German multinationals face declining earnings, but that isn't stopping them from making investments overseas.
New chemical plant, dragons included.
No one looking at the billions of euros German firms plan on investing abroad would conclude they are facing declining sales and slimmer returns in their biggest foreign markets. And yet blue chips like Daimler and Siemens saw their fourth-quarter profit cut in half.
German multinationals have long outgrown their home market and have little alternative for growth but China and the United States, even though the economy in both these markets is slowing down. Their biggest export market, their European Union neighbors, is also showing anemic growth. Germany’s hundred biggest companies get two-thirds of their revenue from these three markets.
Daimler, the maker of Mercedes cars, now sells one out of four of its vehicles in China. Ditto for Vokswagen, which operates 20 locations in China. The carmakers have been hit by the Dieselgate scandal, the botched transition to new emissions testing, and the crossfire from President Donald Trump’s trade warfare.
The 3 million German companies on average get 7 percent of their revenue from China. For the DAX index of 30 blue chips, the percentage is a much higher 16 percent. Carmakers, along with semiconductor maker Infineon and specialty chemical firm Covestro, get one-fifth of their revenue from China.
In recent years, German economic success has become increasingly dependent on exports to China. With a trade war looming and the Chinese economy showing signs of trouble, could Germany be sucked under too?
The slowdown in China has caught them flatfooted and the question is whether China is now permanently on a path of slower growth. “German industry’s years of focusing on China is coming back to bite them now,” said Thomas Gitzel, chief economist of VP Bank in Liechtenstein. Daimler, for instance, tripled its sales in China in just four years.
Despite this uncertainty, BASF, the biggest chemical company in the world, is planning its biggest investment ever in €10-billion plant expansion in its Chines joint venture, including a second steam cracker, to produce ethylene feedstocks. This in spite of the fact that earnings forecast for the chemical giant have been lowered by more than 10 percent over the last three months.
BMW, even amid the problems besetting the car industry, is paying €3.6 billion to increase its share in a Chinese joint venture to 75 percent from 50 percent, the first time China has allowed a major foreign company to exceed the 50-percent threshold. The German carmaker plans to invest a further €3 billion to expand production in China. Merck Group, which already employs 3,500 people in China, is planning an innovation center in the Guangzhou special economic zone.
The second-biggest market for German firms, the US, is also slowing down. Nonetheless, specialty chemical maker Covestro is going ahead with its €1.5 billion investment in Houston suburb Baytown for new production capacity for the foam used in construction for insulation.
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