German firms eye investment in crisis-battered euro states

Crisis vs Opportunity

By Annika Breidthardt

German companies are setting their sights on southern Europe as fears of a euro zone breakup fade and economic reforms transform the crisis-battered region into an attractive place to invest once again.

Countries like Portugal, Italy, Greece and Spain are still struggling with deep recessions and high unemployment but have also attracted attention for the opportunities they present, not just the risks.

Strong companies are attracting interest among the "Mittelstand", medium-sized and often family-owned manufacturing firms to which Germany owes much of its exporting prowess.

That is in large part due to the economic and labour market reforms bailout countries have been forced to implement - making it easier to hire and fire and reducing wage costs - which less stricken countries such as France have been slower to embrace.

"For financially strong German Mittelstand firms, the crisis is turning out to be an opportunity. They are increasingly active with acquisitions in Spain," said Christoph Himmelskamp, a consultant at Roedl & Partner who advises smaller German firms on deals with Spanish counterparts.

Himmelskamp says he has seen a 30 to 40 percent increase in German acquisitions of Spanish firms since 2009, when the euro zone debt crisis first flared in Greece.

"The mood was subdued when there was speculation Spain could leave the euro. Some of our clients started putting the brakes on transactions ... Once that discussion ended, investment returned."

German firms are buying up strong competitors, clients or suppliers at a time when those companies are struggling to stay afloat through years of recession in their home markets and as shaky banks restrict access to credit.

AZ Group, a German fittings maker, bought Italian competitor Fiber in 2012, when insolvency loomed under its previous owner.

German material producer SGL Carbon bought Portugal's fibre maker Fisipe last year.

And Happich, an interior outfitter of buses, acquired its rival Auto Carrocerias Riu last year. A previous attempt failed when the Barcelona-based firm decided to seek a Spanish buyer which never materialised.

Himmelskamp's firm is currently closing a deal where a German buyer is taking over a Spanish rival in Madrid. While these firms rarely publish the amount they pay for acquisitions, Himmelskamp said the price tag was in the low double-digit million euros range.

A study by DZ bank showed last year that one in four Mittelstand firms already present in euro zone crisis countries was willing to invest more there, in contrast with 14 percent of all Mittelstand firms.

MOVEMENT THROUGH REFORMS

What makes southern Europe alluring is the benefits from tough austerity measures and reforms that euro zone policymakers, led by Germany, have pushed for in return for financial bailouts.

In a crisis that started in Greece in 2010, five euro zone countries have now received rescue money on the condition they slash their budgets and reform their economies.

Spain was handed almost 40 billion euros to recapitalise its banking sector after a real estate bubble burst. Portugal was given 78 billion euros in a bailout in 2011, and Ireland was handed 85 billion euros. Cyprus is the latest recipient.

Stringent reforms were demanded in return in all cases.

Unit labour costs, often used as a gauge of competitiveness, have declined every year since 2009 in Spain, Portugal and Greece. In Germany, they are forecast to have inched up from 2009 levels in 2012, according to Eurostat data.

"There is movement in these countries. What should we wait for? For these countries to get organised and for everyone else to notice it, too?" said Michael Kleinbongartz, who runs a family-owned German Mittelstand firm in its fourth generation.

"We want to be in the midst of it when something is moving and we want to be a part of it," he added, speaking from the western town of Remscheid where his firm Kukko is based.

Kleinbongartz's company, with annual sales of 30-40 million euros in 110 countries, makes extractors and pullers used for repair in the manufacturing industry - often highly complex toolsthat require explanation and servicing, he says.

He wants to do away with the wholesalers in these crisis economies and has recently opened a one-man office in Italy and cut out middlemen in Portugal and Spain.

"Many countries have terrible (economic) structures from a German point of view. We are noticing right now that the collapse of these structures is opening up opportunities in these countries for us," said Kleinbongartz.

Even if it is too early for hard data to prove a trend, these are early signs that investment is returning to Europe's periphery, some of which are struggling with youth unemployment above fifty percent.

"You shouldn't underestimate that what's happening in these euro zone countries is quite dramatic," said Michael Heise, chief economist at German insurer Allianz.

"The reforms Germany is pushing for there will massively strengthen these countries' competitiveness compared to Germany. It's not a surprise German companies say Europe is interesting."

Walther von Plettenberg, head of the German Chamber of Commerce in Spain, says rising productivity is one of the big advantages for Spanish companies.

"Spain is shifting back into focus again, especially against the backdrop of falling unit labour costs," von Plettenberg said. He expects the German and French car industries to invest more than 3 billion euros in Spanish production sites in coming years.

Volkswagen said early this year it would invest 785 million euros ($1 billion) in a plant in northern Spain over the next five years, the third carmaker in recent months to boost investment in the country.

Unlike German politicians, who have been greeted in some southern European states with Nazi images and whose insistence on austerity is blamed for unemployment and economic malaise, German firms are often welcomed with open arms.

"It is not like the Germans come and, like locusts, attack the Spanish and Italian companies," said Himmelskamp at Roedl & Partner.

"More often than not the companies have known one another for a long time, and the southern European ones want to be bought. They are the ones taking the initiative because they need money."