Yesterday, Germany’s blue-chip DAX stock market index hit 13,000 points for the first time in its 30-year history. And while that’s great news for the German managers of the 30 big firms that make up the DAX, it’s even better news for their largely foreign owners.
Research by Handelsblatt suggests that foreign investors now own more than half of the stock – 53 percent – in DAX companies. At several of the well-known firms, such as Bayer, Deutsche Börse and Adidas, foreign ownership is well over 70 percent.
In terms of sales, revenue, profits and employment, today’s top German companies are highly globalized. In the last 25 years, firms like BMW, Siemens and Bayer have relentlessly looked outward in search of fast-growing markets and high-value inputs. This has yielded a steady increase in profit margins, which in turn has drawn the attention of overseas investors. German investors, on the other hand, have always been very reluctant to put their money on the stock market.
In terms of return, overseas investors have gained enormously on the back of DAX companies. Infineon, the Munich-based semi-conductor maker, is a good example. It has one of the highest concentrations of foreign investors, at more than 85 percent; not coincidentally, its market performance has been stellar, with its stock increasing 5,000 percent in the past eight years. If you had bought €10,000 ($11,800) in Infineon stock in 2009, you would now be sitting on half a million euros. Likewise, Adidas, which is 80 percent foreign-owned, has tripled its stock price in just two years.
The major exception to the trend is among management: here, Germans still predominate.
The DAX companies that are largely German-owned have not fared so well. They tend to have one large domestic institutional investor; for example, the German government owns 32 percent of Deutsche Telekom and 15 percent of Commerzbank, while the Krupp Foundation has 23 percent of steelmaker ThyssenKrupp. But these stocks are all among the worst-performing German equities of the last decade. Not long ago, a Telekom share sold for €100: today it can be yours for just €15.50.
The success of foreign investors comes down to sober calculation and an eye for short-term profit. They exhibit little of the investor loyalty which was once the hallmark of German business. It is hard to imagine the Krupp Foundation ever selling its stake in ThyssenKrupp, but when the Abu Dhabi state investment fund ploughed €2 billion into carmaker Daimler in 2009 saying it was investing for decades to come, it was really in it for the short-term. And with brilliant success: the fund sold its stake three years later, doubling its initial investment.
US asset investment firm Blackrock, which is among the largest in the world, is the biggest investor in German industry. It holds a stake in every DAX company, on average more than 5 percent, sometimes as much as 10 percent. But Blackrock is no activist investor – it buys, sits back and waits for capital appreciation. If there’s no growth, it reduces its position.
German business has rapidly internationalized in other areas too. On average last year, the 30 DAX companies generated three-quarters of their revenues overseas. Twenty years ago, it was just 50 percent. In the mid-1990s, 60 percent of their workforce was in Germany; today, that figure is just 40 percent.
The major exception to the trend is among management: here, Germans still predominate. According to figures from consultants EY, two-thirds of the most senior 200 executives are German nationals.
Paradoxically, Infineon, the most foreign-owned DAX company, has no non-German executives. Other companies without a single foreign manager include energy giants E.ON and RWE, as well as Commerzbank, the country’s second-largest bank, and real estate behemoth Vonovia. The most globalized management teams can be found at Adidas, Deutsche Bank, Volkswagen, Linde, the personal care conglomerate Beiersdorf, as well as healthcare company Fresenius.
Just six percent of non-executive board members are American, even though 25 percent of the revenues of large German firms comes from the US, and 20 percent of their shares are held by American shareholders. It is a similar story with Asia: just one director, out of 261 in total, comes from Asia, although top German firms raise 17 percent of their revenues in Asia.
This seems likely to change. “The internationalization of senior management and supervisory boards is simply a logical part of globalization,” said Alexander Bassen, professor of finance at Hamburg University.
It is hard to concretely prove that companies actually do better with more foreign managers and directors. “Of course a higher proportion of foreigners on the board is not a yardstick for quality,” said Mathieu Meyer, a managing partner at EY. But by globalizing much more slowly in this than in other areas of their business, German companies may be losing out on expertise.
Ulf Sommer reports for Handelsblatt on companies and financial markets. To contact the author: firstname.lastname@example.org