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CHINA

China woos Germany’s heirless ‘Mittelstand’

The small and mid-sized companies that form the backbone of the German economy are increasingly being snapped up by foreign - predominantly Chinese - investors as the families that run them find no suitable heirs to pass their businesses on to.

China woos Germany's heirless 'Mittelstand'
German engineering firm Putzmeister was purchased by Chinese investors in 2012. Photo: DPA

Two years ago, engineering firm Putzmeister passed into Chinese hands after the founding family was unable to find a successor.

The takeover by Chinese giant Sany for around half a billion euros was one of the biggest investments by China in Europe at the time. But it was just the tip of the iceberg.

"Technology firms, hidden champions with problems finding an heir, that's what Chinese investors are looking out for," said Peter Englisch of EY (formerly Ernst & Young).

"Every private equity fund in the world currently has its eyes fixed on this market," the expert said.

"German firms, and particularly family-run ones, are the ideal takeover targets for Chinese investors at the moment," said Stefan Heidbreder, head of the federation of family-owned businesses.

Around 75 percent of so-called SMEs — small and medium enterprises, or, to use the German term, "Mittelstand" — are in family hands. Specializing in high-tech industrial applications, the sector is known for its innovation and is the driving force behind German exports.

But the tradition of succession where the father hands over the business to his son or daughter is crumbling.

Detlef Keese, of the Institute for SME Research at Mannheim University, estimates that fewer and fewer companies are remaining in family hands: the proportion has fallen from 70-75 percent in the 1990s to around 50 percent at present.

The German association of chambers of commerce and industry, DIHK, sees it as a reflection of the ageing population. But it is also a social phenomenon,
it says.

"In a lot of cases, the children are reluctant to step in to their fathers' shoes, because they have seen what toll it has taken," said Arist von Schlippe, psychologist and lecturer in the management of family-run firms at the university of Witten.

"They have a different idea of life, they want a different balance," he said.

In addition, a lot of companies are in a phase "where it's not just entrepreneurial drive and spirit that is required, but also management competence, which the young people simply don't have, or which their fathers believe that they don't have," von Schlippe said.

The first wave of post-war entrepreneurs passed on the torch in the 1970s and now it is the grandchildren's turn, the expert said.

And in the case of those companies set up in eastern Germany after the fall of communism, it is the time for the first generational changeover.

In the absence of a successor, it is sometimes the non-family management which takes over by way of a management buyout, with the financial backing, say, of a private equity fund.

But the investment funds themselves sometimes act on their own. And, in other cases, the company is simply snapped up by a rival.

From this point of view, Chinese investors can often appear to be the more attractive option. They are reliant on the current workforce and frequently hold on to the existing management teams, said Heidbreder.

Another attraction is that Chinese investors are more willing to pay higher prices, said Jens-Peter Otto, who heads the Chinese-German business group at
PWC.

According to data compiled by EY, the volume of Chinese direct investment in Germany rose from €46 million to €68 million between 2012 and 2013.

German fork-lift truck manufacturer Kion, semi-conductors specialist Prema, car door latch maker Kiekert, and concrete pump maker Schwing are all now in Chinese hands.
 

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ECONOMY

German consumer prices set to rise steeply amid war in Ukraine

Russia's war in Ukraine is slowing down the economy and accelerating inflation in Germany, the Ifo Institute has claimed.

German consumer prices set to rise steeply amid war in Ukraine

According to the Munich-based economics institute, inflation is expected to rise from 5.1 to 6.1 percent in March. This would be the steepest rise in consumer prices since 1982.

Over the past few months, consumers in Germany have already had to battle with huge hikes in energy costs, fuel prices and increases in the price of other everyday commodities.

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With Russia and Ukraine representing major suppliers of wheat and grain, further price rises in the food market are also expected, putting an additional strain on tight incomes. 

At the same time, the ongoing conflict is set to put a dampener on the country’s annual growth forecasts. 

“We only expect growth of between 2.2 and 3.1 percent this year,” Ifo’s head of economic research Timo Wollmershäuser said on Wednesday. 

Due to the increase in the cost of living, consumers in Germany could lose around €6 billion in purchasing power by the end of March alone.

With public life in Germany returning to normal and manufacturers’ order books filling up, a significant rebound in the economy was expected this year. 

But the war “is dampening the economy through significantly higher commodity prices, sanctions, increasing supply bottlenecks for raw materials and intermediate products as well as increased economic uncertainty”, Wollmershäuser said.

Because of the current uncertainly, the Ifo Institute calculated two separate forecasts for the upcoming year.

In the optimistic scenario, the price of oil falls gradually from the current €101 per barrel to €82 by the end of the year, and the price of natural gas falls in parallel.

In the pessimistic scenario, the oil price rises to €140 per barrel by May and only then falls to €122 by the end of the year.

Energy costs have a particularly strong impact on private consumer spending.

They could rise between 3.7 and 5 percent, depending on the developments in Ukraine, sanctions on Russia and the German government’s ability to source its energy. 

On Wednesday, German media reported that the government was in the process of thrashing out an additional set of measures designed to support consumers with their rising energy costs.

The hotly debated measures are expected to be finalised on Wednesday evening and could include increased subsidies, a mobility allowance, a fuel rebate and a child bonus for families. 

READ ALSO: KEY POINTS: Germany’s proposals for future energy price relief

In one piece of positive news, the number of unemployed people in Germany should fall to below 2.3 million, according to the Ifo Institute.

However, short-time work, known as Kurzarbeit in German, is likely to increase significantly in the pessimistic scenario.

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