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As Europe cuts, lean Germany may be spared the worst

Richard Milne
Financial Times
30 January 2009

Liam Brewer has already embarked on the kind of restructuring that lies ahead for much of European industry this year. The managing director of Cargocare, a Dublin-based haulage company, has reduced his staff from 32 to 22 in recent months. He has also changed its business model, cutting prices in return for a reduced frequency of service.

"If everybody works together you can eliminate some things that aren't essential. Everybody has to be a bit smarter in such a recession," he says.

It is a sentiment likely to be be voiced in boardrooms across Europe in 2009, with analysts predicting millions of job losses and structural change in many industries. "Restructuring is very much the story of 2009," says Gilles Moëc, economist at Bank of America. "In 2008 we saw financial problems and lower consumer spending; in 2009 the corporate sector will be the driver of recession, with big cuts in investment and jobs."

Restructuring as it is commonly understood - a shorthand for job losses and internal reorganisations of the kind seen at Philips, Rolls-Royce, Volvo, BASF and BT - is likely to be dominant in Europe. But industries with big problems could also see structural changes such as the exporting of production out of the continent.

Mark Thomas, the head of strategy at PA Consulting and author of a new pamphlet on 'surviving and thriving in the economic crisis', says: "Restructuring will be the most visible sign of the recession. You could go from having high streets where everything is 70 per cent off to one where one in three or one in four shops is boarded up."

Hany Fam, the new head of MasterCard in the UK and Ireland, voices similar sentiments: "2009 will be challenging and I think one of the best things companies can do is quickly tackle restructuring."

Economists say German companies may escape some of the pain facing those in France, Italy, Spain and Britain, even though the German economy is expected to suffer similarly. This is because German companies restructured far more heavily in the last downturn at the start of this decade. "The corporate sector in Germany can withstand a global slowdown more easily than France, Spain or Italy," says Mr Moëc.

The Berlin government helped with labour reforms, particularly when Gerhard Schröder was chancellor, but companies played the leading role. They kept wage growth flat for almost a decade while salaries in France and Spain increased by 25-40 per cent.

Wolfgang Reitzle, chief executive of Linde, the German industrial group, likes to tell the story of when it decided to build a new factory for fork-lift trucks in eastern Europe. Trade unions found out and offered their own savings, totalling about €100m, through a combination of longer hours, lower pay and more shifts. "The German works council was very open to solutions . . . It has been much easier here than in France and Italy," he says.

Mr Moëc also points to the poor profitability of the French corporate sector and the "very painful adjustment" due in Spain but he says that companies in these countries and Italy are in a better position than they were in the recession of the early 1990s.

Berthold Leibinger, the chairman and owner of Trumpf, a German maker of laser machinery that is the world's largest machine tool company, has not seen such difficult conditions in 50 years in business. But he still uses the standard phrase of German businessmen to explain their recent success: "We have done our homework. We are better prepared and we will come out all right."

Just as some countries will be less affected, so will some sectors. Mr Thomas, looking mainly at UK companies, says utilities, healthcare and insurance will all see limited structural change, although there is the prospect of some takeover activity. Others such as builders and retailers face huge upheaval.

The car industry is also likely to be deeply affected. Carmakers have built up huge manufacturing overcapacity - especially now sales are collapsing - and pressure is likely to mount for some expensive factories in western Europe to be closed. "Some shake-out would be of enormous benefit to the companies that remain. It will be even more Darwinian than usual," says Mr Thomas. Consolidation is also likely, as shown by Fiat's agreement to acquire 35 per cent of Chrysler, the US carmaker.

The survival of the fittest is likely, over time, to lead to the disappearance of many companies either through bankruptcy or takeover. Euler Hermes, the world's largest credit insurer, is predicting a record level of business failures in Europe this year at 197,000 companies - one-third more than in 2007. For the bold and strong in sectors such as aviation or finance, however, "once-in-a-lifetime opportunities will not be scarce", says Mr Thomas - "but nor will they be easy to take."

Mr Brewer says Cargocare is in as good a shape as it can be after examining "everything, right down to the window cleaner". Looking out into the slate-grey Dublin sky, he is pessimistic about the prospects for any company that does not embrace restructuring this year.

"Some people haven't done it but there will be a price to pay for that," he says. "Those who don't make adjustments are without hope." 


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