Germany/Economics - Mixed but Increasingly Worried Messages

UNCLAS SECTION 01 OF 03 MUNICH 000396 SENSITIVE SIPDIS E.O. 12958: N/A TAGS: EFIN ECON GM SUBJECT: Germany/Economics - Mixed but Increasingly Worried Messages from Bavaria on the Recession REF: Berlin 1630 SENSITIVE BUT UNCLASSIFIED -------------- SUMMARY -------------- ¶1. (SBU) Chancellor Merkel, ridiculed by some for her cautious approach to an economic stimulus package, might be half right and half wrong, based on analysis of the evolving situation in Germany's touchstone state, Bavaria. On one hand, the graph from the November 2008 "business sentiment indicators" study for Bavaria (published by Munich's Institute for Economic Research, IFO) shows an unprecedented vertical drop from the October figure. Serious slowdowns in major industries explain the fall. On the other hand, the IFO graph shows that the same firms' assessment of the current situation slumped, but not as much as their expectations did. Anecdotal evidence from leaders in business, trade organizations, and trade shows confirms that many Bavarian businesses are increasingly concerned, but not yet desperate about economic conditions both in Germany and in their life-giving export markets. The Bavarian government will advance start dates for capital programs in order to support the economy, which is in recession after coming off unprecedented highs, as confirmed by the director of IFO Institute in a public lecture on December 15 (reported septel). End Summary. Psychology Accounts for Half of Economic Performance -------------- -------------- ¶2. (SBU) Ludwig Erhard, the legendary Bavarian father of German "Soziale Wirtschaft (Social Economy)," famously pronounced that "psychology accounts for 50 percent of economic performance." Juergen Hofmann, a senior official at the Bavarian Economics Ministry, quoted Erhard as he showed P/E chief and Consulate Economics Specialist on December 10 an unpublished IFO Institute survey about the (1) current situation and their (2) expectations. Firms' assessment of the current situation slumped but not as much as expectations, which dropped to an unprecedented low level coming off an historic, exuberant high in mid-2006. Hoffman added that steep declines in incoming orders were adding to the gloom. Although Hoffman recalled Erhard's maxim that all these negative scenarios bore the danger of self-fulfilling prophecies, he concluded that the government could not ignore the bad signs. He argued that the German Federal government should take more decisive fiscal policy measures. Separately, Bavarian Economics Ministry State Secretary Hessel told the CG on December 11 that Bavaria would bring forward into the first quarter of 2009 investment spending for infrastructure and other government projects. This was to support the Bavarian economy and help it through the upcoming rough period, which the director of IFO, Professor Hans-Werner Sinn, confirmed in a public lecture in Munich on December 15 (reported septel). Bavaria's Giant Global Businesses Have Mixed Reports -------------- -------------- ¶3. (SBU) In Bavaria, the news from the largest Bavarian businesses is mixed. BWM (cars),MAN (trucks),and Infineon (microchips) have taken unprecedented enforced week-long "vacations" over Christmas, closing factories to save money due to collapsing sales. Workers at BMW and MAN are cashing in overtime hours to draw full paychecks, but relative to Opel, BMW remains in relatively good shape. BMW's and MAN's actions will postpone layoffs or shortening of the work week, at least for a while. Infineon, a Munich-headquartered chipmaker in trouble even before the current crisis, has put its Regensburg factory on short time work and is considering this measure for other production sites as well. On the other hand, EADS (Airbus) has reported an order book with 500 million dollars worth of contracts. These outstanding orders could keep Airbus busy for years but these are 65 percent fewer than those that Airbus had on the books in 2007. There is the concern that substantial numbers of orders could be cancelled due to the global economy, as China is reported to be considering. Small and Medium-Sized Firms Still Relatively Stable? -------------- -------------- ¶4. (SBU) One level down, German small and medium-sized companies (SMEs) think of themselves as more flexible and innovative than their DAX-listed counterparts in adjusting to tough times, but it remains to be seen how they can weather the coming storm. Consulate contacts around the District confirmed to us in the last weeks that in Bavaria, as in Germany overall, SMEs, which account for the majority of employment and the vast majority of businesses, would continue to underpin Bavarian prosperity in the long run. Many smaller German businesses, which dominate niche markets and pursue flexibility and innovation as a matter of course, predict they will be able to steer their operations through the current economic downturn, albeit with belt tightening. ¶5. (SBU) Over the past four weeks, AmConsul Munich and Embassy Berlin representatives discussed the economic crisis with representatives from the Bavarian Economics Ministry, the Industrie- und Handelskammer (Industry and Chamber of Commerce),and private SME businesses in Bavaria. The following three examples illustrate a business culture that SMEs across Germany embrace and that could explain, in part, the relative confidence of the Federal and Bavarian Governments in the longer term health of the German economy (reftel). a) Loewe Electronics: Loewe is a medium-sized electronics manufacturer in Upper Franconia (near Bayreuth) that won business awards recently after surviving a crash business reform to create an award-winning flat screen television. At a recent meeting with P/E chief, Dr. Hans Trunzer, head of the Chamber of Commerce (Industrie- und Handelskammer) in Bayreuth, Upper Franconia, cited Lowe as a perfect example of resiliency and reform. Even though Loewe is publically-traded, Trunzer compared the firm to SMEs in Bavaria and praised it for its efficient size, flexible management and leaner operations. b) Diehl: Another Bavarian business example is Diehl (the international metal, tool, and defense firm) in Nurnberg, where Herbert Wust, senior executive manager, told P/E chief in early November that his business was holding steady, even with decreased orders from BMW, for whom Dhiel produces a unique gear part. Although Diehl is not technically an SME because of its size and multinational reach, Wust described a company that emphasized the autonomy and flexibility of its constituent parts, run from a home office and led by a close family team. c) E-T-A: Bernd Ellenberger of E-T-A (the world market leader for circuit breakers for equipment protection, located near Nurnberg) told an Embassy economics specialist on December 4 that ETA is "still doing fine" although Ellenberger expects a "rough year" in ¶2009. He confirmed that the company is in good shape because it was able to increase its capital ratio in past years. It invests only its own capital, so it does not need help from banks. When asked about his general impression of other SMEs in the greater Nurnberg area, Ellenberger said that those which have not found a specialized market niche might increasingly face credit problems. While he did not know of a particular case, he speculated that companies that did not increase their capital ratio during good times might now face difficulties in repaying credits or getting new money. Trade Show Attendance and Sales Predict Next Economic Cycle -------------- ¶6. (SBU) Trade shows "predict the health of the economy like canaries in a coal mine," Kurt Schraudy, senior executive office for new technology at Messe (trade fair) Munich, told P/E Chief on November 10. He confirmed good participation both before and after the Electronica show in November; it is the main trade fair for the international electronics industry aimed at business, not consumers. Exhibitors and visitors told him that they expected an economic downturn, but they were "reacting with self-confidence." In this spirit, one businessman we met on the floor of the show said his company was aggressively seeking new markets, moving in where weaker competitors had abandoned the field. Business Visa Applications Holding Steady -------------- ¶7. (SBU) Finally, at the visa window at Consulate General Munich, the pace of business visa applications has not noticeably changed. However, a Qimonda employee (electronic component division of Infineon) confirmed press reports that the company is very unstable, and that "key employees are jumping ship." In fact, the employee was in the Consulate to get a B1/B2 visa, because he feared his valid L-1 visa, issued in the name of Qimonda, might become invalid if Qimonda ceased to exist. Comment -------------- ¶8. (SBU) Looking at Bavaria as a microcosm of Germany's economy, one could come away with the impression that things are serious but not hopeless. Trade shows, a generally reliable predictor of future business activity, act like the proverbial "canary in the coal mine," and, so far, the bird still sings business tunes here. However, there is ample reason to fear that song could turn into a swan song. The economic data is becoming increasingly worrisome. The reactions of major-name German firms, like BMW and MAN cutting production and idling factories, will have a ripple effect across the economy as suppliers get trapped in the riptide. On the other hand, there is ample evidence that many SMEs, which dominate niche markets or which have conservative and innovation-rich management styles, will ride out the storm. German SMEs six months down the road may tell a somewhat different story since they rely heavily on exports; thus the deeper the global recession, the more they will be affected despite their gritty determination. ¶8. (U) Consulate General Munich coordinated this report with Embassy Berlin. Track Munich reporting at http://www.intelink.sgov.gov/wiki/Portal:Germ any. NELSON