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deindustrialization or business model change? – DW – 09/21/2022

Against the backdrop of an acute energy crisis with exorbitant prices for electricity, and especially for gas, a discussion is flaring up in Germany about the possible de-industrialization of the German economy. Businessmen, trade union leaders, economists, and the media spoke about the danger of mass closure of industrial enterprises and the transfer of production capacities abroad (although until quite recently there was a lot of talk, on the contrary, about new large industrial projects in Germany).

Germany’s long dependence on two autocracies

The Internet portal of the Focus weekly describes the essence of the problem as follows: “Using natural gas, which is badly needed by powerful German industry, as a weapon, the Russian president is rocking the world’s fourth largest national economy and the world’s third largest exporter of goods.”

Container ships in the port of Hamburg
Germany’s main export and import port is located in HamburgPhoto: Rupert Oberhäuser/picture alliance

The situation is aggravated by the fact that the most important trading partner of Germany – China is experiencing a “severe crisis”continues the publication and concludes that the German economy is facing a serious test, since so far its business model has been largely based on “cheap energy from one autocracy and high demand from another.”

In any case, it is clear, states the weekly Der Spiegel, in turn, that “if the pandemic affected mainly culture and catering, then this time the giants of the German economy, huge enterprises with complex processes, were under attack. It is relatively easy to close and open restaurants but not a chemical plant.”

Macroeconomists tend not to exaggerate the threat

Der Spiegel wonders how great the danger is now that “concerns will start to leave the country”, and cites, in particular, the answer of one of the most respected German economists – the president of the ifo institute in Munich, Professor Clemens Fuest: “The threat of deindustrialization exists, but it’s too early to announce it.”

Ifo Institute President Prof. Clemens Fuest
Ifo Institute President Prof. Clemens FuestPhoto: Frank Hoermann/SvenSimon/picture alliance

Some particularly energy-intensive industries will indeed have to be transferred to other countries, admits Holger Schmieding, chief economist at the Hamburg bank Berenberg, in the Frankfurter Allgemeine Zeitung. However, he believes that the German economy “can handle this quite well”, since, according to his estimates, we are talking about only 2-3 percent of industrial enterprises.

Professor Stefan Kooths, vice-president of the Institute for World Economics in Kiel (IfW), also “does not see any drama” in the fact that, for example, energy-intensive products such as fertilizers will continue to be imported from the United States . In addition, he believes that “companies will not close their factories from day to day, but rather simply stop investing in them.” So, in his opinion, the process of gradual structural changes will go on. Or, in other words, there will be a change in the business model.

Industry lobbyists must sound the alarm

Such reserved assessments and forecasts by macroeconomists contrast sharply with the extremely alarming statements of representatives of individual industries. “If we don’t find a solution to the energy crisis soon, there will soon be no aluminum smelter in Germany,” Hinrich Mählmann, head of lobbying organization Aluminum Deutschland, said in August.

“The reduction in production will only be the first step. If some processes have to be completely stopped, then they may never resume again,” Christian Kullmann, head of the German Chemical Industry Association (VCI), admitted in mid-September. And he said that production in the industry (excluding pharmaceuticals, where things are going well) will decrease this year by 8.5%.

New acetylene plant at BASF's Ludwigshafen plant
New acetylene plant at chemical giant BASF’s plant in LudwigshafenPhoto: Andreas Pohlmann/BASF

But if the largest industrial gas consumer in Germany, namely the chemical industry (which, however, uses blue fuel mainly in factory power plants, as well as for the production of steam, and much less as a hydrocarbon feedstock), is experiencing a drop of 8.5% , this suggests that the industry, although in crisis, is still very far from deindustrialization.

Because of this crisis – and incomprehensible prospects for the next year – industry associations are now sounding the alarm, drawing attention to the concerns of those enterprises whose interests they defend. At the same time, lobbyists, of course, are more likely to exaggerate and describe the situation in more gloomy colors, because they are faced with the task of obtaining preferences, benefits, financial assistance from the government and parliament – or, say, the abolition of decisions that are unprofitable for business.

All this is legitimate, but when assessing the real state of affairs in the economy, one should take into account that the frightening word “deindustrialization” may well be used by interested parties simply as a rhetorical device.

Some companies are reducing industrial production, others are expanding

True, the reduction in production at two steel plants of the metallurgical concern Arcelormittal in Bremen and Hamburg due to the excessive cost of gas and electricity or the bankruptcy of the toilet paper manufacturer Hakle in Düsseldorf for the same reason is no longer rhetoric, but concrete facts. Many media cite them as the latest evidence of a possible trend towards the loss of Germany’s industrial potential. However, let’s not forget that the decline in production and bankruptcy are inevitable attributes of almost any crisis. It is important that they do not become a mass and ubiquitous phenomenon.

Headquarters and main plant of the chemical concern Henkel in Düsseldorf
Headquarters and main plant of the chemical concern Henkel in DüsseldorfPhoto: Jahr Henkel AG & Co. KGaA

But this, at least so far, is not observed in Germany. Quite the contrary: quite a few industrial concerns are quite satisfied with the way their business is going. Thus, the chemical giant Henkel from the same Düsseldorf raised its revenue growth forecast for this year for the second time in a few weeks, pointing, first of all, to the success of its most important division, which produces industrial adhesives. Daimler Truck, the world’s largest truck and bus manufacturer, which has five car factories in Germany, said it does not yet feel a decrease in demand for its products. By the way, these are two companies from among those that curtailed or are curtailing business in Russia.

The Federal Statistical Office of Germany (Destatis) reported on September 19 that the order portfolios of the German manufacturing industry continue to grow and reached record volumes in July.

A large number of industry giants with record profits

And the economic newspaper Handelsblatt even decided to compile a list of the country’s largest companies that are unaffected by the energy crisis. To do this, she analyzed the financial statements for the first two quarters of 40 joint-stock companies included in the main German stock index DAX.

“Perhaps no other industrialized country suffers as much from the consequences of the war in Ukraine, from high energy prices, gas shortages and interrupted supply chains, as Germany,” a detailed article on the publication’s website begins. However, it goes on to say that many companies are coping well and even excellently with the crisis so far.

New generation production
Production of a new generation of Mercedes C-class at the Mercedes-Benz plant in Bremen Photo: picture alliance/dpa/Mercedes-Benz Ag – Global Commun

“Billion-dollar profits despite all crises: 2022 will be a record year for 15 DAX concerns” is the headline of the article. There are many industrial companies on the list of firms counting on the highest net profit in their history this year. These are car builders BMW, Daimler Truck and Mercedes-Benz, chemical and pharmaceutical companies Beiersdorf, Brenntag, Merck, Symrise, medical equipment manufacturers Sartorius and Siemens Healthineers, technology concern Linde specializing in industrial gases, one of the world leaders in the production of Infineon microchips.

All these concerns, Handelsblatt points out, are focused on the global export of high-tech and science-intensive products, all benefit now from the low euro exchange rate, and most importantly, all have crisis-resistant business models.

Handelsblatt editor-in-chief: we need to bet on the European Union

In the article about these successful industrial concerns, the word deindustrialization does not occur. However, this problem, in particular – in the field of medium-sized businesses, the newspaper addresses in other publications. Including in a detailed commentary of his editor-in-chief Sebastian Matthes (Sebastian Matthes). He also warns that “there is a threat of dangerous development – creeping deindustrialization of the country.”

However, such a development can be prevented, because there are solutions to the problem, although they are not simple. According to him, “the industry must change itself”: to make betting on green energy and on the digitalization of their factories – and on the export of related technologies. But, first of all, the editor-in-chief of Handelsblatt is convinced, it is necessary to reorient from Asia to Europe, to the European Union, and finally complete the project of creating a truly common market, the second largest in the world, in order to take full advantage of its benefits. In short, he calls for a very significant adjustment to Germany’s current business model.

See also:

Will the chemical industry of Germany be able to do without gas from the Russian Federation?

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