Handelsblatt Exclusive The Big U.S.-German Market Test

Drawing on its vast domestic market, Silicon Valley innovation and risk-taking ways, the U.S. comes out a clear winner in Handelsblatt's comparison of companies from the world's No. 1 and 4 economies. But in autos and consumer products, the edge goes to Germany.
In a Handelsblatt comparison between leading firms from the world's No. 1 and No. 4 economies, the United States, bouyed by a bigger domestic market, Silicon valley tech dominances and risk-taking, came out on top. But in autos and in some consumer products, Germany had the edge.

Although both are global powerhouses and the driving economic forces on their respective continents, the United States and Germany couldn't be more different. Geographically, the U.S. is 26 times bigger than Germany and has some 4,000 companies listed on the New York Stock Exchange, compared with about 600 on Germany's benchmark DAX.

The world's 10 most valuable companies all hail from the United States, and the top three, Apple, Alphabet (Google) and Microsoft, are worth €1.4 trillion ($1.57 trillion). That's over €300 billion more than all of the 30 DAX firms. Apple alone is worth €515 billion, more than the annual gross domestic product of Finland and Denmark added together.

Based on size and influence, companies like drug king Pfizer, chip giant Intel and the world's biggest retail firm, Walmart, tower above their German rivals Bayer, Infineon and Metro.

But a closer look at the world's No. 1 and No. 4 economies tells another story, one that is not so lopsided. After all, a company's success boils down to more than just market value or revenue alone. More important is: How profitable is the firm? How fast are its earnings really growing? Which company's shares will deliver the most capital gains and dividends?

To answer these questions, Handelsblatt compared the five biggest U.S. firms to their five biggest German counterparts. On average, Handelsblatt found that U.S. companies were bigger as well as more profitable – but not always.

In the chemical and drug sectors, as well as in general industry, U.S. companies prevailed, with Dow Chemical, Johnson & Johnson and 3M clearly more efficient than BASF, Bayer and Siemens.

But the auto sector remains a German stronghold. And, surprisingly, many German consumer companies were more successful than bigger peers across the pond. Although U.S. companies profit from a bigger, consumption-driven home market, German firms are more successful selling globally, reaching across the borders of Europe's largest economy.

But autos and consumer products are exceptions in a bigger global economic picture that is clearly dominated by the United States. But why do U.S. firms fare better?


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“It is one thing to reach a high level, but another to retain it,” said Michael E. Raynor and Mumtaz Ahmed, consultants at Deloitte, in a report.

Take Microsoft, which was co-founded by Bill Gates 41 years ago and has reached a level of market penetration that makes it hard for competitors to make inroads. Microsoft draws its clout from the near dominance of the computer desktop business software suite of Word, Excel, PowerPoint, which can be found on nine in 10 computers worldwide.

Microsoft's near-monopoly status generates its high profit margins, and funds its forays, many of them not successful, into the computer hardware business, the mobile handset business and even Skype, which the Redmond, Washington-based behemoth bought for $8.5 billion in 2011.

Year-on-year Microsoft retains around 20 percent of its revenue as profit.


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But high earnings in the United States are possible without monopolist tendencies, as shown by 3M, with its range of some 50,000 products, including its brightly colored Post-It notes. The Minnesota company knows its products are easy to copy and at risk. But its profit levels are enviable.

Last year, 3M retained 24 cents out of every dollar in revenue as profit, before tax and interest. The firm was helped by a productive pipeline of new products, the result of its big investment in research, which helps to constantly improve and refresh its global lines.

Of course, the U.S.'s greatest dominance is in high tech, which goes way beyond Apple. Microsoft and Facebook are much more profitable than Europe's most successful tech company, SAP, the global market leader in business management software.

The U.S. firms are relentless at reinventing themselves, and most unquestioningly follow the advice of the late Apple CEO Steve Jobs, who advised startups and other tech companies to "cannibalize'' their own products, creating new innovation and iterations, before rivals do.

The auto sector remains a German stronghold. And, surprisingly, many German consumer companies were more successful than bigger peers across the pond. Although U.S. companies profit from a bigger, consumption-driven home market, German firms are more successful selling globally.

In the process, the tech revolution led out of Silicon Valley is constantly opening up new opportunities -- and often, entirely new business sectors -- for U.S. companies.

The explosion in smartphones led to a seismic shift in internet use, which now takes place primarily on mobile handsets, not desktop or laptop computers. That development generated billions in new advertising revenue for Facebook, the world's biggest social network with 1.5 billion users, and Alphabet, owner of the Google search engine, another near-dominant player.

Although Facebook undershot Wall Street's earnings expectations for three years, the company has since delivered rapid earnings growth thanks to mobile advertising, pushing it to No. 8 on the list of the world's most valuable companies, leapfrogging industrial giant General Electric.

Meanwhile, with new, innovating digital products such as drones and mobile wind turbines, Google's Alphabet and its Silicon Valley brethren are entering other sectors.

“Digitalization has developed into the all-dominant trend, putting a question mark above the business models of other firms and whole sectors,” said Hubert Barth, the head of EY, formerly Ernst & Young, in Germany. He added that it was time for German companies to change course if they don't want to have the pace dictated to them by the likes of Google and Tesla, the California-based electric automaker founded by a Russian immigrant, Elon Musk.

Many of Germany's biggest firms are already heeding Mr. Barth's warning.


Quelle: dpa
ThyssenKrupp, Germany's biggest steelmaker, has moved to incorporate digital technology in its corporate DNA, devising a internet-enabled elevator system.
(Source: dpa)


ThyssenKrupp, Germany's largest steel- and steel-products maker, recently unveiled an elevator system that is linked to the internet, echoing Microsoft's Platform, Azure. “In Germany we don't have any companies that do that,” said Heinrich Hiesinger, the ThyssenKrupp CEO.

Amazon, the world's largest online retailer based in Seattle, is a major disruptive force whose influence is great in Germany and Europe. For years, the company led by Jeff Bezos invested heavily in technology and expansion, at the expense of earnings. Its patience is now paying off, and profits are rising.

With an operational return on sales of just under 4 percent, Amazon is more profitable than the Germany's largest retailer, Metro.

Jerome Engel, a business professor at the University of California-Berkeley, has analysed why U.S. companies are so dominant. Germans, he said, see competition as a threat, while their peers across the Atlantic take inspiration from alternative business models, often incorporating them or co-opting them.

Many innovation experts believe the U.S. is strong in “thinking big,” while Germany is slowed by its doubt, uncertainties and a fear of failure.

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But that too is changing in Germany.

The transformation is most visible in the German energy sector, where utilities E.ON and RWE, are being forced to exit their traditional bread-and-butter fossil fuels business amid the country's subsidized sprint into alternative energy.

After years of resisting investing in solar and wind, the German utilities now realize that alternative energy is their future, and are recruiting a new sort of employee. The same challenge faces German car companies, which needs to hire fewer engineers and more tech experts moving forward in the transition to connected, electric-powered vehicles.

Daimler, the iconic German luxury car company, is facing up to its need to go digital. “Not only the car will be reinvented, but the whole company,” Daimler Chief Executive Dieter Zetsche said recently after presenting first-half figures. He said Daimler's budget for research and development would be boosted, with a focus on green technologies.

Michael Ziesemer, president of the influential German industry association for electro-technology, says both the United States and Germany stand to gain from digitalization. “The U.S. leads with its IT abilities and its Silicon Valley culture. Germany is ahead with its embedded systems, machines, sensors and knowledge of industrial processes,” he said.


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Germany continues to set high standards in the car industry – despite the Dieselgate emissions scandal surrounding the DAX's largest listed firm, Wolfsburg-based Volkswagen. In autos, Germany has the clear advantage, much as Apple does in smartphones, where although it sells fewer handsets than its bigger rivals, makes much more money on what it sells.

General Motors and Ford produce huge numbers of cars, but BMW and Daimler sell their high-performance vehicles for a lot more money. As a result, they are more profitable.

Jerome Engel, a business professor at the University of California-Berkeley, has analysed why U.S. companies are so dominant. Germans, he said, see competition as a threat, while their peers across the Atlantic take inspiration from alternative business models, often incorporating them or co-opting them.

But size does not automatically means success, a fact illustrated by German consumer-goods makers like Henkel, sport shoe giant Adidas and optical glasses maker Fielmann, which Handelsblatt compared with Walmart, Procter & Gamble and Home Depot.

Overall, Germany's five biggest consumer companies are a touch more successful than their bigger U.S. peers. For example, family-run Fielmann, founded in 1972, has a return on sales of more than 15 percent. After struggling, Adidas recently raised earnings forecasts four times in six months. In the first half year, Adidas' operating profit climbed by almost 60 percent to €905 million, helping its shares climb to twice as high as they were a year ago.

But there is no easy secret for success. Long-running restructuring at Henkel and others German companies made them more competitive today, focusing on lucrative product lines with stronger profit margins. Such strategies have been adopted by Beiersdorf, which sold off its less well-known brands to focus on global products such as Nivea, Tesa und Labello.


Quelle: dpa
Stefan Heidenreich, the CEO of German consumer goods maker Beiersdorf, employed U.S.-style restructuring techniques to sell off much of the company's product portfolio, to focus on global brands such as Nivea.
(Source: dpa)


Henkel recently bought laundry detergent maker Sun Products, pushing the Dusseldorf-based firm to No. 2 number in the North American market for household detergents. At the same time, Henkel is reducing its dependence on its highly cyclical adhesives business, enabling management to boost earnings targets for 2016.

And despite the VW fiasco, Germany retains a clutch of strong brands and cars.

But there are signs some of Germany's export-driven industrial giants are reaching their limits. Chemicals maker BASF and industrial gases maker Linde have both been hit by a sluggish world economy. The companies can no longer rely on overseas markets to offset sluggish domestic demand. The latest wave of globalization, which kicked off a quarter of a century ago, is starting to splutter – hurting one of its biggest beneficiaries: Germany.


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That is evident in both profits and margins. “Important markets did not grow as fast as expected,” said BASF Chief Executive Kurt Bock as he recently unveiled a new cost-cutting plan. Linde Chief Executive Wolfgang Büchele outlined his 2016 targets on a somber note. “There are no cancellations, but customers are wary of signing new orders,” he said.

The slowdown in China has hurt many German exporters. When the Russian economy waned in the wake of E.U. economic sanctions, sales of firms from Germany, Russia's top economic trading partner, fell dramatically. Companies like Siemens, Henkel or retailer Otto all reported slowing business one of their traditionally biggest European trading partners.

As 2016 begins to draw to a close, there are no signs on the horizon that global demand will improve any time soon. “The return to a national focus, following the big phase of globalization, is unsettling,” said Karsten Junius, a chief economist at Swiss bank Sarasin.

In addition to weakness in China and Russia, the European debt crisis and cost-cutting by many nations has fed a growing nationalism on the Continent. The explosion of refugees from Syria, Iraq and northern Africa has fed nationalist fervor, which is threatening trade deals.

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The European-U.S. free trade proposal TTIP appears to be facing an uphill battle amid growing political opposition on the Continent, and uncertainty has been further stoked by Britain's vote on June 23 to exit the European Union. That all spells an economic slowdown in Europe, which for the 70-year post-war era had grown as borders were removed.

“When border controls once again become the norm around Europe, mid-term growth will suffer,” warned Stefan Bielmeier, a chief economist at Frankfurt-based DZ Bank.

All of the ascendant right-wing parties in Europe, whether it be France's National Front, or its allies in Hungary, Poland and Britain, are seeing their support grow as they promise a rollback of trans-border liberalism and free trade.

But protectionism usually leads to economic disaster. In Brazil, import restrictions imposed after the collapse of commodity prices led to a deep recession. Such slowdowns in key markets hurt exporters worldwide, not least Germany.

“New borders, protectionism, isolationism and nationalism all represent a higher risk for Germany than hardly any other country,” said Mr. Barth, the EY consultant.

Multinational companies like Bayer, Daimler, Henkel, Linde, SAP and Siemens -- which all make more than 80 percent of their revenues abroad -- are especially vulnerable to increasingly inwardly looking economies.


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But such fears are muted in the United States, where companies will always be buoyed by a vast, strong internal market. Two thirds of U.S. products remain in the country – meaning that firms are more sheltered from sinking exports than their German counterparts.

That is a key motor behind U.S. strength, alongside its command of the transforming tech economy. Germany's advantage, as before, hinges on its industrial might, which in large part can be tied to its broad range of mid-cap family-owned firms, the so-called Mittelstand.

Hermann Simon, a German consultant, spent 25 years researching relatively unknown mid-cap global market leaders from around the world. His most current international list of "hidden champions'' spans more than 2,700 companies – and almost half of them from Germany.

Mr. Simon said these firms generate a quarter of all German exports, which he said is “a unique phenomenon worldwide.”

According to his calculations, Germany has 16 "hidden champions'' for every million residents, compared to just 1.2 per million residents in the United States. In this discipline at least, the victor's medal goes to Germany.


Ulf Sommer is a Handelsblatt editor who specializes in market coverage and DAX firms. Kevin O'Brien is the editor in chief of Handelsblatt Global. To reach them: [email protected] and [email protected]