Germany's Auto Woes Could Point to a Recession - OZY | A Modern Media Company


A struggling auto industry is dragging down Europe’s biggest economy. 

By Guy Chazan

The woes of a small equipment manufacturer in southern Germany have become a symbol of the headwinds facing the German car industry, as global trade tensions, fears of a hard Brexit and the cooling of the Chinese car market take their toll.

Last week, Eisenmann, which produces paint lines for car plants, said it was filing for insolvency. The company, which employs more than 3,000 people, blamed problems with a series of big projects carried out in 2018: Costs had been miscalculated and milestones missed, and there had been difficulties with suppliers — resulting in a “big annual loss.”

“We had to act quickly and resolutely,” says Michael Keppel, Eisenmann’s chief restructuring officer.

The news is the latest sign of trouble in a sector that is one of the main pillars of the country’s export success, and comes amid increasing signs that Germany is facing a broader downturn. While the economy is still largely healthy, with unemployment near record post-reunification lows, business confidence has become negative across all sectors except for construction. The Bundesbank said recently that gross domestic product probably contracted in the second quarter, with “no sign yet of a recovery in exports and industry.”

The German car industry is in a really critical situation.

Stefan Bratzel, director, Center of Automotive Management

The DIW Berlin think tank expects the weakness to continue, forecasting that economic output will shrink by 0.1 percent in the third quarter amid signs the industrial slowdown is spreading to the wider economy.

“Orders are deteriorating, consumers are becoming more skeptical and even the labor market, which has been robust until now, is losing momentum,” says Claus Michelsen, head of forecasting and economic policy at DIW. “These are not good prospects for the current [third] quarter.”

The forecast coincides with further signs of a eurozone-wide slowdown. The economy of the single currency area expanded by just 0.2 percent in the second quarter, down from 0.4 percent for the first three months of the year, recent Eurostat data showed.


Germany’s industrial weakness has been particularly marked in the automotive sector, in which production declined by 12 percent in the first half of this year. Last week Daimler AG, maker of Mercedes-Benz cars, reported a $1.8 billion loss in the second quarter, partly as a result of falling sales in the U.S. and China, while Audi sold 4.5 percent fewer cars in the first half of the year.

The health of the car industry is critical to Germany’s economic strength. It sustains 820,000 jobs domestically, produced total revenues of 423 billion euros in 2017 and contributes around 5 percent to German GDP. More than 77 percent of the cars produced in Germany are exported. But the industry is in trouble, hurt by trade tensions and the slowdown in China, its biggest market. Passenger vehicle sales there fell 4 percent to 23 million last year, and sales have continued to decline this year, dropping 14 percent in the first half.

“The German car industry is in a really critical situation,” says Stefan Bratzel, director of the Center of Automotive Management. Carmakers are being hit not only by falling sales in their biggest markets and uncertainty about the future of trade but also by the shift to electric vehicles, which requires billions of dollars in investment.

The impact of this is reverberating far beyond Volkswagen, Daimler and BMW. “All of them have had to reduce costs because they need the money for investment, and that is having a knock-on effect on their suppliers,” says Bratzel.

Continental, Europe’s largest publicly listed auto technology supplier, cut its 2019 guidance last week as well as its forecast for production across the automotive sector. Schaeffler, a parts-maker, followed suit this week, revising down its forecast for profit and revenues and saying it expects global automobile production to decline by 4 percent in 2019. In February, it had predicted a fall of just 1 percent.

Already, companies are making cutbacks. Schuler recently announced it will be shedding 500 of 4,195 jobs in Germany, citing “changed competitive conditions and increased cost pressures.” Mahle is closing a factory near Stuttgart with 250 employees that makes air management systems for combustion engines, and says it will cut 380 of the 4,300 employees at its headquarters.

Eisenmann still hopes it can survive as a going concern. It is seeking a “strategic partner” and says it has already had a number of expressions of interest. But it may not be the last car industry player to file for insolvency in the current downturn. “The carmakers’ profit warnings, the decline in production and sales they’re experiencing — that is impacting all the suppliers, big and small alike,” says Bratzel.


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