While 2017 was a record year for Germany’s largest companies, a number of clouds have appeared on the horizon to darken the outlook for this year: The strong euro, fallout from Brexit, unpredictable oil prices and the need for huge capital investments are all giving investors a not-so-sunny forecast.
“The business model of Germany’s companies is based on open markets,” said Mathieu Meyer of consulting firm EY. “Because the trend is in the opposite direction, we must be worried,” he added, apparently referring to US President Donald Trump’s proposed tariffs on imported steel and aluminum.
Although a trade war is still a hypothetical possibility, the problem now facing most large German companies, most of them exporters, is the strong euro, which is currently 15 percent above where it was against the US dollar at this time last year. Many industrial companies have put a halt to hedging strategies, making the impact even greater.
The chemical company BASF, for example, increased net profits in 2017 by a whopping 50 percent to €6.1 billion ($7.5 billion). But the company anticipates a decline in profit this year. “The headwind is coming from the euro,” said CEO Kurt Bock. That combined with volatility in petroleum prices and complications stemming from Britain’s forthcoming departure from the European Union make planning very difficult.
Also suffering from the strong euro is chipmaker Infineon, whose products flow mainly to the US and Asian markets, where prices are also calculated in dollars. Chief Financial Officer Dominik Asam said the euro problem goes straight to the company’s bottom line. ”We’ve benefited from the fluctuations in the currency before, but now we’re suffering,” he said.
One analyst said that when the euro is 10 percent higher than the year before, most members of the blue-chip DAX index take a 7 percent hit to their earnings before taxes, interest and depreciation (EBITDA).
It’s not only the euro that is hurting the outlook for Germany's largest 30 companies, however. German airline Lufthansa, which saw a 33 percent rise in profits in 2017, said it expects to see a decline this year because of an increase in fuel prices.
Another cause for concern is the demand for increased research investments by German companies to stay competitive with foreign rivals. For example, carmaker BMW is boosting its research and development budget from €6.1 billion to €7 billion, with €400 million earmarked for the development of autonomous vehicles at a new research center in Milbertshofen. Daimler, the parent company of Mercedes-Benz, is pouring €32 billion into innovation in the next two years, including €1 billion towards producing batteries for electric cars at five different factories.
Deutsche Telekom is also ramping up its capital investment as it transitions to fiber optic cable for its internet customers, investing €12 billion this year to lay 60,000 kilometers of cable. While many of these investments will dent short-term profits in the coming year, the companies hope they will produce measurable benefits over the longer term.
Ulf Sommer covers companies for Handelsblatt out of Düsseldorf. To contact the author: [email protected]