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Sunday
Jan132013

CEO of German Multinational: Costs Of Monetary Union Too High

Bernd Scheifele, CEO of HeidelbergCement—one of the world’s largest producers of construction materials with nearly 55,000 employees at 2,500 locations in over 40 countries—lashed out against European politicians and their inability to bring budgets under control. But he reserved the most devastating judgment for the euro itself.

HeidelbergCement’s long history—it was founded in 1873—almost ended during the financial crisis. For more than 100 years, the company had expanded in Germany. But in 1977, it began to branch out internationally by acquiring Vicat in France and Lehigh Cement in the US. At the end of the 1980s, it invested heavily in Central and Eastern Europe, then moved via acquisitions into Northern Europe, Africa, and Asia—piling on debt as it went. The acquisition spree culminated in 2007, when it paid GBP 9.5 billion for Hansen plc., a British company with 26,000 employees. HeidelbergCement had become one of the world’s largest producers of cements and aggregates, the two key raw materials for concrete.

Then the financial crisis unfolded. Worldwide revenues dropped from €14.2 billion in 2008 to €11.1 billion in 2009, and net profits from €1.92 billion to €168 million. Staggering under nearly €12 billion in net debt, the company laid off 15,000 people. Shares plunged from €120 in May 2007 to €20 in early 2009. Credit became scarce. On the verge of bankruptcy, the company underwent some financial re-engineering that included a capital increase and the issuance of 62.5 million new shares.

It survived. By December 2011, revenues had recovered to €12.9 billion. Net profit approached €1 billion. Net debt had been reduced to €7.8 billion. And shares have more than doubled since their 2009 lows.

“The result of hard work, hard efforts to save money,” Scheifele told the FAZ. The crisis, “an absolutely exceptional situation,” had surprised him. Until then, he said, it was “hard to imagine” that sales would plunge “in almost all countries simultaneously.” But they did.

The entire industry had believed in the guiding principle that declines in one region of the world would be balanced out by growth in other regions. “That was suddenly obsolete,” he said. They’d done stress tests to determine how to react to revenue declines of 20%, but in the US, for example, “sales of cement collapsed within a few months by 50%.” Something that hadn’t happened since the 1930s. And when they needed an extension of their credit lines, they suddenly found themselves “in the middle of a tsunami.”

So never again load up on debt? No, he said, debt helps companies make the necessary investments, but the level of debt, for companies as well as governments, would always have to “remain within a manageable magnitude.” And that’s why he was worried about Europe.

Despite all the to-do about austerity, no country has managed to reduce its debt burden, he said. Instead, debts continue to rise, just more slowly. “I think this is devastating,” he said. “While companies are throttling back their expenditures, politicians keep spending cheerfully.”

But weren’t eurocrats proclaiming victory in fighting the debt crisis? Wasn’t he able to see the signs of progress?

“Hardly,” he said. The world economy wasn’t doing all that badly, Africa and Asia were growing nicely, the US was recovering. “The problem is Europe,” he lamented. “The costs of the monetary union are simply too high; politicians must finally recognize that.”

Harsh words for a German industrialist—words that flew in the face of persistent rumors that German industrialists, eager to expand outside Germany, were supporting the common currency with all their might.

“That’s why we invest in Europe only very frugally,” he added, dousing the future of Europe with gloom. Instead, the company was plowing its money into Asia, source of 40% of its revenues. “In particular, countries like Indonesia, China, and India are important for us,” he said.

Reason: cement, sand, and gravel could only be produced and sold locally, but in contrast to Europe, it was still possible “to open quarries and build new plants” in Asia—where a lot of cement was needed to build infrastructure. Cement consumption serves as a measure of industrial development, he said. “In Indonesia, for example, cement consumption is 230 kg (50 pounds) per capita. That’s currently more than in Great Britain. In some Chinese provinces that grow strongly” —perhaps he was referring to those that were building entire ghost cities—”values of 2,200 kg (4,800 pounds) per capita are not uncommon.”

He’d summarized with a few words how companies were reacting to the miasma in Europe: they were taking their money and investing it elsewhere—contributing to the economic hardship in Europe and to growth overseas. He blamed it on the costs of maintaining the euro, and on politicians who refused to “recognize that.” And just when the hype about Europe’s victory over its crisis reached a feverish pitch.

But not all overseas investments work out: Bolivian President Morales ordered the nationalization of four business units owned by Spain’s largest utility, Iberdrola. Hours later, the army and police seized the company’s offices. So far, 15 companies have been nationalized. Read.... Bolivia Seizes Spanish Utility In Forced Nationalization.

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Reader Comments (4)

Germany, a cloaca, a soiled patch of land, open to everbody, to be plundered, including by their own utterly amoral corrupt elite. That's what I call complete annihilation.
January 13, 2013 | Unregistered Commenterfinis germaniae
A Dutch government agency has calculated around 2 years ago that the EZ contributes around 1.5% to GDP and the EU/Common Market close to 10%. The latter a considerable percentage and relatively at hardly any costs.
And for Holland likley one of the countries that benefits the most from the Euro because it EZ export/import is as a percentage much higher than the EZ-average.

The former a very marginal contribution against which now the Euro rescue costs have to be offset.
At marketprices Germany cs already have transferred via several mechanisms a few 100 Bn (that it doesnot count for the (dodgy) way they do their bookkeeping is imho totally unrelevant. If you lend eg 100 Bn to Greece with loans being worth on the open market 30% at that moment you have made a loss of 70 Bn. Not even mentioning that the 30% is largely because Germany and Co are doing these things and not because that anybody without that on Greece creditworthyness alone expect anything back. So is simply an (indirect) transfer as well.

Uncertainty is another issue. Uncertainty spoils investments. Will the North transfer and lose spending power themselves; will the EZ split etc, very difficult to make larger real investment decisions on that so most of the time those will be postponed. While you want these in order to stimulate the lame economy to be speeded upo instead.

Basically you have a 100-200 Bn annual gap between interestcosts that are sustainable and market demanded riskpremia in PIIGS and Co. The only way to make that work is a transfer. Direct or indirect via the ECB, but at the end of the day a transfer. Which is about the annual real economic growth of the North. If the ECB can carry that extra burden, it could do so anyway even without Euro problems and transfer the proceeds as dividend via the CB system to its ultimate shareholders the taxpayers.
Depends on what multiplier you take but even with a rather low one (0.5) structural growth would drop to 1.0% (and that will be completely needed to compensate the cost of aging (0.5% on less structural GDP growth (ad relatively smaller workforce) and another 0.5% because of higher expenditure because of aging. And those aging 'costs' are starting to hit right now.
So basically 0.5% extra expenditure on aging (healthcare and pensions) will have to pull the whole of the Northern economies. That is not going to work.
The South is even considerably worse off. It had slightly higher structural growth before but that was mainly caused by overborrowing what now has to be reversed. Combined with heavily increased competition from EMs and Eastern Europe with wages of 1/5 to 1/2 of those in say Spain an impossible task in its own right.

The best solution would be stop the junk go back to pre-Euro times. Link currencies and do something about the transaction- and exchangecosts banks charge for intra European transactions. Works nearly the same as the Euro. Business basically can do business against an insured exchange rate and tourist or 'abroad-buyers' can take money out without high costs. But would now give Spain and Co the possibility to devalue the currency and solve say half the problem.
January 13, 2013 | Unregistered CommenterRik
Ah yes, the few countries in the EU torso, that benefited from the arrangement originally, want to continue to believe that it will continue, when the EU legs have both arteries slashed and blood is gushing into the European Central Bank bucket. Problem is, the so called brain, Brussels, (?) is about to lose consciousness and the EU will die. Poor analogy, maybe, but the end is the same. Denial changes nothing. The Us will learn the same lesson shortly after the EU is dead.
January 14, 2013 | Unregistered CommenterMakati1
RE: Finis Germaniae
Yes....now try to envision the plunder by anglo-amrican banking in my country. California has been reduced
to vast tracts of squalor connected by freeways filled with the unemployed flotsam and jetsam of every country
and race.
Soon the elites will once again take us to war in a sleight-of-hand to hide the obvious........we are going to have a
revolution and the financial-military elite will be eliminated.
January 14, 2013 | Unregistered CommenterDr. R. Janesh

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