DusseldorfA strong domestic market, the economic boom in the USA and the robust demand in China for many years have given export-oriented German industry a long-term boost. Only the 30 DAX companies are likely to be together this year generate almost 90 billion euros net profit, That is only five billion euros less than in the record year 2017.
But the trade conflict initiated by US President Trump, the decline in gross domestic product in Germany In the third quarter and worse economic data from all major world regions are leaving ever deeper traces: Nearly a dozen of the 30 Dax companies published yield warnings and cautious forecasts for 2019 in recent months, including BASF. Bavarian. handle, Fresenius as well as the carmaker BMW and Daimler.
Now the companies are reacting with austerity programs on the predictions: BASF wants to save two billion euros a year with an efficiency program in production, logistics, research and development. Bavarian plans that Dismantling of 12,000 jobs worldwide, And in order to reach its targeted margin of six percent by 2022, and not just in 2025, wants VW save three billion euros by 2020 and by 2022 another three billion euros.
“The companies are thus reacting to the difficult economic environment,” says Kai Bender, Germany boss of the management consultancy Oliver Wyman. “They want to make their businesses robust.”
Current club events
That is necessary too. Screwed on Wednesday two research institutes further down their economic forecasts, The German Institute for Economic Research (DIW) expects growth of only 1.6 percent for 2019 and the Kiel Institute for the World Economy (IfW) for 1.8 percent. In 2017, the growth was still a two before the decimal point. The DIW judges: “The times of boom are over.”
CEOs on austerity course
From left: Martin Brudermüller (BASF), Herbert Diess (VW), Werner Baumann (Bayer).
(Photo: Andreas Pohlmann / obs, Axel Schmidt / Reuters, Ingo Rappers / laif)
Example Bayer: With the group the pension with 57 is to be possible soon. But what sounds tempting, has a bitter taste: The planned early retirement is part of a massive austerity program, with which the Leverkusen pharmaceutical and agrochemicals group wants to reduce its annual costs by 2.6 billion euros. 12,000 jobs are eliminated worldwide, around ten percent of the workforce.
In Germany, Bayer wants to make do without company redundancies and relies on employees to retire voluntarily or to retire early.
So far it is not yet at the competitor BASF. But also Europe’s largest chemical company wants to slim down. Around two billion euros should bring the “excellence program” of the company from Ludwigshafen to reduce costs. How many places are victims of this is still unclear. “This will depend very dramatically on how we grow,” says BASF CEO Martin Brudermöller and thus holds all options open.
The two rival chemical companies are not the only German companies that have caused a stir in recent days with new conversion programs. In view of the gloomy economic outlook, the companies are getting ready and looking to austerity measures.
The announcements from Bayer, Volkswagen, BASF, Covestro or Heidelberg Cement are just the beginning: Experts believe that industrial companies in particular will be trimmed for greater efficiency in the coming year – with far-reaching consequences for organization and employment.
The trend is already felt by those who help the companies with the reorganization. The business of management consultants has been going well for years and is driven by the desire of customers to make their businesses more digital and to grow faster internationally. In addition, there are increasing orders for the simultaneous streamlining of the organization.
The prospects are getting worse
“Many companies are focusing more on efficiency. We see clear signals in the order books, “says Kai Bender of Oliver Wyman. The companies responded to internal problems, but they also want to weatherproof.
The board members have enough reason to do so. Because the prospects for the further growth of the German economy are getting worse. The most recent indication of this is provided by forecasts submitted by the research institutes on Wednesday. They are skeptical before the turn of the year. “The upswing in Germany is increasingly faltering,” say the economists at the Kiel Institute for the World Economy (IfW).
As the global economy slows down, so too will export growth. According to the German Institute for Economic Research (DIW), the upswing is reaching its limits more and more.
The growing pessimism has many reasons. In America, Asia and above all Europe, the economy is slowing down after years of boom. In the face of high demand, companies had expanded their capacity. Demand is now weakening and world market prices for many of the goods produced are falling, for example, for basic chemicals, including BASF and Covestro suffer with falling profits and margins.
DAX companies on austerity course
In addition, the trade conflict is putting pressure on many export-oriented German companies. So more expensive for BMW and Daimler produced in the US and from there exported to China off-road vehicle in the face of ever new tariffs and countervailing duties. Both carmakers have already tuned their shareholders to yielding difficult times.
In no other major industrialized country are companies so dependent on foreign demand and smooth world trade as in Germany. More than two-thirds of its revenues are generated by the 100 largest publicly traded companies abroad, while the share of medium-sized companies is around 50 percent. The still robust German domestic market can not compensate for the weaknesses from abroad.
The economic downturn comes as a surprise, because until the middle of the year, it was considered certain that the companies again surpass their record profits from the previous year in 2018 again. There can be no talk of it now. Nearly a dozen of the 30 DAX companies have shocked shareholders with earnings warnings, bad news has accumulated over the past four weeks.
Economic forecast: The boom is over, but the risk of recession remains low
The fourth quarter should be weak. With 85 to 90 billion euros, the 30 Dax companies will still be the two-highest net profit in history in 2018. But the signs are on a downturn.
Therefore, many companies are now embarking on a austerity course to maintain the profit level achieved. The last major austerity wave hit the German economy in 2012/13, when many companies recorded a decline in sales. At that time, 22 out of 30 DAX companies started programs to increase efficiency, as the cuts in managerial German like to be titled. In almost every case, it was above all the so-called overhead, ie the administrations, corporate staff, purchasing and finance departments. That’s up again now.
Administrative costs are rising
But the scheduled programs often did not bring the desired sustainable effect, as calculations by the Handelsblatt show. Despite saving efforts, administrative costs in relation to sales have increased in many companies. Bayer came in at a rate of 4.1 percent in 2014, three years later it was already 5.8 percent. In 2014, BASF had to spend around 1.8 percent of sales on administration, compared to 2.2 percent in 2017. Also at Volkswagen and Siemens the odds went up.
Now the companies control against. At Bayer, up to 6,000 positions in Group functions and national companies are to be eliminated by 2021. The plastics manufacturer Covestro is cutting 900 jobs in the administration and expects cost savings of 350 million euros per year.
The austerity programs are not only a reaction to the macroeconomic challenges. Digitization and the swivel on future technologies also play a role. The Dax company Covestro, for example, wants to accelerate the internal cooperation of its departments – namely with the “increased use of digital solutions”, as it is called in the company.
Competitor BASF has launched an efficiency program. It starts in 2019 and is expected to contribute about two billion euros annually from the end of 2021 to the operating result. The Group wants to scour all processes in production, logistics and research and make it faster – there should be “fewer transfer points”, explains CEO Martin Brudermüller. The new design of interaction should also be shaped by digital technology at BASF.
We will implement the planned steps fairly and responsibly. Werner Baumann, CEO Bayer
Digitization is encouraging companies to want to be resilient to a slowdown, says Oliver Wyman CEO Bender. It offers completely new possibilities for cost reduction, for example in digital sales and in corporate planning.
This trend is weakened by the exhaust gas scandal and weaker demand in China weakened Volkswagen Group. According to the plans presented last week, the operating margin should rise as early as 2022, three years ahead of schedule. This will save the brand VW by 2020, three billion euros and by 2022 another three billion euros.
What that means for the employees is still unclear. Up to now, the “Future Pact”, which was adopted in the fall of 2016, applies with the planned reduction of up to 30,000 jobs, of which 23,000 in Germany. In return, 9,000 new jobs will be created, especially in software and battery development. According to the group, the program is necessary to finance even more investments in electromobility.
But before the new austerity programs take effect, they cost the companies a lot of money. Almost all major corporations do not use redundancies in Germany and rely on fluctuation, severance packages and early retirement. “As in the past, we will implement the planned measures in a fair and responsible manner,” said Bayer CEO Werner Baumann. The Group estimates the cost of its conversion program at around 4.4 billion euros.
Bayer CEO Oliver Zühlke, who contributes to the job cuts, sees the pension from 57 a “huge potential” at the Leverkusen Group. The workforce is now waiting for attractive offers. Group leadership must deliver, while serving the interests of the shareholders, the workforce and the company as a whole. A difficult balancing act.