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VDMA: Russia crisis leaving ever greater mark

The economic crisis in Russia and the political dispute with the EU are making an increasingly clear mark on the German mechanical engineering industry.
In the first quarter of this year, machinery exports to Russia fell by another good 28 percent compared to the previous year, pushing it down to 10th place in the ranking of most important buyer countries. In 2013, i.e. before the Russia crisis began, the country was the fourth largest sales market for the German mechanical engineering industry.

“Unfortunately, the downtrend in machinery exports accelerated at the start of this year,” says VDMA President Dr Reinhold Festge.

A new survey by the VDMA German Engineering Association of nearly 260 member companies shows that the Russia crisis is having multifaceted consequences for the industry in Germany. 94 percent of those surveyed indicated that they were affected by the crisis; companies are feeling it in particular in the form of declining orders (83 percent) and fewer enquiries (70 percent). Exports to Russia can therefore be expected to decline sharply in the months to come.

It is also becoming increasingly difficult to raise financing to export machinery and equipment to Russia. A good half of all the companies surveyed are suffering from the fact that Western banks have become very hesitant when it comes to Russian business, while Russian customers can hardly afford loans from their domestic banks because of the high interest rates. “The shortage of financing is the biggest obstacle at present,” explains Ulrich Ackermann, head of VDMA foreign trade.

Detrimental customs and export controls

It is somewhat surprising that order cancellations (20 percent of those surveyed reported them) and payment defaults (15 percent) have increased only very slightly compared to the previous survey in 2014. In contrast, delays in customs clearance and export controls are having a much more noticeable effect (22 percent and 24 percent respectively). Here, clarification of whether the machinery and components supplied are “dual-use” goods, i.e. equipment and parts that could also be used for military purposes, is having the greatest negative effect. Manufacturers of machine tools feel particularly affected by this.

There are also growing concerns among companies that the Russian market will be lost forever to Chinese competition. In the last ten years, Chinese companies have already wrested a market share of 10 percent from German mechanical engineers. A good third of those surveyed now believe they have lost further customers or orders to Chinese rivals because of the crisis and sanctions. “It is therefore only a question of time until China becomes Russia’s most important supplier of machinery,” says Monika Hollacher, an expert on Russia in the VDMA.

No retreat – but much restraint

The uncertainty both of German mechanical engineers and their Russian customers is also reflected in investment planning. Although 43 percent of those surveyed said that they had not yet taken any specific measures to respond to the crisis, a fifth of the companies are now cutting staff in Russia or putting projects there on hold. Moreover, willingness to set up in Russia with a branch or even a plant has declined sharply. Only 40 percent of those surveyed indicated that they wanted to handle service and sales in Russia via a branch office before 2017 – a drop of 12 percentage points compared to the last survey. This differentiates the current Russia crisis from the one in 2008/09, when many German mechanical engineers invested in the country counter-cyclically.

However, German mechanical engineers in no way intend to give up or flee. Only 2 percent of the companies surveyed said they wanted to withdraw from the Russian market. At Moscow’s Metalloobrabotka, the country’s most important machine tools trade fair that just ended, more than 100 German manufacturers exhibited as a united front and with individual stands – a clear indication of the great importance of this partnership. “Russia is and will remain a key market for German mechanical engineering,” concludes VDMA President Festge.
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