Herbert S Traub  12/16/2008 10:02:48 AM  From  DB/Inbox:  Herbert S Traub

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UNCLAS        MUNICH 00396
CXMUN:
    ACTION: POL
    INFO:   PA CONS CG FCS RSO JIS MGT

DISSEMINATION: POL /1
CHARGE: PROG

APPROVED: CG: EGNELSON
DRAFTED: POL: HSTRAUB/HKRUEGE
CLEARED: BERLIN ECON:IKOLLIST, JMR MUN CONS:DC, FCS: IC (SUBS)

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PP RUEHC RUEKJCS RUCPDOC RUEHZG RUCNMEU RUCNFRG
DE RUEHMZ #0396/01 3510756
ZNR UUUUU ZZH
P 160756Z DEC 08
FM AMCONSUL MUNICH
TO RUEHC/SECSTATE WASHDC PRIORITY 4594
INFO RUEKJCS/SECDEF WASHDC PRIORITY
RUCPDOC/USDOC WASHDC
RUEHZG/NATO EU COLLECTIVE
RUCNMEU/EU INTEREST COLLECTIVE
RUCNFRG/FRG COLLECTIVE

UNCLAS SECTION 01 OF 03 MUNICH 000396 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON GM
SUBJECT: Germany/Economics - Mixed but Increasingly Worried Messages 
from Bavaria on the Recession 
 
REF: Berlin 1630 
 
SENSITIVE BUT UNCLASSIFIED 
 
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SUMMARY 
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¶1.  (SBU) Chancellor Merkel, ridiculed by some for her cautious 
approach to an economic stimulus package, might be half right and 
half wrong, based on analysis of the evolving situation in Germany's 
touchstone state, Bavaria.  On one hand, the graph from the November 
2008 "business sentiment indicators" study for Bavaria (published by 
Munich's Institute for Economic Research, IFO) shows an 
unprecedented vertical drop from the October figure.  Serious 
slowdowns in major industries explain the fall.  On the other hand, 
the IFO graph shows that the same firms' assessment of the current 
situation slumped, but not as much as their expectations did. 
Anecdotal evidence from leaders in business, trade organizations, 
and trade shows confirms that many Bavarian businesses are 
increasingly concerned, but not yet desperate about economic 
conditions both in Germany and in their life-giving export markets. 
The Bavarian government will advance start dates for capital 
programs in order to support the economy, which is in recession 
after coming off unprecedented highs, as confirmed by the director 
of IFO Institute in a public lecture on December 15 (reported 
septel).  End Summary. 
 
Psychology Accounts for Half of Economic Performance 
--------------------------------------------- ------- 
 
¶2. (SBU) Ludwig Erhard, the legendary Bavarian father of German 
"Soziale Wirtschaft (Social Economy)," famously pronounced that 
"psychology accounts for 50 percent of economic performance." 
Juergen Hofmann, a senior official at the Bavarian Economics 
Ministry, quoted Erhard as he showed P/E chief and Consulate 
Economics Specialist on December 10 an unpublished IFO Institute 
survey about the (1) current situation and their (2) expectations. 
Firms' assessment of the current situation slumped but not as much 
as expectations, which dropped to an unprecedented low level coming 
off an historic, exuberant high in mid-2006.  Hoffman added that 
steep declines in incoming orders were adding to the gloom. 
Although Hoffman recalled Erhard's maxim that all these negative 
scenarios bore the danger of self-fulfilling prophecies, he 
concluded that the government could not ignore the bad signs.  He 
argued that the German Federal government should take more decisive 
fiscal policy measures.  Separately, Bavarian Economics Ministry 
State Secretary Hessel told the CG on December 11 that Bavaria would 
bring forward into the first quarter of 2009 investment spending for 
infrastructure and other government projects.  This was to support 
the Bavarian economy and help it through the upcoming rough period, 
which the director of IFO, Professor Hans-Werner Sinn, confirmed in 
a public lecture in Munich on December 15 (reported septel). 
 
Bavaria's Giant Global Businesses Have Mixed Reports 
--------------------------------------------- ------- 
 
¶3.  (SBU) In Bavaria, the news from the largest Bavarian businesses 
is mixed.  BWM (cars), MAN (trucks), and Infineon (microchips) have 
taken unprecedented enforced week-long "vacations" over Christmas, 
closing factories to save money due to collapsing sales.   Workers 
at BMW and MAN are cashing in overtime hours to draw full paychecks, 
but relative to Opel, BMW remains in relatively good shape.  BMW's 
and MAN's actions will postpone layoffs or shortening of the work 
week, at least for a while.  Infineon, a Munich-headquartered 
chipmaker in trouble even before the current crisis, has put its 
Regensburg factory on short time work and is considering this 
measure for other production sites as well.   On the other hand, 
EADS (Airbus) has reported an order book with 500 million dollars 
worth of contracts.  These outstanding orders could keep Airbus busy 
for years but these are 65 percent fewer than those that Airbus had 
on the books in 2007.  There is the concern that substantial numbers 
of orders could be cancelled due to the global economy, as China is 
reported to be considering. 
 
Small and Medium-Sized Firms Still Relatively Stable? 
--------------------------------------------- ------- 
 
¶4.  (SBU) One level down, German small and medium-sized companies 
(SMEs) think of themselves as more flexible and innovative than 
their DAX-listed counterparts in adjusting to tough times, but it 
remains to be seen how they can weather the coming storm.  Consulate 
contacts around the District confirmed to us in the last weeks that 
in Bavaria, as in Germany overall, SMEs, which account for the 
majority of employment and the vast majority of businesses, would 
continue to underpin Bavarian prosperity in the long run.  Many 
smaller German businesses, which dominate niche markets and pursue 
flexibility and innovation as a matter of course, predict they will 
be able to steer their operations through the current economic 
downturn, albeit with belt tightening. 
¶5.  (SBU)  Over the past four weeks, AmConsul Munich and Embassy 
Berlin representatives discussed the economic crisis  with 
representatives from the Bavarian Economics Ministry, the Industrie- 
und Handelskammer (Industry and Chamber of Commerce), and private 
SME businesses in Bavaria.   The following three examples illustrate 
a business culture that SMEs across Germany embrace and that could 
explain, in part, the relative confidence of the Federal and 
Bavarian Governments in the longer term health of the German economy 
(reftel). 
 
a) Loewe Electronics:  Loewe is a medium-sized electronics 
manufacturer in Upper Franconia (near Bayreuth) that won business 
awards recently after surviving a crash business reform to create an 
award-winning flat screen television.  At a recent meeting with P/E 
chief, Dr. Hans Trunzer, head of the Chamber of Commerce (Industrie- 
und Handelskammer) in Bayreuth, Upper Franconia, cited Lowe as a 
perfect example of resiliency and reform.  Even though Loewe is 
publically-traded, Trunzer compared the firm to SMEs in Bavaria and 
praised it for its efficient size, flexible management and leaner 
operations. 
 
b) Diehl: Another Bavarian business example is Diehl (the 
international metal, tool, and defense firm) in Nurnberg, where 
Herbert Wust, senior executive manager, told P/E chief in early 
November that his business was holding steady, even with decreased 
orders from BMW, for whom Dhiel produces a unique gear part. 
Although Diehl is not technically an SME because of its size and 
multinational reach, Wust described a company that emphasized the 
autonomy and flexibility of its constituent parts, run from a home 
office and led by a close family team. 
 
c) E-T-A:  Bernd Ellenberger of E-T-A (the world market leader for 
circuit breakers for equipment protection, located near Nurnberg) 
told an Embassy economics specialist on December 4 that ETA is 
"still doing fine" although Ellenberger expects a "rough year" in 
¶2009.   He confirmed that the company is in good shape because it 
was able to increase its capital ratio in past years. It invests 
only its own capital, so it does not need help from banks.  When 
asked about his general impression of other SMEs in the greater 
Nurnberg area, Ellenberger said that those which have not found a 
specialized market niche might increasingly face credit problems. 
While he did not know of a particular case, he speculated that 
companies that did not increase their capital ratio during good 
times might now face difficulties in repaying credits or getting new 
money. 
 
Trade Show Attendance and Sales Predict 
Next Economic Cycle 
---------------------------------------- 
 
¶6.  (SBU) Trade shows "predict the health of the economy like 
canaries in a coal mine," Kurt Schraudy, senior executive office for 
new technology at Messe (trade fair) Munich, told P/E Chief on 
November 10.  He confirmed good participation both before and after 
the Electronica show in November; it is the main trade fair for the 
international electronics industry aimed at business, not consumers. 
 Exhibitors and visitors told him that they expected an economic 
downturn, but they were "reacting with self-confidence."  In this 
spirit, one businessman we met on the floor of the show said his 
company was aggressively seeking new markets, moving in where weaker 
competitors had abandoned the field. 
 
Business Visa Applications Holding Steady 
----------------------------------------- 
 
¶7.  (SBU) Finally, at the visa window at Consulate General Munich, 
the pace of business visa applications has not noticeably changed. 
However, a Qimonda employee (electronic component division of 
Infineon) confirmed press reports that the company is very unstable, 
and that "key employees are jumping ship."  In fact, the employee 
was in the Consulate to get a B1/B2 visa, because he feared his 
valid L-1 visa, issued in the name of Qimonda, might become invalid 
if Qimonda ceased to exist. 
 
Comment 
------- 
 
¶8.  (SBU) Looking at Bavaria as a microcosm of Germany's economy, 
one could come away with the impression that things are serious but 
not hopeless.  Trade shows, a generally reliable predictor of future 
business activity, act like the proverbial "canary in the coal 
mine," and, so far, the bird still sings business tunes here. 
However, there is ample reason to fear that song could turn into a 
swan song.  The economic data is becoming increasingly worrisome. 
The reactions of major-name German firms, like BMW and MAN cutting 
production and idling factories, will have a ripple effect across 
the economy as suppliers get trapped in the riptide.  On the other 
hand, there is ample evidence that many SMEs, which dominate niche 
markets or which have conservative and innovation-rich management 
styles, will ride out the storm.  German SMEs six months down the 
road may tell a somewhat different story since they rely heavily on 
exports; thus the deeper the global recession, the more they will be 
affected despite their gritty determination. 
 
¶8.  (U) Consulate General Munich coordinated this report with 
Embassy Berlin.  Track Munich reporting at 
http://www.intelink.sgov.gov/wiki/Portal:Germ any. 
 
NELSON