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  Ticking Timebomb: The Financial Crisis Reaches Germany's Economy

Ticking Timebomb The Financial Crisis Reaches Germany's Economy

By SPIEGEL Staff

Part 2: A Stress Test for Companies

Companies like construction machine manufacturer Komatsu will also feel the effects of the slowdown. Around 900 employees at its plant in the northern German city of Hanover assemble excavators and wheel loaders, which are then sent to Spain, France, Italy, England and Germany.

But when construction slows to a near-halt in countries like Spain, now that its real estate bubble has burst, construction machines are no longer needed. The few growth markets in Eastern Europe can no longer offset these declines.

"If the market in Romania grows by 50 percent, we're talking about no more than 100 machines," says Wilfried Tschich, the managing director of Komatsu's German subsidiary. "But a 50-percent decline in the market in Spain corresponds to about 1,000 machines."

Mercily Exposing Weaknesses

The consequence is a drastic reduction in the number of overtime hours worked at Komatsu, which in turn means that the temporary workers' contracts are not renewed. The slowdown could eventually affect the company's full-time employees.

In this way, the crisis is slowly eating its way through the German economy. It is a stress test of sorts for companies and will mercilessly expose their weaknesses.

Especially vulnerable are those companies that in recent years have fallen victim to private equity firms, the corporate raiders that have come in for sharp criticism in Germany. Some of the companies they now own include the television group ProSiebenSat.1, bathroom fixture maker Grohe, fashion giant Hugo Boss, auto parts maker Unger and Cognis, a former subsidiary of consumer products giant Henkel.

A time bomb is ticking within all of these companies, because the financial investors acquired them to a large extent with loans, which they subsequently unloaded onto the companies. The hijacked companies have been forced to take on debt to be able to distribute dividends to their new masters.

Until recently, there was a surplus of cash on markets worldwide, which meant that cash was cheap. But in an economic downturn, companies will have trouble servicing the interest for their new loans.

The dangerous point will come when the loans mature and the companies are forced to look for new financing. Jan Moulton, the founder of the British financial investment firm Alchemy Partners, says: "There will be collapses of large companies in the hands of private equity groups. That is absolutely guaranteed."

Other companies, even those seen around the world as the pearls of German industry, could also end up in serious trouble, companies like BMW or Daimler. Despite being successful for years, the financial crisis is also eating away at the foundations of their business.

Both companies have almost doubled their car sales in recent years. Their customers didn't seem to mind that the new models kept getting bigger and more expensive. By offering attractive leasing and financing terms from their own banks, the manufacturers ensured that their sedans and SUVs remained affordable. Mercedes-Benz already finances the purchase of one in three vehicles worldwide, while BMW finances one in two.

But if the car companies are forced to charge their customers higher interest rates in the future because they too will be paying higher rates, this could jeopardize the entire business model. This would threaten growth and, ultimately, the companies' independence.

Only by sharply increasing sales could German carmakers, which are relatively small by international standards, earn the billions they urgently need for investments in new engine technologies. This creates growing pressure on Daimler and BMW to work together.

"I don't want to rule anything out at this point," says one Daimler manager. The drastic decline in the stock prices of both companies could even force them to aim for cross-ownership as a protection against hostile takeover attempts.

Much of these anticipated problems are just that: anticipated. At this point, no one can predict the true consequences of the financial crisis. Which is precisely what makes executives so nervous. They can handle an economic crisis -- by streamlining, cutting costs and increasing their competitiveness. But how are they supposed to react when all financial markets are in turmoil at the same time?

The German economy still tends to be structured in a more stable way than that of the United States or Great Britain. German industry is not focused on one or two sectors. For this reason, there are enough companies that do not fear a sharp decline in their business, including energy companies, the chemical industry and pharmaceutical manufacturers. But how much longer will these companies be able to avoid the vortex?

There is only one thing that corporate CEOs currently enjoy from their offices in their companies' headquarters buildings: a clear view of the foggy wall of the crisis and the certainty that whatever it conceals cannot be good.

One example is the Mercedes World showroom on Berlin's Salzufer. The giant, €40 million ($55 million) cathedral to consumption, is populated almost exclusively by salespeople these days. The Formula One simulator is abandoned, and the child care center is as quiet as a graveyard.

They are under massive pressure, says one salesman, whose shoes are so shiny that they reflect his desk lamp. "Those who bought an eight-cylinder car in the past order a six-cylinder today. And the former six-cylinder customer now prefers a four-cylinder car." If he orders a car at all, that is.

Some do what Gerald Heese does. The 59-year-old resident of Berlin's Spandau district plans to buy a Mercedes SLK in silver -- but this one is a toy car for his nephew.

NINA BOVENSIEPEN, DIETMAR HAWRANEK, MARTIN U. MÜLLER, ALEXANDER NEUBACHER, CHRISTIAN REIERMANN, JANKO TIETZ

Translated from the German by Christopher Sultan