provide export financing. Source: DPA / picture alliance / Benjamin Beyt

The purchase order came from Buenos Aires: three machines for road construction, with a price tag of €2.5 million ($3 million). It’s an ordinary transaction for the Wirtgen Group, a global leader in the market of road-building machines.

Since the 2015 political power shakeup in Argentina, there’s been a lot of infrastructure renewal there, meaning lots of demand for Wirtgen’s road construction machines and tarmac rollers. The construction equipment manufacturer has received more than three dozen such Argentinian orders worth between €500,000 and €4.5 million since 2015, but the success has also caused a headache: trade financing is problematic or impossible.

“The banks’ credit offers for smaller orders are not adequate,” said Reimund Felderhoff, business manager of Wirtgen GmbH, the company’s subsidiary responsible for street construction machinery. “We are financing our orders from Latin America 100 percent through our own supplier loans.”

The fact that a company with a turnover of €2.6 billion and an export share of about 90 percent in auxiliary construction is having this problem isn’t an exception. For many German industrial companies, especially the small and medium-sized, family-owned businesses known as Mittelstand, this financing hang-up is a real problem. “Many banks are no longer offering any financing,” said Ulrich Ackermann, foreign trade expert of the VDMA mechanical engineering association. This is particularly true for orders up to €5 million – so-called “small tickets.”

“Increased demands on risk management are forcing banks to scrutinize and assess the creditworthiness of borrowers more strictly.”

Gabriele Fuchs, Managing Director, Economic Policy and International Affairs, Association of German Banks

At the macro level, however, the figures add up. Germany’s mechanical engineering firms, such as packaging specialist Multivac , storage systems maker, Viastore, and garment machine producer, Oerlikon Textile, exported machines and equipment worth €156 billion last year. Around 10 percent of the export orders are worth less than €5 million. Although engineering firms especially suffer from the lack of funding, it affects all types of Mittelstand firms, which form the backbone of the country’s export-focused economy.

Many German companies now fear losing market share abroad because rivals from the US, Asia or Europe often enjoy backing by specialized, state-owned trade finance banks. The US, for instance, has the Exim bank, a credit agency that is part of the US administration, while Korea has a trade insurance agency known as KSure and the Korean Eximbank.

German industry is demanding a government initiative for an export bank for orders up to €5 million. “Other countries are already very successful,” said Mr. Ackermann of the VDMA mechanical engineering association. “Japan, the USA, Korea, France – there is financing and hedging from a single source. It’s more straightforward, because many interfaces are eliminated.”

Many other countries were also faster in providing export financing, Mr. Ackermann said. It’s no longer enough just to manufacture good products. Tailor-made financing is now part of the business for most customers. “If you can’t make an appropriate offer in this field, the businesses often won’t come,” said manager Mr. Felderhoff of road-building specialist Wirtgen. “Financing plays an important role in the sale of construction machinery.”

While the German government does provide export credit guarantees, called Hermes covers, the companies still need bank financing to start fulfilling the orders. But without banks providing the money, Hermes does not offer the insurance. As a result, Hermes guarantees fell from €1.3 billion in 2013 to €400 million in 2016.

The banks, however, are pointing their fingers the other way. “Increased demands on risk management are forcing banks to scrutinize and assess the creditworthiness of borrowers more strictly,” said Gabriele Fuchs, of the Association of German Banks. “This is politically desired and leads to increasing risk premiums and additional collateral requirements, as well as increased documentation obligations in the case of lower credit ratings.” From the banks’ perspective, the “small tickets” are looking increasingly unprofitable.

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Insurer Euler Hermes, a subsidiary of Allianz, and PriceWaterhouseCooper provide the government’s credit guarantees. In addition to the banks, Hermes also demands extensive documentation before issuing its covers. The insurer has been in talks with the banks to simplify the processes of standardization and digitization for some time. Nevertheless, this double credit checking and extra scrutiny may stick around, said Edna Schöne, a board member at Euler Hermes. “Ultimately, we are dealing with taxpayers’ money. The government has to pay attention as to whether the risks are acceptable,” she said.

For now, most German companies go from bank to bank and beg for a loan, which would first be subject to review by the financial institution and then again by Hermes, complained Mr. Ackermann of the VDMA mechanical engineering association. “The time investment is high,” he said, adding that these companies are dependent on quick decisions.

Speeding up the process in the short run is unlikely. The banking industry is lukewarm to the idea of a combined insurance and funding agency as in the US or Korea, as proposed by the engineering association, especially when it is government-backed.

“We do not consider a state-initiated export bank to be necessary or to make sense from a budgetary standpoint,” said Ms. Fuchs of the Association of German Banks.” The cited challenges for private banks would also affect a state-owned export bank, which would also put taxpayers at risk.”

The Wirtgen Group, which in June agreed to be bought by US tractor maker John Deere, is solving the problem in its own way: putting supplier loans on its own books and selling the debt claims to the banks, a process known as factoring. This is the easiest way for the banks because the regulatory hurdles aren’t as steep, but the process is complicated for the manufacturer. “Getting it done is not easy,” said Mr. Felderhoff.

As long as German banks don’t offer small loans quicker, Germany’s export champions can only hope foreign rivals don’t take over their positions in global markets.

 

Martin Wocher is an editor with Handelsblatt, focusing on the mechanical engineering and steel industries. Gilbert Kreijger, an editor with Handelsblatt Global, contributed to this article. To contact the author: wocher@handelsblatt.com

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