Location conditions remain a massive problem for SMEs

After a difficult year in 2023, the situation remains tense according to the ArGeZ. For investments in electromobility to pay off, production figures need to develop much more dynamically. Location conditions remain a massive problem for SMEs. The newly elected EU Commission must ensure growth with an industrial strategy and less regulation.

At the end of 2023, German suppliers are facing a significant drop in production and turnover. While production fell by 4.8 per cent, companies generated sales of 240 billion euros, around 3.2 per cent less than in the previous year. This development is subject to further rising producer prices due to inflation-related wage cost increases and lower capacity utilisation. Following a double-digit increase in 2022, these prices rose again, although the momentum slowed with an increase of 2.9 per cent. The very weak demand in some areas led to a continuous decline in capacity utilisation over the course of the year, which is problematic given the high cost pressure and important investment decisions. While capacity utilisation still averaged 81% in 2022, it averaged just 76.6% last year.

The data makes one thing clear: "German suppliers have had a difficult year in 2023 and are in a critical phase in spring 2024," says Christian Vietmeyer, spokesperson for ArGeZ.

While the signs for 2024 were pointing towards recovery for a long time, the forecasts for economic development have been successively adjusted downwards in recent months. As a result, SME suppliers are starting the year with no order backlog and no prospect of an impetus in demand in the near future. This is also reflected in the current data. Production in the first two months of the year fell by 4.9 per cent compared to the same period last year, while turnover was around 4.1 per cent lower. In view of the shortage of skilled labour, which will worsen dramatically in the coming years, SMEs are trying to retain employees despite this difficult situation. With around 921,000 employees, this was largely successful last year. In February 2024, however, the number fell by 1.8 per cent compared to the previous year.

The mood among German suppliers is correspondingly poor. At the end of the first quarter, the seasonally adjusted ifo business climate of ArGeZ companies was clearly in negative territory at minus 23.1 points. While sceptics have predominated in terms of expectations for the next six months since the outbreak of the war in Ukraine, the assessment of the current business situation has taken a remarkable downturn. Within the space of a year, the balance of good/bad assessments by companies has turned into the red. From plus 14.6 balance points in March 2023, the situation assessment worsened noticeably to minus 17.7 points in March 2024. Not even one in five companies describes the current business situation as "good". Worse values in the recent past can only be found during the pandemic and the global financial crisis. While these were both exogenous shocks, today the question arises of a structural weakness of Germany as a business location against the backdrop of the transformation.

For medium-sized automotive suppliers, Germany as a production location is even more important than for large customers. However, car production in Germany has been declining for years, from 5.6 million cars and vans in 2012 to 4 million units at best. In the first quarter of 2024, only just under 1 million cars were built in Germany. At the same time, the production of German car manufacturers abroad has increased to over 10 million vehicles. This creeping deindustrialisation in the automotive sector is leading to declining call-off figures, especially for smaller suppliers, because more and more vehicles are being purchased locally abroad and not every supplier can go abroad.

In this scenario of declining demand, many suppliers continue to struggle with costs that are too high by international standards. Even if the inflation rate itself falls, the inflation-related cost increases from the past are still there. Labour costs are very high by international standards, partly because the increases in recent years have not been offset by productivity gains. In addition, employees are more frequently absent due to illness or retire before reaching retirement age. And recruiting new employees continues to be extremely difficult.

Furthermore, the problem of high energy prices has not been solved. The reduction in exchange prices for electricity and gas and the promised reduction in electricity tax are deceptive. The price level for electricity and gas, including grid fees and other levies, is still double to triple that of China, France and the USA, for example. It should not be overlooked that grid fees rose significantly at the turn of the year after the federal subsidy for transmission grid fees was cancelled. The continuing high energy prices are hitting energy-intensive companies at the beginning of the automotive supply chain with full force. However, the industrial heating processes involved in the manufacture and processing of vendor parts, e.g. made of metal, plastic, rubber or textiles, require a lot of energy. This also applies to gas and other fossil fuels as long as alternatives such as hydrogen are not available. If these costs cannot be passed on in the market, liquidity and equity will soon melt away. Fairness and partnership in the supply chain are therefore more necessary than ever. In this environment, in which costs continue to rise, the legislator has unfortunately still not found any answers to the dramatic increase in competitive disadvantages.

The German supplier industry also sees itself as a driver of innovation for the transformation of the mobility sector and is a pioneer in climate protection and sustainable production. It has invested heavily in the development of new technologies and brought new products, e.g. for electric vehicles, to series maturity. However, it is now realising that the manufacturers of electric vehicles are not committing to purchase the announced quantities to the extent expected. In the first quarter of 2024, new registrations and production figures for BEVs in Germany fell compared to the same quarter of the previous year, which is certainly also due to the cancellation of subsidies. However, many suppliers have made considerable advance payments and are now not receiving the necessary returns because BEV production is not developing to the extent that would be necessary. This slowdown in electromobility and the still very volatile ordering behaviour of OEMs and large system suppliers for other vehicle types are putting many medium-sized suppliers in a tight spot. This also applies to other customers, e.g. from the wind power industry. At the moment, suppliers are realising that the transformation is not a successful business model.

The SME supplier industry is calling on the European Commission, which will be newly elected in June 2024, to swiftly present and implement a valid industrial strategy that will make Europe competitive with the USA and Asia again in the long term. The Green Deal and sustainability issues, such as sustainability reporting and supply chain due diligence obligations, must no longer dominate the political agenda in Brussels alone. It is now a matter of giving industry the right of way so that it is not left behind. Suppliers are already realising that it is becoming more difficult for them to obtain financing from their principal banks. However, it is unacceptable for politicians to make access to finance more difficult for European companies, while at the same time industrial value creation is growing strongly in other regions of the world. Christian Vietmeyer, spokesperson for ArGeZ: "The EU taxonomy must not be allowed to happen, as it will lead to the deindustrialisation of the EU without actually promoting climate protection."