Big Deals Fear of Being Sidelined

German plant construction companies are increasingly losing bids to Asian rivals. The firms themselves are partly at fault, but so are passive politicians.
Few Germans, many Asians could be the future.

At first glance, business appears to be booming for ThyssenKrupp, a tradition-steeped steel manufacturing and plant engineering company based in the industrial Ruhr region.

Last month, the company won a contract to build a €100-million ($125-million) cement plant in Saudi Arabia after landing a large plant construction deal in Algeria. And chemical plant builder Uhde, which merged with the ThyssenKrupp Resource Technologies to form the new Industrial Solutions division in January, has meanwhile become a major player in the United States. Americans have been ordering chemical plants ever since they began producing low-cost shale gas and oil on domestic soil with the controversial extraction method known as fracking.

But these impressive contracts are little more than a snapshot. German plant construction firms are increasingly being sidelined in a growing number of major, high-ticket projects around the globe.

Since 2013, ThyssenKrupp, for example, has lost four bids for fertilizer plants in Eastern Europe and Central Asia to competitors from Asia, and the company is rarely a player in projects outside the West.

Other German plant builders are losing out, too. Despite its good connections in Russia, the SMS Group lost a bidding war for a rolling mill in the Ural Mountains region, and the electronics and engineering conglomerate Siemens has faced major challenges in its efforts to compete in the Vietnamese power plant market.

If we let the ability to handle major turnkey projects slip away, we will eventually lose out in the world market. Klaus Gottwald, Industry expertn, German Engineering Association

The consequences not only affect companies within the sector, but also pose a threat to Germany as an industrial base. South Korean companies are still ordering turbines from Germany for giant power plants around the world. But one day, they will be producing their own high-efficiency turbines and could force the Germans out of these large-scale projects.

"If we let the ability to handle major turnkey projects slip away, we will eventually lose out in the world market," said Klaus Gottwald, an industry expert with the German Engineering Association (VDMA).

There are numbers to substantiate his fears. Within five years, the volume of orders has declined by almost a third for German suppliers of large power plants, steel mills and chemical and fertilizer plants, according to the association. In 2013, these companies earned only €21 billion on major projects worth more than €50 million.

Major plant construction firms are partly to blame for the decline, according to Hubert Lienhard, chief executive of Voith GmbH, a mechanical engineering firm in Germany's southwestern Swabia region. No manager is willing to assume responsibility, as general contractor, for a project that entails risks in the billions, he said.

Yet the German government is also responsible for the decline, because of its inability to find effective ways to fight what can be characterized as loan dumping by countries such as China. Despite its membership in the World Trade Organization, Beijing blatantly supports its own export industry with cheap loans.

At the same time, the German government's export credit guarantees, known as Hermes, are gradually losing their clout as an instrument of foreign trade promotion in Germany. Exporters, which the federal government protects against non-payment by foreign debtors through the privately held Euler Hermes insurance group, are often hobbled by the many policy exclusions and overly strict conditions. In many cases, companies have no choice but to bear the risks themselves – or avoid doing business abroad in the first place.

Signs of the decline are everywhere, for example, in long-isolated Myanmar, where giant infrastructure projects have been in the works since the military dictatorship ended in 2011. Munich-based airport operator FMG was interested in participating in three airports, but the door to Myanmar remained closed.

Major plants abroad

 

In Brazil, German architects designed the plans for five of the 12 stadiums for the 2014 soccer World Cup. But in the end, only the seats and the locking technology were made in Germany, while the major construction contracts went to local construction firms. Also in Brazil, German power plant builders Voith and Siemens faced off against lower-priced Chinese competitors, which are gradually improving their quality.

While Chinese companies are muscling into the world market, their domestic market remains sealed off, enabling Chinese competitors to become world leaders in the construction of airports, ports, roads and highways. Some 6,600 kilometers (4,100 miles) of subways are being built in China in 2014 alone – at an estimated value of €80 billion. Foreign bidders generally secure only 2-to-3 percent of public contracts, according to the European Union Chamber of Commerce in Beijing.

In Germany, politicians who help businesses secure contracts quickly become embroiled in scandals, but in Asia the practice is taken for granted. On a visit to Myanmar about a year ago, Japanese Prime Minister Shinzo Abe signed an agreement to improve market access for Japanese companies, while at the same time approving $610 million in funds for infrastructure projects. It was no coincidence that Germany's FMG was left out in the cold.

Quelle: Bloomberg
</a> Worker at Chinese company Sany Heavy Industry.

 

The Chinese are even more aggressive. When they signed a contract to build a hydroelectric power plant in Zimbabwe, a state-owned bank financed the $400-million project at a ridiculously low 2-percent rate of interest. German companies don't stand a chance against such practices.

"Chinese banks frequently offer financing that can be considered an unfair competitive practice," said Hans Janus, a member of the executive board at Euler Hermes, pointing a finger at policymakers. This is why German exporters are calling for a reform of the Hermes guarantees.

Under the Hermes system, a German exporter seeking to deliver a bottling plant to Africa, for example, insures the trade transaction with Euler Hermes. If the deal falls apart or the customer defaults on payment obligations, the federal government bears the lion's share of the loss.

Chinese banks frequently offer financing that can be considered an unfair competitive practice. Hans Janus, Executive Board Member, Euler Hermes

"We have to get back into major projects," said Volker Treier, the deputy chief executive of the Association of German Chambers of Commerce and Industry, or DIHK. "It's naïve to believe that we can miss out on major construction projects around the world and remain prosperous."

If Mr. Treier had his way, Berlin would entrust the state-owned KfW development bank with a "significantly more intensive" foreign trade mandate. The KfW, he argued, should fund infrastructure projects worldwide and bring in German suppliers.

A disquieting sense of resignation is already taking hold. Ailing construction firm Bilfinger, for example, has decided to stop building power plants and only operating them in the future. Siemens has largely withdrawn from the plant construction business. The only corporations listed on Germany's blue-chip DAX index still involved in the business are ThyssenKrupp and Munich-based industrial gases and engineering firm Linde. The Düsseldorf-based SMS Group supplies rolling mills and steel plants, while Voith sells power plant turbines and paper machines abroad.

There is still a glimmer of hope in the construction business, with China's government-supported companies facing an uphill battle in Europe. The Chinese firm Covec failed miserably when it was unable to complete a highway in time for the 2012 soccer European Championship in Poland, meaning European companies had to take over.

 

This story first appeared in Wirtschafts Woche. Alexander Busch, Martin Fritz, Philipp Mattheis, Mathias Peer and Harald Schumacher also contributed to this story. To contact the author: [email protected].