At the end of 2023, German suppliers faced a significant decrease in production and revenue. Production fell by 4.8 percent, and companies generated about 3.2 percent less revenue at 240 billion euros than the previous year. This development was subjected to inflation-related wage cost increases and lower utilization, further increasing producer prices.
Revenue Declines by 4.1 Percent in 2024
While signs pointed to a recovery in 2024 for a long time, forecasts for economic development have been progressively adjusted downward in recent months. According to ArGeZ, small and medium-sized suppliers start the year without a backlog of orders and without prospects for immediate demand impulses.
In the first two months of the year, production decreased by 4.9 percent compared to the same period of the previous year, while revenue fell by approximately 4.1 percent.
Skill Shortage Intensifies
The skill and labor shortage is expected to worsen in the coming years. Small and medium-sized businesses are thus trying to retain their employees. With about 921,000 employees, this was predominantly successful last year. Nevertheless, in February 2024, the number fell by 1.8 percent compared to the previous year.
The mood among German suppliers is correspondingly poor. The seasonally adjusted ifo business climate for ArGeZ companies is significantly negative at the end of the first quarter, with minus 23.1 points.
Additionally, employees are more frequently absent due to illness or retiring before reaching the age of retirement. And recruiting new employees continues to be extremely difficult.
Pessimistic Assessment of the Current Business Situation
Within a year, the balance of good-bad assessments of the companies turned negative. From plus 14.6 balance points in March 2023, the assessment of the situation increasingly worsened to minus 17.7 points in March 2024. Not even one in five companies describes the current business situation as "good". Worse values are only found in the recent past during the pandemic and the global financial crisis.
Decline in Automotive Production in Germany
For small and medium-sized automotive suppliers, the production location in Germany is even more important than for the large buyers. However, automotive production has been declining for years, from once (2012) 5.6 million cars and small transporters to now about 4 million units.
In the first quarter of 2024, just under 1 million cars were built in Germany. At the same time, the production of German automotive corporations abroad has increased to over 10 million vehicles. This gradual deindustrialization in the automotive sector leads to declining call-off numbers for smaller suppliers because increasingly, local purchases are made abroad, and not every supplier can move abroad.
In this scenario of decreasing demand, many suppliers struggle with internationally high costs. Although the inflation rate itself is falling, inflation-related cost increases from the past are still present. Labor costs are very high in an international comparison. Increases in recent years have not been offset by productivity gains.
Comparatively High Energy Prices
The reduction in market prices for electricity and gas and the anticipated reduction in the electricity tax are deceptive, according to ArGeZ. The price level for electricity and gas, including network charges and other levies, is still two to three times as high, for example, compared to China, France, and the USA. It should not be overlooked that network charges increased significantly at the turn of the year after the federal subsidy for transmission network charges was eliminated.
High energy prices hit energy-intensive businesses, which are at the beginning of the automotive supply chain, with full force. Industrial heating processes in the manufacture and processing of supplier parts such as metal, plastic, rubber, or textiles require a lot of energy. This also applies to gas and other fossil fuels as long as alternatives like hydrogen are not available.
If these costs cannot be passed on in the market, liquidity and equity quickly dwindle, says ArGeZ. Fairness and partnership in the supply chain are more necessary than ever. In an environment where costs continue to rise, legislators have yet to find answers to dramatically increasing competitive disadvantages.
Electromobility Not Developing as Hoped
The German supply industry sees itself as a driver of innovation for the transformation of the mobility sector and is a pioneer in terms of climate protection and sustainable production. It has invested extensively in the development of new technologies and brought new products, e.g., for electric vehicles, to market readiness.
However, it now finds that manufacturers of electric vehicles are not taking up the announced quantities to the expected extent. In the first quarter of 2024, new registrations and production numbers for BEVs in Germany fell compared to the same quarter of the previous year, which is also due to the elimination of subsidies.
Many suppliers have made significant upfront investments—without the necessary return because the production of BEVs has not developed as needed. This cooling in electromobility and the volatile ordering behavior of OEMs and large system suppliers for other vehicle types are putting many small and medium-sized supplier businesses in distress.
Demands on the EU Commission
The small and medium-sized supply industry calls for the newly elected EU Commission in June 2024 to quickly present and implement a valid industrial strategy that makes Europe permanently competitive against the USA and Asia.
Green Deal and sustainability topics, such as sustainability reporting and supply chain due diligence obligations, should no longer dominate the political agenda in Brussels. It is now about giving the industry priority to avoid falling further behind.
Suppliers already feel that their financing with local banks is becoming more difficult, according to ArGeZ. However, it should not be that politics makes it harder for European companies to access financial resources while industrial value creation in other regions of the world is growing strongly.
