The general outlook remains positive, and margins are relatively high, especially in niche segments. However,competition from China is increasing.
- The German machines/engineering sector is one of the main drivers of the German economy, accounting for 3% of GDP. The general outlook remains positive, with annual production forecast to grow 3% in 2017 and 2018, according to the German engineering association VDMA.
- Due to its high export ratio of more than 75%, the industry is highly dependent on demand from abroad, and is therefore susceptible to certain risks (deterioration of the global economy, rising geopolitical risks, exchange rate volatility and the threat of rising protectionism).
- The industry is characterised by high investments (IT and equipment) and increased labour costs. The equity ratios of Machinery businesses is higher than the German industry average, as necessary investments can often be financed by own resources (cash slow, shareholder and/or mezzanine loans). Due to this, many machinery businesses are not excessively reliant on bank finance, and bank indebtedness is rather low.
- Margins are relatively high, especially in niche segments. However, margins have come increasingly under pressure in recent years due to rising competition, especially from China. In the global market, Chinese machinery builders are increasingly capable of producing high quality machines, forcing German businesses to compromise on price.
- Compared to other German industries, the machinery/engineering sector’s payment behaviour and default/insolvency rate is good. The number of non-payment notifications and business failures is expected to remain low in 2017 and 2018.
- Given the general financial strength of Germany’s machinery businesses, our underwriting approach remains generally relaxed. However, we are more cautious with machinery businesses involved in the paper/print subsector, as the shift towards digitalisation has resulted in shrinking profit margins, and many companies are still restructuring to adjust their production to customers’ needs. Another segment with difficulties is textile machinery, but this subsector represents only a minor share of the German machinery industry.