Market Update: Germany

From the March 2017 issue.

With the central European trailer market expected to level off in 2017 and a Federal Election looming in September, it’s promising to be a turbulent year ahead for the German economy.

Buoyed by last year’s headline-making IAA Commercial Vehicle Show, which spiritedly celebrated the transport sector’s transition into the digital age, Germany’s trailer building industry is in the healthiest position it’s been in a long time.

New semi-trailer registrations were up nine per cent to 34,400 units in 2016, according to the Verband der Automobilindustrie (VDA), with total commercial vehicle registrations rising to a record 357,300 units – the best result since 1992, when the country’s reunification gave sales an unprecedented boost.

And yet, there is an aura of caution in the air that doesn’t quite reflect what the statistics say. VDA President, Matthias Wissmann, for example, was careful not to overreact when he delivered the good news in January. “2016 was a good year for the German commercial vehicle market,” he said. “The dynamic business in commercial vehicles reflects the current healthy general state of the economy.”

Wissmann’s restraint was both a nod to the fast-moving nature of the industry in post-GFC (Global Financial Crisis) Europe and a warning that business sentiment can change quickly in an election year – especially on the background of a volatile new US administration that has openly criticised the German automotive industry when it came into power in January.

Operating on the interface of business and politics, Wissmann would have been all too aware that the upcoming political battle between social democrat, Martin Schulz, and third-term Chancellor, Angela Merkel, was much more important than the data he presented and would likely lead to a long and arduous election campaign that could stall policymaking all the way until the Federal Election in autumn. After all, Schulz’ Social Democratic Party (SPD) and Merkel’s Christian Democratic Union (CDU) are currently ruling as part of a Grand Coalition, so chances are low for the alliance to be effective as both try to dissociate themselves from each other leading up to the ballot. 

As head of the VDA, Wissmann would have also been acutely aware that last year’s IAA was merely a starting point on a journey into the unknown: “When it comes to the key topics for the future of our industry – electric mobility and automated and connected driving – we absolutely have to break new ground to push quality forward and establish processes that satisfy the demands of these technologies,” he stated during an industry meeting at the end of 2016 – pre-empting that more work has to be done to maintain Germany’s status as the world’s prime engineering destination.

The German Institute for Economic Research (IFO) seems to share Wissmann’s somewhat cautious approach: In a February press release, it said it was optimistic about growth in 2017, but also warned the economy would not be as strong in 2017 as it had forecast before. In line with Wissmann’s well-considered comment, IFO economist, Klaus Wohlrabe, said the year started out with a “minor mood killer” in terms of business sentiment, but added it should not be overemphasised, as “managers … still hold a positive view of the current business climate”.

The German Government chose a similar tone when it stated in a recent report on the state of the nation that “the strong economic situation will continue” in the year ahead. Ever so considered, it added that Gross Domestic Profit (GDP) was expected to increase by 1.4 per cent only, which would place it in the middle range of forecasts by economic institutes and international organisations, whose growth estimates range from 0.9 to 1.7 per cent. Wohlrabe and the IFO predicted 1.5 per cent growth.

The result is an atmosphere of constructive tension in 2017 Germany, as some observers labelled it, with business going on as usual – and successfully so – but with a heightened sense for risk management.

Gary Beecroft, Managing Director of UK consultancy, Clear International, described the scenario as early as December 2016, when he said central Europe had just seen the peak of the current business cycle and needed to prepare for a downward correction in 2017 or 2018. “There has been a distinct weakening of the market in the second half of the year [as] Denmark, France, Germany, Italy and Spain all proved less buoyant than they were assumed to be six months ago,” he explained. “We are now approaching the tenth anniversary of the GFC, which decimated the trailer market in 2009. A cyclical slowdown in 2018 or 2019 is now almost inevitable and the only real questions are how far the market will fall and how long this slowdown will last.”

In his December analysis, he added a trailer market fall of more than 15 per cent would be “unlikely” and a slowdown, not a recession, lasting only 12 to 18 months is still probable. “Clear believes there is a 60 per cent probability of this happening in 2018, a 30 per cent probability in 2019 and 10 per cent in 2020.”

Scarred by the fateful 2007 slowdown, Germany’s trailer building community is well aware of the risk involved and thus trying to couple current innovation initiatives with measures that will allow it to produce more flexibly should business do end up winding down.

Krone, for example, has announced it will invest some €15 million in a new testing centre in a move to bundle all validation activities within the Krone Group and allow for a more proactive knowledge exchange between the company’s on-road and agricultural business.

According to Managing Partner, Bernard Krone, mega-trends such as autonomous driving have made it necessary to “leverage existing synergies across the wider business” more strategically – not just because of a possible downturn, but also because the industry as a whole is going through a period of change. “In both … agricultural machinery and commercial vehicles, the Krone Group faces ever-stricter legal requirements, as well as increased demands in terms of quality, functionality and user-friendliness,” he said in a media statement, echoing Wissmann’s sentiment.

“Particularly in light of growing digitalisation and the increasing complexity of agricultural machinery and commercial vehicles, Krone wants to meet these requirements even better and therefore decided to build the new validation centre.”
At the end of December, Krone also announced a moderate price increase across the company’s product range, citing rising costs for raw materials such as steel, aluminium, crude oil and gas as the reason. Back then, Krone Commercial Vehicle CEO, Bernhard Brüggen, explained: “The economic environment for the commercial vehicle industry remains challenging. In the entire value chain, the essential cost drivers have been consistently reduced to a minimum.”

After a record 2016, which saw some 50,000 vehicles delivered, Schmitz Cargobull, too, is more conservative about 2017 – with Board Member, Andreas Schmitz, expecting some 47,000 deliveries only. “According to our rather conservative plan, vehicle sales should reach more than 47,000 units in the current business year,” he says, choosing a slightly more optimistic tone than the competition. “Unless the current demand receives an unexpected dampener, this target could be clearly exceeded.”

However, one early dampener hit Germany last month when news broke that the country’s trade surplus had climbed to a record high in 2016. Experts like Marcel Fratzscher, head of the German Institute for Economic Research (DIW), were quick to comment such a development could worsen tension between Washington and Berlin, especially after US President Trump’s top trade adviser had accused Berlin of exploiting a “grossly undervalued” euro to its advantage.

According to German newspaper Handelsblatt, however, the German economy reacted surprisingly unimpressed, saying the possible impact of “Trumponomics” on Germany’s economy is still “completely unclear” and that Q1 data showed signs of continued optimism. As such, Matthias Wissmann’s polite restraint in announcing the VDA’s record registrations figures for 2016 may have just hit the right tone for a country that is working hard for the win, but preparing for the worst.

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