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© aydindurdu-dreamstime.com Analysis | June 18, 2013

German companies underestimate risk of European stagnation

A Roland Berger restructuring study for Germany shows: 80% of companies expect to grow in the next two years However, two-thirds of those surveyed assume Europe will stagnate or even possibly slip into recession
In terms of their own competitiveness, German companies are looking optimistically into the future: According to the "Restructuring study 2013" by Roland Berger Strategy Consultants, about 80% of respondents think that they will continue to grow until 2015. The study revealed that German companies consider themselves to be competitive compared to other European players. However, they were less optimistic about the rest of Europe. Two-thirds of those surveyed expect the European economy to stagnate or even slip into recession in the next few years.

"German companies are well positioned overall, and that's why they're internationally competitive," says Max Falckenberg, Partner at Roland Berger Strategy Consultants. "However, they appear to underestimate the economic risks in Europe significantly." After all, the German economy is very export oriented. "If neighboring EU countries slip into recession, this will negatively impact German companies too," explains Falckenberg. "They need to be ready should this happen!"

Europe – The big risk
German companies consider the single market one of the big advantages of the EU. However, should the economic situation deteriorate throughout Europe, German companies would be faced with a drop in intra-European exports. Furthermore, this would most likely be accompanied by greater unemployment and weaker consumption across Europe.

However, German companies are still convinced that they can grow over the next two years – especially because of their international market access (21%), broad and high-quality product portfolio (19%) and strong innovation (17%). "Their good financial situation also gives German managers reason to be optimistic as liquidity has become less tight at many companies," according to Roland Berger restructuring expert Jakob Rüden. "Many companies have been able to strengthen their equity base since the last economic crisis in 2008/09."

Using scenario planning to deal with volatile markets
Nevertheless, German companies need to keep a close watch on the volatile economic environment – especially in Europe – and ideally base their planning on various economic scenarios. Almost 80% of the study participants already use scenario planning when setting up their strategies. Just as important for them is to permanently restructure their own company (86%).

"Only those companies that regularly review their own strategy and take appropriate actions will be able to remain competitive long term and successfully operate in volatile markets," says Falckenberg. Therefore, it's no surprise that 65% of those surveyed are contemplating changing their strategy or business model. In 2012, only 44% considered doing so. Making costs more flexible (76%), such as by outsourcing, also plays a key role. However, as in previous years, in 2013 German companies intend to focus on growth and sales initiatives (80%) to further improve their competitiveness.

Securing financing
Over 60% of the study participants view their liquidity situation as better than average. Therefore, 90% of German companies are planning to finance their future growth using own resources. "They plan to focus on direct working capital actions such as optimizing inventories and payment terms," says Rüden.

To secure outside finance, companies are relying on bank loans (50%). In most cases companies are planning to renew existing credit lines (32%), expand them (19%) or apply for new lines (18%). In contrast, the capital market plays a lesser role: Only 9% of the companies surveyed plan to issue bonds or search for external investors; no more than 3% consider SME bonds. "Alternative forms of financing play hardly any role for weaker companies – especially for SMEs," says Falckenberg. "This is because after the expiration of standard mezzanine programs, new mezzanine solutions have become quite expensive. On the other hand, SME bonds bear a certain placement risk and mean the company must be really fit for the capital market."

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