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MarketScreener Homepage  >  Equities  >  Xetra  >  Deutsche Bank AG    DBK   DE0005140008

DEUTSCHE BANK AG

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German Companies 'Are Losing Their Importance' as Big Names Struggle

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07/12/2019 | 05:45am EDT

By Sara Germano

BERLIN--German efficiency has taken a hit this year as many of the country's most recognizable corporate names have faced setbacks, hurt by a slowing local economy, questionable business decisions and trouble shifting to a digital world.

In the past week, Deutsche Bank AG abandoned its global ambitions and initiated layoffs, the chief executive of BMW AG said he would step down and sharp profit warnings from Daimler AG and BASF SE rattled markets.

That news followed the continuing legal woes facing Bayer AG for its acquisition of Monsanto, the maker of weedkiller Roundup, and continued fallout for auto makers from the diesel-emissions scandal and depressed global new car sales. Meanwhile, German blue chips from software maker SAP SE to industrial giant Thyssenkrupp AG have announced a combined tens of thousands of job cuts this year.

One in three large public companies in Germany's DAX index have reported profit warnings, job cuts or restructurings, or are dealing with legal disputes or investigations from authorities. More firms based here are slipping from the rankings of the most valuable global companies, leading consulting firm Ernst & Young to conclude this month that "German companies are losing their importance."

Some companies are facing unique challenges, but broader trends are also affecting them. Contributing to the nation's woes, analysts say, are the effects of global trade disputes on Germany's export-oriented economy, increased pressure to digitize and a degree of complacency after years of robust growth.

"There is a crisis at the moment, the German economy was so good for such a long time, people thought we'd go on and go on and go on," said Markus Schön, managing director of DVAM Asset Management in Detmold, Germany.

The economy grew just 0.7% in the 12 months through March, far behind others in the eurozone, and earlier this year Berlin slashed its forecast for 2019 growth domestic product to 0.5% from 1.8%. "German companies were not prepared for this situation," Mr. Schön said.

Key among them are the German auto makers, which were hit by a collapse in demand for diesel vehicles and a global slowdown in car sales as they are spending heavily on electric and autonomous vehicle development.

Both BMW and Daimler lowered their financial guidance this year and the latter--maker of Mercedes-Benz luxury vehicles--issued two profit warnings in the last three weeks, while Volkswagen AG said it would cut 7,000 jobs. In turn, the difficulties of large car makers have filtered down through the network of smaller suppliers and service providers whose fortunes are directly tied to the sector's health.

Volkswagen has also struggled to move beyond an emissions-cheating scandal that first surfaced in 2015. In March, the U.S. Securities and Exchange Commission sued the auto maker and former Chief Executive Martin Winterkorn for defrauding U.S. investors. And a month later, German prosecutors indicted Mr. Winterkorn and four others for fraud.

Other German firms say their problems are closer to home. Last month, days after issuing a profit warning attributed to aggressive competition from European low-cost carriers, Deutsche Lufthansa AG Chief Executive Carsten Spohr said the airline had made missteps navigating the local short-haul market, including efforts to capitalize on the 2017 bankruptcy of ex-rival Air Berlin.

"Did we underestimate the complexity? We did," he said. In an effort to reassure investors, Mr. Spohr reasserted the company's commitment to being dependable and efficient. "In the end, we're boring. We're German."

Another factor behind Germany's corporate troubles is the country's legally mandated board structure, which flanks the management board with a powerful supervisory board, half of whose members represent workers. While such checks and balances have helped maintain labor peace at large companies, they can also inhibit quick decision-making and discourage risk-taking.

"On the one hand, it can be an advantage to have a strong CEO, who can react quickly in times of crisis," said Christian Lawrence, a partner at Brunswick Group in Munich. "Whereas if you have a German system, the CEO is one of many making decisions and there must be consensus for things to be done."

Hubert Barth, chief executive of Ernst & Young Germany, said some German blue chips are stumbling over "the transformation of the economy toward more digitized business models."

On the surface, German companies and the government are adamant about their commitment to digitization. This week, German economics minister Peter Altmaier traveled to Silicon Valley to meet with executives from Alphabet Inc.'s Google, Apple Inc. and others, part of a continuing effort to raise Germany's profile in digital industry.

There is a pervasive feeling, analysts and executive say, that German companies can't keep up with the large tech giants from the U.S. and elsewhere. This is also partly attributable to strong limitations that German and European privacy laws put on companies' ability to collect, store and monetize user data.

"Tell me one company in Germany which is playing a role in platforms, the area of Facebook and Amazon," said Mr. Barth of Ernst & Young. "There's no obvious German company that plays a significant role."

At an internal Bertelsmann SE meeting in May, executives from across the media conglomerate presented their strategies for working with, and competing against, American tech firms.

"We will never be able to gather the same amount of data as Google, Facebook or Amazon," said one executive at the meeting. "This is a fact, and we just have to deal with it. They are on their own planet."

Troubles at Germany's large companies aren't a perfect guide to the health of the national economy. While the country is home to many global brands, the backbone of its industry is the vast number of small- and midsize private businesses known as the Mittelstand.

Those traditionally family-owned private firms haven't encountered the same challenges as large public companies, Mr. Lawrence said, in part because their management system is less complex and they aren't subject to the restrictions of the public market.

But this has brought other negative consequences. According to a report from the International Monetary Fund this week, about 60% of corporate assets and profits in Germany are generated by privately-owned firms, contributing to rising wealth inequality in Germany, the strongest in Europe behind the Netherlands and Austria.

"The concentration of privately held and publicly-listed firm ownership in the hands of industrial dynasties and institutional investors is especially prevalent in Germany," the IMF report said.

Write to Sara Germano at sara.germano@wsj.com

Stocks mentioned in the article
ChangeLast1st jan.
BASF SE 1.16% 56.85 Delayed Quote.-5.88%
BAYERISCHE MOTOREN WERKE AG (PREFERENCE) 0.79% 48.32 Delayed Quote.-22.19%
BMW AG 1.26% 59.56 Delayed Quote.-15.76%
DAX 1.31% 11562.74 Delayed Quote.9.51%
DEUTSCHE BANK AG 4.71% 6.16 Delayed Quote.-11.58%
SAP AG 1.48% 107.3 Delayed Quote.23.43%
THYSSENKRUPP AG 1.21% 9.524 Delayed Quote.-36.42%
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Financials (EUR)
Sales 2019 23 756 M
EBIT 2019 -1 297 M
Net income 2019 -5 289 M
Finance 2019 10 342 M
Yield 2019 -
P/E ratio 2019 -2,59x
P/E ratio 2020 32,5x
EV / Sales2019 0,10x
EV / Sales2020 -0,40x
Capitalization 12 720 M
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Number of Analysts 27
Average target price 6,60  €
Last Close Price 6,15  €
Spread / Highest target 46,5%
Spread / Average Target 7,48%
Spread / Lowest Target -34,9%
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Christian Sewing Chief Executive Officer
Karl von Rohr Co-President & Chief Administrative Officer
Garth Ritchie Co-President & Co-Head-Corporate & Investment Bank
Paul Achleitner Chairman-Supervisory Board
Frank Kuhnke Chief Operating Officer & Member-Management Board
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