Global risks threaten to choke off Europe’s growth engine

Bloomberg

The command center at the Otto Junker GmbH metals plant stands in sharp contrast to the noisy and smelly factory floor, where until just a few weeks ago workers operated various machines individually. The new digs are quiet, there’s no oil stench, and there’s even room for a coffee maker. The downside? The control room boss may end up drinking that coffee alone, because running the machines requires just one person, down from about a half-dozen.
The 95-year-old company—in the town of Simmerath, just a few hundred meters from the Belgian border—is preparing for storm clouds gathering over German industry. Chief executive officer Bernward Reif says Otto Junker, which builds furnaces that can melt tons of metal in minutes, must adapt to a changing economy by improving the productivity of its 480 employees. That has spurred him to propose initiatives like building the control room and shifting more work to its facility in the Czech Republic, while investing in technologies such as 3-D printing and wireless apps.
“The environment is more volatile,” Reif says as he passes freshly cast metal pumps that are still too hot to touch. “It means we have to become more productive and flexible.”
Like Junker, companies from tiny family-owned engineering specialists to global giants such as Volkswagen are doing what they’ve long done: transforming themselves to meet the demands of a shifting global order. But this time, the stakes seem higher as the world is riven by trade conflicts and as value moves from old-school engineering—Germany’s traditional strength—to digital technologies.
The country’s export-focussed industrial base, the motor of its growth, today is becoming a disadvantage. Faced with the challenges posed by Donald Trump’s America First protectionism and China’s slowdown, the country is at greater risk than, say, neighboring France, because of Germany’s greater reliance on selling manufactured goods.
The longer term challenges may be even more vexing. Transport infrastructure is crumbling, data networks are patchy, the population will start shrinking in the coming decade, and the crucial auto industry risks getting sidelined by the emergence of self-
driving electric cars.
“On top of the normal level of investment, they’ve got the additional demand of trying to find the right answer for these new technologies,” says Peter Wells, a professor at Cardiff Business School who studies global auto manufacturing. “German industry has been quite firmly in denial about the prospects for electric cars,” and now is trying
to catch up.
The strains are undeniable. The European Central Bank announced a new stimulus program and cut its 2019 forecast, predicting expansion of just 1.1 percent. Germany narrowly avoided a recession at the end of 2018 after automotive bottlenecks from emissions changes caused a contraction in the third quarter, and growth this year is forecast to be the weakest since 2013—spurring the government to propose a national industrial policy for the first time in Chancellor Angela Merkel’s 14 years in power.
Still, Germany has a strong track record of adaptation. It emerged from the ashes of World War II to become the industrial powerhouse of Europe, and the integration of the communist East after the fall of the Berlin Wall 30 years ago has been largely successful.