German Industry Powerhouse Shaken to Core by War in Ukraine

Germany’s industrial base, just emerging from pandemic and unprecedented supply-chain challenges, is taking another beating with Russia’s war on Ukraine hitting its powerhouse car, chemical and precision-machinery manufacturers.

As the conflict pushes energy costs to new heights and a wave of inflation builds, scores of companies including BMW AG, BASF SE and ThyssenKrupp AG have warned their earnings will slip while others declined even to offer a prediction. Economists have slashed growth forecasts.

“If the war drags on, it would seriously threaten a world order that has brought freedom and prosperity to many parts of the world over the past decades,” Herbert Diess, Volkswagen AG’s chief executive officer, said this month at the company’s annual earnings press conference. “Europe would suffer the most in such a scenario.”

In Berlin, the government has acknowledged the depth of the predicament, but its options -- both economic and political -- are limited by decades of energy policy that have left Germany among Europe’s most heavily dependent nations on Russian gas and oil. Even before the invasion, Germany’s energy-intensive industry base faced momentous shifts with the planned exit from nuclear and coal alongside Europe’s highest electricity costs.

Economy Minister Robert Habeck has set up a task force to gather data from industry on gas and electricity use and prices, production plans, supply bottlenecks and reliance on Russian energy.

On Friday, Habeck, who’s been moving to lock in other energy sources, said Germany wants to end Russian gas imports by mid-2024. Habeck led a group of executives from firms including BASF, Deutsche Bank AG, Commerzbank AG and RWE AG to Qatar and UAE last week to secure shipments of liquefied natural gas.

But the moves can’t provide the immediate relief firms are seeking, and signs are building that the war could cause lasting economic pain to Germany’s export-driven manufacturers riding high for years on demand from China and efficient supply chains. Finance Minister Christian Lindner has warned Germany is in danger of stagflation, when high inflation persists alongside an economic slowdown.

A range of gauges have turned gloomy in a country that depends on its manufacturing sector to keep humming along. Goods production accounts for about 22% of Germany’s economic activity, compared to 11% in France.

Kiel Institute cut its 2022 growth outlook for Germany by nearly half to 2.1% as shock waves from the war offset resurging demand following the depth of the pandemic alongside inflation accelerating to 5.8%, the highest level since the country’s 1990 reunification. An index of German manufacturing sank further in March, and a key business climate survey fell by a record. Even so, businesses as well as the broader public are strongly supportive of are strongly supportive of sanctions against Russia.

Germany’s coalition government reached a deal Thursday for its second package to ease the burden of energy costs, bringing the total relief spending to about 30 billion euros ($33 billion). But there’s still no cohesive plan to head off a crisis that’s reverberating through so many layers of the economy, said one official, who spoke on condition of anonymity.

“With skyrocketing prices for energy and commodities, our main business right now is survival and the preservation of jobs, and no longer making profit,” said Ralf Stoffels, head of BIW Isolierstoffe GmbH, a mid-sized silicon producer in Germany’s former industrial heartland North Rhine Westphalia.

Stoffels isn’t alone. According to a survey of 3,700 companies by business lobby DIHK, 78% reported that the war was hurting their business, and more than half complained about rising prices or disrupted supply chains.

“What hurts us most are electricity prices,” said Simon Eickholt, managing director of Kern Microtechnik GmbH, which makes precision milling machines. The firm’s energy costs have roughly doubled, he said.

Supply chain disruptions and raw material costs are also weighing on Kern, which has about 40 million euros in annual sales. The company’s mechanical engineering business receives several notices each week of longer delivery times and price hikes of as much as 15%, Eickholt said.

Steffen Auer, managing director of steel trader Schwarzwald Eisenhandel GmbH & Co KG, said prices “are completely crazy” after the price per ton of sheet metal nearly doubled 2,200 euros from within a week, forcing the company into hiking prices almost daily.

“Some of our customers can’t pay those prices,” said Auer.

Russia supplies about two-thirds of Germany’s gas, half of its coal and roughly a third of its oil. The biggest worry for businesses in Germany is right now a possible shutdown of Russian energy supplies – either by President Vladimir Putin or the European Union.

Speaking Friday, Habeck underscored Germany’s predicament.

“Even if we become less dependent on Russian imports, it is too early for an energy embargo at this point in time,” Habeck said. “The economic and social consequences would still be too serious.”

So far, the EU is refraining from cutting off Russian gas and oil, recognizing that such a move would send shockwaves through the continent. If Europe were to do so, BIW Isolierstoffe’s Stoffels expects his firm would have to shut down, rippling through to manufacturers such as carmakers who depend on his silicon.

“We face the danger of not having enough energy to keep up our production, although we produce something which is needed in all kinds of sectors,” said Stoffels.