VDMA: Large industrial plant engineering sector well prepared

Bookings by members of the German Large Industrial Plant Manufacturer’s Group (AGAB) increased to a record 32.8 billion Euro in 2008 compared to 32.4 billion Euro in 2007 (Fig. 1). “Since the beginning of the upturn in 2003, bookings have risen by 115  %, which is an unprecedented rate of growth,” reported AGAB spokesman Dieter Rosenthal from SMS DEMAG Aktiengesellschaft following publication of the current executive report. “However, there has been a noticeable drop off in demand since the middle of 2008. Orders were up by 15  % during the first six months, but they declined by 11 % in the second half of the year.”

Hermes export guarantees alleviate effects of the financial crisis
The worldwide loss of confidence in the financial sector shows just how dependent the German Large Industrial Plant Engineering Sector is on government-backed Hermes export guarantees and financing. Country risks have undoubtedly increased. Even industrialized nations are now on the high-risk list, and commercial lending policies by private banks are far more restrictive. “The fact that the German government adapted Hermes export guarantees to the current situation in the second economic stimulus package was a very welcome development for the large industrial plant engineering sector,” said Rosenthal. “Hermes guarantees have proven to be a very effective instrument for alleviating the very serious effects of the collapse in the financial markets.” Companies expect the banks to take advantage of the new Hermes provisions and to provide substantial export and project financing.

Broad-based export market
Foreign demand (Fig. 2) fell slightly in 2008 to 26.3 billion 7 (compared to 26.8 billion 7 in 2007). However, that is still an excellent result, and it is 10 million 7 more than the average for the preceding ten years. The industrialized nations were the largest customer segment in 2008. The US and South Africa were the top markets. Demand was also strong in the Asia Pacific Region, the CIS countries, North Africa and South Asia. China was once again the most important customer. “Chinese industry still has a huge need to catch up, and German engineering firms have a good reputation in the country. Therefore, German companies are experiencing strong market demand in China despite intense competition,” explained Rosenthal.

Record demand from the domestic power industry
Bookings from German customers in 2008 were at the highest levels for 15 years. The industry placed orders worth 6.4 billion 7, a 16  % increase compared to 2007 (5.6 billion 7). A significant rise in demand from the power generation industry was the main factor behind the increased booking levels. ­
“Power plant construction accounted for 55  % (3.5 billion 7) of the domestic orders,” explained the AGAB spokesman. ­“Orders were below last year’s levels in many other sectors.”

Job creation
Job creation in the German large industrial plant manufacturing sector continued at an accelerated pace in 2008. Employment during the reporting period was up 7  % following a 5  % increase in 2007. A total of 58,400 employees were working for AGAB member companies in Germany at the end of 2008 compared to 54,900 in 2007. This is remarkable given the continued shortage of skilled workers. “Innovative human resource marketing and greater cooperation with the academic sector were the major factors which contributed to the success of the recruitment programs,” said Rosenthal.

New double taxation agreement puts companies at a competitive disadvantage
The recently completed negotiations on a double taxation agreement with the United Arab Emirates have confirmed fears in the industry that Germany intends to collect income tax at German rates on income earned outside the country. “Because these rates are generally higher, this puts companies at a significant competitive disadvantage,” claimed Rosenthal. A large portion of the work on large industrial engineering projects is carried out on site, so a level playing field in the country is very important if German companies are to remain competitive. The exemptions for the Large Industrial Plant Engineering Sector, which were contained in previous double taxation agreements, made an important contribution to the competitiveness of German companies in the industry.

2009: the large industrial plant manufacturing industry is expecting a difficult year
2009 will not be an easy year for the industry. Bookings are expected to be down significantly, as credit remains tight in the wake of the financial crisis and demand continues to drop off. There are, however, some encouraging signs. Capacity utilization remains high. “On average, current contracts will keep the industry busy until the end of 2009,” said Rosenthal. Falling material and component prices are also good news for the AGAB members. Rosenthal claimed that the industry is prepared for the downturn and will be able to cope with it.

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