German Economy Exposed to a Chinese Slowdown

In the first week of 2016, Germany’s blue-chip DAX index coughed up almost all of last year’s gains. The reason: Germany's economy has the most to lose from a weakening Chinese economy.
Germany's companies should fear the Chinese dragon.


It's no surprise that German carmakers BMW, Daimler and Volkswagen topped the list of biggest losers Thursday in Germany's blue-chip DAX stock index, which took another deep dive on the bank of concerns about China's growth prospects.

Together, the trio of carmakers shed nearly €10 billion, or $10.8 billion, in market value on Thursday alone.

In a change of narrative, however, it isn’t VW’s emissions-rigging scandal that is weighing so heavily on German automakers these days. Rather, it is their dependence on China’s increasingly uncertain economic growth prospects, which has sent global stock markets tumbling into the New Year.

Volkswagen sells more than one out of every three cars in the People’s Republic, which also accounts for a third of its sales. China makes up 19 percent of BMW’s sales and 10 percent of Daimler’s, as well – with the latter’s share rising fast.

Should China’s current economic weakness turn out to be more than a passing correction, and possibly even intensify, quite a few companies will be hard hit. Klaus-Günter Klein, Head of Warth & Klein Grant Thornton

But it’s not just Germany’s auto manufacturers that are at risk. China may be the kryptonite for Europe’s most powerful economy as a whole.

No other Western industrial nation suffers as much as Germany when China’s economy falters. The 30 DAX-listed companies alone have more than 650 subsidiaries in China. On average, these 30 German companies generate 13 percent of their revenues there, according to consulting firm EAC, which specializes in developing economies.

“China’s importance for Germany’s top companies is increasing,” said Daniel Berger, a partner at EAC based in Shanghai.

That may not be a good thing, at least right now, since German companies could have farther to fall when problems emerge for China’s economy. If the first week of 2016 is any indication, investors are extremely jittery about this prospect.

Data shows that Germany’s companies were already feeling the effects of China’s slowdown – and that of other emerging markets – at the end of last year. Germany’s statistical agency on Friday said industrial production fell 0.3 percent in November. Exports rose just 0.4 percent in November compared to the previous month, below economists’ expectations of a 0.7-percent rise on the month. The country's exports had also slumped 1.3 percent in October.


German Blue Chips Depend on Exports 1-01


With imports up 1.6 percent in November, the weak export numbers could weigh on Germany’s overall growth. Marco Wagner, a senior economist with Commerzbank, noted that Germany's economy is likely to have expanded by just a quarter-point in the final three months of 2015.

"The turmoil in China and problems in other emerging markets give little reason to hope that growth will soon pick up again," Mr. Wagner said in a note to clients.

Investors have borne the brunt of the pain so far this year. Germany's DAX dropped 8 percent in the first four trading days of 2016, coughing up nearly €100 billion in market value and wiping out almost all of last year’s 10-percent gain. It is the single worst start to a year since the DAX index launched in 1988.

That may seem like an overreaction to seasoned investors. Many warned that this week's Chinese turmoil had more to do with the government's mismanagement of the stock market than with any new information suggesting the world's second-largest economy is headed for a deep downturn.

But China is just one factor. Another is the overall shaky global economy.

China is a “huge risk factor” and “a great threat for the stability of the global economy,” warned Anton Börner, head of the Federation of German Wholesale, Foreign Trade and Services.

It is precisely this connection between China and the global economy that has investors and companies so concerned.


German Blue Chips Depend on Exports 2-01


“China has become the problem child of the global economy,” added Martin Wansleben, chief executive of the Association of German Chambers of Commerce and Industry. “Especially German exporters of machines, electronics and vehicles are feeling the cooling off of investment activity,” Mr. Wansleben said.

And yet, China isn't the only trouble spot. World Bank economist Franziska Ohnsorge told Handelsblatt Global Edition this week that a broad slowdown across all emerging markets is perhaps the biggest risk facing the world economy this year.

This means trouble for Europe's largest economy. Just as the German economy is uniquely dependent on the People’s Republic, it is also uniquely tied to the entire global economy.

Today, Germany’s publicly listed companies rely on exports for two-thirds of their sales, while only one-third is attributable to the domestic market. Thirty years ago it was the other way around.

Other large industrial countries like France, Britain and the United States have export quotas of around 50 percent.

In Germany, companies such as Bayer, Henkel and SAP – which each sell more than 80 percent of their goods and services abroad – have been profiting handsomely from globalization. Shoe icon Adidas and industrial gas supplier Linde even rely on exports for more than 90 percent of their business.

According to a regional analysis by Handelsblatt, a large share of Germany’s exports focus on Asia and America.

Semiconductor maker Infineon, for instance, generates about 50 percent of its business in Asia. BMW, Linde and Beiersdorf – known for its Nivea skin-care products – rely on Asia for around one-third of their sales.


German Blue Chips Depend on Exports 3-01


The United States, meanwhile, is the most important market for companies like fertilizer producer K+S and healthcare giant Fresenius.

Given Germany’s dependence on exports, a global economic slump would come down very hard on a large majority of companies listed not only on the DAX, but also on other major indices like Germany’s small-cap SDAX, mid-cap MDAX and technology-focused TecDAX.

The 50 companies listed on the MDAX, for example, have an average export ratio of 70 percent.

Germany’s strong domestic demand would not suffice to compensate for a weakened world economy. But precisely that may be on the cards.

Anemic growth in major emerging markets, including China, is the reason the World Bank on Wednesday cut its 2016 global growth forecast by nearly half a percentage point to 2.9 percent. The bank lowered its economic growth forecast for emerging markets by more than half a percentage point to 4.8 percent, with Chinese growth slowing and Brazilian and Russian economies stuck in recession.

A recent survey by consulting firm Warth & Klein Grant Thornton shows how deeply concerned Germany’s executives are about the precarious economic outlook.

The number of German managers with a positive business forecast halved already last fall. And for the first time in years, the majority of German managers expect earnings to shrink in 2016.

“Should China’s current economic weakness turn out to be more than a passing correction, and possibly even intensify, quite a few companies will be hard hit,” said Klaus-Günter Klein, head of Warth & Klein Grant Thornton.

Some German companies already are abandoning their 2016 guidance. Among them is medical technology company Drägerwerk, which revised its outlook last year, citing increasing weakness in the Asian-Pacific region, above all China.

Pointing to spreading malaise in Asia and sluggish business in the United States, fashion company Hugo Boss also said it would miss its 2016 sales forecast – following similar actions by rivals Gerry Weber, Tom Tailor und Ahlers.


Ulf Sommer is an editor for Handelsblatt in Düsseldorf covering companies. Norbert Häring is a Ph.D economist for Handelsblatt and writes regularly about Germany and the wider global economy. Christopher Cermak of Handelsblatt Global Edition also contributed to this story. To contact the authors: [email protected] and [email protected]