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March 24, 2014

German Engineering & Construction: staying competitive in a volatile environment

Posted by Gerald Ondrey

The member companies of the Large Industrial Plant Manufacturers ́ Group (AGAB) at the German Engineering Federation (VDMA; Frankfurt am Main, Germany; booked orders worth €21.2 billion in 2013, a 3% increase year-on-year (2012: €20.5 billion). The industry is continuing to experience a fundamental shift in the business environment.

“To an increasing extent, customers expect suppliers to take total responsibility. The number of medium-size projects is generally declining and competition from Asian plant manufacturers is growing at an enormous rate,” reported Helmut Knauthe, AGAB spokesman and chief technology officer at ThyssenKrupp Industrial Solutions AG, as the organization released its latest status report in Frankfurt. The challenges in the global project business can be summarized as follows: internationally competitive pricing, faster completion times as well as project execution and service delivery with a global horizon. This greatly increases pressure for globalization.

While demand in foreign markets stagnated in the current business environment, domestic order intake rose by 15% to €4.5 billion (2012: €3.9 billion). However, the upturn is due exclusively to large orders for wind parks. “As a consequence of the new German energy policy which has resulted in massive expansion of renewable power generation, fossil-fueled power plant operators are reluctant to invest,” explained Knauthe. “They have an urgent need for planning reliability. Essential steps would be a quick reform of the Renewable Energy Act in harmony with European law and the development of a effective electricitiy market design.”

Total foreign new order intake totaled €16.7 billion compared to €16.6 billion in 2012. The pick-up in demand was particularly noticeable in the industrialized nations. Projects in the chemical and energy sectors — triggered by the shale gas boom in the U.S. — drove order intake volumes to a new record level in the North American business. AGAB member companies reported an increase in orders from Western Europe for the first time since 2008. “The fact that large orders were also reported from South European countries was particulary encouraging,” observed Knauthe. Deliveries of large orders for the metallurgy industry in Portugal and Greece are examples of this.

In contrast, the shift in demand to emerging markets did not continue. Exchange rate turmoil, trade balance crises and political conflicts cast a shadow over economic conditions in some regions. This had a noticeable effect on German large industrial plant manufacturers primarily in North Africa, South America, Eastern Europe and the Middle East. China and India on the other hand remained core markets for the industry. Order intake exceeded a billion euros in each of the two countries. The continuing need for industrial development remained unchanged, resulting in around 40 large orders for power stations, chemical plants and steel factories.

If German companies are to retain their role in worldwide industrial infrastructure development and contribute to the maintenance of basic services and the development of high-tech production, Hermes export credit policy must reflect the structural change which is taking place in the large industrial plant manufacturing industry. “It takes too long for German suppliers in international markets to receive the binding export credit guarantees they need during the vital acquisition phase on difficult projects,” reported Knauthe. In addition, there is a need to reassess eligibility for coverage when a significant portion of the products and services provided are foreign sourced. This is a normal aspect of the business because obviously the facilities and equipment can only be finally installed on site in the foreign country.

Attempts are underway in labor market policy to regulate temporary work and contract labor. It is important to realize however that temporary work give suppliers the flexibility they need in the cyclical project business. This flexibility should be retained in its current form.

Market expectations in the large industrial plant manufacturing industry are subdued. For 2014, the industry expects that growth in order intake will stagnate and remain at the previous year’s level. While the year ahead promises to be difficult in some of the emerging markets such as Turkey, India, Brazil and South Africa, the outlook for Western Europe and the U.S. in particular remains positive. In tough market conditions, the service business gives companies opportunities to apply their process know how and to stabilize turnovers over the course of the economic cycle. “Along with technological expertise, service expertise is an additional factor which helps companies to differentiate themselves, particularly from Asian competitors who are becoming an increasing challenge,” observed Knauthe. The AGAB Spokesman does not expect order intake to increase significantly until 2015 or perhaps even 2016.


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