German engineering feels euro heat
BERLIN – The euro’s strength against the dollar and the yen has hurt the price competitiveness of German engineering firms and is curbing their earnings, the head of the country’s plant and machinery makers’ association VDMA said. «The strong euro is having more of an impact than a lot of people realize at the moment,» Dieter Brucklacher, president of VDMA, said in an interview with Reuters. «Currency problems are mentioned time and again by VDMA members at all our meetings.» «The excessive appreciation of the euro, particularly against the US dollar and the yen – the currencies of our two most important competitor nations – is clearly worsening our industry’s price competitiveness,» he added. «And that obviously puts a squeeze on earnings.» Engineering firms have been at the forefront of export growth in Germany, the world’s biggest exporter of goods since 2003. The success has been fueled by strong demand from fast-growing economies, such as China and oil-producing nations. But the euro has gained more than 5 percent against the dollar and over 12 percent against the yen in the past year. Brucklacher said many firms represented by the VDMA, whose members include Siemens, MAN, Volkswagen, ThyssenKrupp and DaimlerChrysler, were enjoying strong growth. «But it doesn’t look quite so rosy on the cost side,» he said. «Aside from the exchange rate burdens and the exploding cost of materials, we’re also feeling pressure on labor costs. That’s further worsening our competitive position.» Engineering and metalworking industry unions and employers last month agreed to a 4.1 percent pay rise for the 3.4 million workers in the sector, a deal the VDMA criticized. Brucklacher said he still expected the industry to create jobs in 2007, though he added that firms struggling to make a profit would be hardest hit by the higher costs. Oil boost Another factor weighing on firms’ plans are rising borrowing costs. Last week the European Central Bank raised its main lending rate by a quarter percentage point to 4 percent – a close to six-year high – and has signaled further increases may lie ahead. Brucklacher was relaxed about current eurozone rates. «We’re not of the view that the interest rate level reached so far will hinder investment by German and European clients of German machinery and plant makers,» he said. Crude oil prices have also crept up since the end of 2006, though Brucklacher said high energy costs were more of an advantage than a disadvantage to the sector. «Because all sectors directly afflicted by (high oil prices) increasingly need to invest in new machinery with greater energy efficiency, which the engineering sector provides,» he said. In addition, investment budgets among oil-producing countries have risen, boosting sales at manufacturers of equipment used to pump and refine crude oil, he added. Nevertheless, with the German economy growing 2.8 percent last year, its fastest pace since the start of the decade, plant and equipment makers have struggled to keep up with demand. A shortage of engineers, now estimated at more than 20,000, is costing Germany about -3.5 billion every year, according to the Cologne-based IW think tank. «The lack of engineers has become a brake on growth for many firms,» said Brucklacher. «They can’t deal with all the orders they could take on. That ultimately hits sales and earnings.» The VDMA raised its 2007 output growth forecast for the industry to 9 percent from 4 percent on May 31, and Brucklacher said it was too early to tell how accurate this would prove. «In view of that, both an upward or a downward correction (to the forecast) is equally possible,» he said.
