by Dr. Markus Contzen
Donald Trump’s customs plans were not yet 24 hours old when the specter of an “import and export crisis” had already made the rounds. Crisis? This refers to a situation where the domestic market is swamped by cheap imports while exports are complicated by customs duties. The German steel industry last experienced this in 2015, when the price for hot band fell to a record low as a result of Chinese price dumping.
The questions we are currently facing are:
- Will history repeat itself? And if so, what would be the consequences, not only for the German steel industry, but also for other industries such as mechanical engineering and plant construction?
- But most of all, will it get even worse and will export be affected as well?
If the customs dispute between the US and China should turn into a global trade war, which is a real possibility in view of the recent escalations, how can German machine and plant manufacturers prepare themselves for this eventuality?
High risks for mechanical engineering and plant construction
Of course there are also winners in disputes such as the current one between the US and China. Local steel buyers will win in the short term if there should really be a widespread price drop across the board.
However, the economic risks are enormous. This is particularly the case if a spiral of ever-new customs measures should be put in place, which will in turn inevitably affect more and more countries and sectors.
Naturally, the German economy with its considerable international network would suffer in such a case. Let’s take mechanical engineering, for example, which is something of a model industry in Germany (especially since the local automotive industry has to fear for its once undisputed position). For years, German mechanical engineering companies have been selling at least three quarters of their products abroad. You can hardly get any more vulnerable than that. However, it has already become apparent recently that the growth came mostly from other European countries (+3.4% in 2016), while sales to the US (-2.9%) and especially China (-9.3%) have been declining significantly.
Speculation on falling share prices of German companies
What will these numbers look like if Washington and Beijing really enter a prolonged period of protectionism? After all, it is not a coincidence that the US hedge fund Bridgewater has been massively betting on sinking share prices of various large German companies. That is not a blind attack, but a calculated bet on the escalation of the international trade dispute, and on the fact that Germany has the most to lose in this case.
Five strategies for mechanical engineering and plant construction companies
Of course, responsibility for resolving the conflict lies first and foremost with politicians. However, this does not release the German industry from its own responsibility, namely to make provisions for the potential outcome should the political process fails to prevent a trade war. Here are five strategies for German mechanical engineering and plant construction companies to consider in these testing times:
- Put the review and realignment of the sales markets and the current project pipeline on the agenda of the management boards.
- Some internationally positioned companies are taking precautions and making capacities in their plants more flexible in order to increase production at sites in the US and China if necessary.
- Your supply chains must be reviewed in order to identify and strengthen local content.
- It is time to consider possible acquisitions or at least partnerships in the US and China.
- And last but not least, another important strategy is to review your (fixed) costs in order to be better able to mitigate a possible decline in sales.
When should this happen? If you have not already addressed these points, then it is high time. Tomorrow it could be too late.
