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By Chris Bryant and James Wilson in Frankfurt and Gerrit Wiesmann in Berlin
Cost cutting and job losses are no longer confined to Europe’s indebted periphery. As the eurozone heads towards another recession, a variety of companies in Germany, the currency bloc’s strongest economy, are also tightening their belts to restore competitiveness.
Falling European demand and a slowdown in emerging markets such as China are putting pressure on profit margins, forcing businesses to trim discretionary spending, find savings in their supply chains and address low capacity utilisation
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“The general sentiment is that the eurozone crisis could become tougher in the next couple of months and I would say all large corporates are preparing for tougher times and are trying to reduce their cost base,” says Markus Schweizer, a managing partner at Ernst & Young’s Germany, Switzerland and Austria unit.
The German jobless rate remains near record lows thanks in part to its companies’ greater ability to export to the US and Asia, where growth remains relatively strong.
Much of Germany’s industrial core has therefore continued to report solid profit growth and there has not yet been a slump in investments as happened during the 2008-09 crisis.
Cost-cutting programmes have instead been concentrated in sectors undergoing profound structural shifts such as Germany’s hard-hit solar industry, utilities and in pharmaceuticals. Here the weak economic environment is exacerbating long-term trends.
“It’s important to distinguish between cost cutting that happens for structural as opposed to cyclical reasons. In industries where historically we had strong margins, such as pharmaceuticals and power generation, we are seeing structural pressure on costs,” Mr Schweizer says.
After the government last year decided immediately to close eight of the country’s 17 nuclear reactors after Japan’s Fukushima disaster, German utilities have been at the vanguard of the job cuts wave.
Only weeks after that decision midyear, Eon said it would shed up to 11,000 of 80,000 jobs worldwide to cut costs.
RWE fell into step this summer when it said it would cut 2,400 posts as plunging European demand for electricity and gas left first-half profits stagnant. This added to some 8,000 posts the company had said it would shed in the midterm through asset sales and natural churn.
In pharmaceuticals, Merck KGaA is set to close the Geneva headquarters of its Serono unit, cutting 500 jobs and transferring another 750.
This action is part of a cost-cutting plan launched earlier this year designed to address what Merck called “unprecedented market shifts, increasing competition in key product areas and existing inefficiencies in its own organisation”.
Meanwhile, German retailers are struggling to adapt to an era of growing online sales. Catalogue retailer Neckermann announced plans to cut almost 1,400 jobs before it was forced into insolvency proceedings as it tried to accelerate its move into ecommerce. Karstadt, a department store group that was rescued from insolvency in 2010, is still struggling and plans 2,000 job cuts, citing challenging conditions because of the eurozone crisis.
“A lot of German companies have become much more proactive in managing costs following their experiences during the 2008 crisis,” says Tobias Mock, a managing director at Standard & Poor’s.
“In this volatile environment it’s more challenging to managing costs as visibility is not so high. They are looking on an ongoing basis at their cost structure and capacity utilisation and are making adjustments.”
Voith’s papermaking machines were already challenged by the trend towards growing digitisation but an unexpectedly marked first-half slowdown forced the family-owned industrial conglomerate to announce more than 700 job cuts at the paper unit in May.
Siemens, Germany’s largest engineering company by sales, plans to cut costs as demand for short-cycle products such as industrial automation and drive technology weakened more than expected and pricing pressure in areas such as power transmission and renewable energy remains high.
“Cost efficiency and productivity need to be in the forefront of our management approach,” Peter Löscher, chief executive, told investors last month. He declined to reveal what role job cuts would play in Siemens cost-cutting programme. The details are set to be announced in the autumn.
Volkmar Denner, chief executive of Bosch, the private industrial conglomerate, warned in June of “increasing risks to growth” that would make it harder for the company to achieve its full year sales target.
A slowdown in China has had an impact on demand at Bosch’s Rexroth drive and control technologies subsidiary and the company is now in talks about the possibility of introducing short-time working at a plant in Schweinfurt.
Indeed, rather than lay-off workers, some German companies are again making use of short-time working subsidies under the government’s Kurzarbeit programme that was used widely by companies in the 2008-09 crisis.
General Motors’ Opel unit and Ford have announced production cuts at German plants in response to a sharp downturn in the European car market.
Meanwhile, ThyssenKrupp has cut the working hours of some employees at its European steel unit the end of the year in order to preserve profitability, as prices for its products have fallen below cost.
“Others asked why are you doing this instead of filling order books? But it makes no sense to operate at higher capacity and make losses,” says Heinrich Hiesinger, chief executive.
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