The BASF factory in Ludwigshafen

The BASF factory in Ludwigshafen

Foto: Xaver Lockau / BASF SE

Growing Energy Crisis A Grave Threat to Industry in Germany

The German economy has long been rooted in the country's industrial prowess. But with energy prices skyrocketing, many companies face a murky future. Some have begun considering relocation, highlighting a possible long-term threat to the country's business model.

German Employers’ Day, the annual gathering in Berlin hosted by the Confederation of German Employers’ Associations (BDA), has long been a target of protesters. Leftists on the barricades, climate activists – most of the people who attend the event hardly even notice anymore.

But even the police were surprised by a small group of demonstrators that turned up last Tuesday to voice their displeasure. It included a dozen men and women in business attire who formally shook hands in greeting before carrying sacks of coal from a green van to prepare for their vigil in front of Berlin’s now defunct urban airport, Tempelhof. Strange times.

DER SPIEGEL 38/2022

The article you are reading originally appeared in German in issue 38/2022 (September 17th, 2022) of DER SPIEGEL.

SPIEGEL International

The group is called Die Jungen Unternehmer, or "the young entrepreneurs,” and they gathered just in time for the appearance inside of German Economy Minister Robert Habeck, their sworn enemy. The young executives don Habeck masks, grab bundles of fake 50-euro notes and gather around a metal firepit full of charcoal. Three, two, one – then they throw the bundles of money into the pit and launch into a chant in favor of using coal and nuclear to prop up Germany’s teetering power supply. They also hold up signs warning of insolvency and demanding that Habeck put a stop to the "price explosion.” The minister, they say, is burning money instead of coal – money belonging to them and to German consumers.

Inside, BDA President Rainer Dulger’s tone is far from rosy. Only state aid, he says, can prevent companies from going bankrupt due to the rapidly rising prices for gas and electricity. It is a sentiment that can be heard everywhere in Germany as summer draws to a close. Collapse, company relocations, deindustrialization: Those are the terms being used by employee representatives and company executives as they heap pressure on Germany’s political leaders to do something.

The annual BDA gathering, to be sure, has always been a hotspot for Cassandras, but this year, it’s not feigned. Siegfried Russwurm, president of Germany’s national industry association BDI, issued a warning earlier this month of fundamental challenges facing his members. In one recent industrial sector survey, 90 percent of the companies reported that increased energy and raw material prices represent either an existential danger or a serious hazard. Almost one in five companies is looking into moving production abroad. And Yasmin Fahimi, head of the German Trade Union Confederation (DGB), agreed with the doom and gloom in comments to DER SPIEGEL. If the government doesn’t take immediate action, she said, Germany could find itself facing a process of deindustrialization. But it was Peter Adrian, president of the Association of German Chambers of Commerce and Industry (DIHK), who was the most pessimistic. The country, he said, faces several years of economic crisis, including "prosperity losses of an extent not previously imagined.”

The horror scenario that German economic leaders have sketched out could hardly be any worse: It foresees the German economy facing far more than just a recession, but a structural fracture that could lead both Germany and Europe to economic ruin. Entire sectors are threatened, and perhaps the core of what has made the country into one of the winners of globalization in recent years: German industry.

The fact that industrial companies in Germany must modernize to prepare for the coming era, to free themselves from dependence on China and other autocracies, and to become more reliant on renewable energies is a message that everyone has received by now. The German government and the European Commission just recently committed themselves to ensuring that Europe remains home to industry. The bloc would like to see semi-conductors and battery cells produced here in the future, and it wants to become a major exporter of environmental technologies. Natural gas is seen merely as a transition technology to bide time until wind, sun and hydrogen deliver enough power to run all the power plants, chemical factories, blast furnaces and cars that form the backbone of European industry.

But suddenly, right at the most sensitive moment of the transition, at a time when billions must first be invested to build this wonderful new economy, the basis for success has been eliminated: cheap energy.

There is hardly any doubt left that Germany is facing recession. The first bits of bad news have begun trickling in, likely just the beginning. The toilet paper manufacturer Hakle, the shoe store chain Görtz and the auto parts supplier Dr. Schneider have all filed for insolvency. Companies from energy-intensive sectors like the chemical, steel and paper industries have reduced production or suspended it altogether, such as the fertilizer producer SKW Piesteritz. "Instead of the economic recovery we had been hoping for, Germany is set to experience a painful recession,” says Stefan Kooths, vice president of the Kiel Institute for the World Economy (IfW).

The questions that executives across the country find themselves faced with are of an existential nature: For how long can we continue to withstand high energy prices? How can we save? Is production in Germany even still worth it any longer? Or is it time to move away to a place where energy prices aren’t as high?

The answers depend on how long the crazy fluctuations on the gas and electricity markets continue. And when, or if, prices fall back to their pre-crisis levels. A winter is perhaps doable. Maybe even a year. But two years? Or three?

At 94 billion cubic meters per year, Germany is by far the largest consumer of natural gas in Europe, with a third of that going to industry. Torsten Henzelmann, an energy expert with the business consultancy Roland Berger, now at least believes that there is no longer a danger of German gas supplies completely drying up overnight. "In all probability, we will get through the winter without the rationing foreseen in the third level of the Emergency Plan for Gas,” he says. But even beyond that, he warns, prices could remain high. And the cost of electricity, which is even more important for the German economy, is linked to the price of natural gas. And that has also been spiking from record high to record high of late. Who is supposed to pay for it all? The state?

Economist Clemens Fuest, president of the influential Munich-based economic institute ifo, is demanding aid packages for the German economy similar to those seen during the pandemic. Effective business models must be provided with state assistance to help them through the acute crisis, Fuest says. At the same time, the state and industry must join forces to restructure the country’s energy infrastructure, set up terminals for liquified natural gas (LNG) and expand renewable energies. In short, existing plans for the realignment of the economy must continue to be pursued. And if the restructuring is successful, it is far from a given that future energy prices will consistently be higher than they are now. Fuest’s dual message is clear: "The threat of deindustrialization is real, but at the moment, it is too early to proclaim it.”

But what happens if companies decide that this dual effort – overcoming the energy crisis and restructuring the economy – isn’t worth it? That the two challenges together are simply too expensive?

The Kirchhoff Group has been active in Germany since 1785 and is one of the country’s most important auto parts suppliers. They produce such divergent products as aluminum covers for the batteries in Volkswagen’s electric cars and crash-management systems for some BMW models. The company is well established.

Gunnar Groebler, CEO of Salzgitter AG

Gunnar Groebler, CEO of Salzgitter AG

Foto: Volker Crone / DER SPIEGEL
“Green steel is the only chance for steel production in Europe to survive."

Gunnar Groebler, CEO of Salzgitter AG

The automobile sector in Germany could be hit all the harder if companies like Kirchhoff run into difficulties. "In the coming months, we will start seeing who can even still afford to produce in Germany,” says Arndt Kirchhoff, chairman of the advisory council for the family-owned company. It used to be that electricity and gas made up 3 to 4 percent of company’s costs. Since the Russian invasion of Ukraine, that share has skyrocketed to 12 percent. "In a situation like that, investments in Germany are no longer worth it,” says the 67-year-old.

Kirchhoff is a global player with revenues of 2.2 billion euros and also operates factories in the United States, Mexico and China. In those places, there is plenty of cheap energy, which makes it easier for Kirchhoff to manage risks associated with any one location. Which is what the company is doing. Here in Germany, Kirchhoff is merely keeping its machines running, but isn’t planning any new facilities.

But there are plenty of suppliers that don’t have a global network of production sites, and they are in a much more difficult spot. According to a recent survey conducted by the German Association of the Automotive Industry (VDA), 10 percent of companies in the sector say they are suffering from liquidity problems. An additional 32 percent are forecasting financial shortfalls in the coming months. The 103 companies that took part in the survey said that the biggest burden they are currently facing is the price of energy. More than half have reacted by delaying or cancelling planned investments. The situation of small and medium-sized companies (SMEs), in particular, is "becoming increasingly dramatic," says Hildegard Müller, the VDA president.

Even VW, which raked in record profits in 2021, is sounding the alarm. "We depend heavily on the strong supply industry that we have," says Supervisory Board Chairman Hans Dieter Pötsch. If Europe were to lose this industrial structure, "then it would also lose its competitiveness" – unusually drastic words from a powerful man who rarely speaks in such a manner.

Some companies are already being pushed by their financial backers to invest outside of Europe due to the energy crisis. In the worst case, even the multibillion euro shift to electric mobility could be in danger. "For e-auto drivers, there must be a sufficient quantity of affordable electricity available,” says Pötsch.

A dangerous tendency could develop. The automobile industry in particular must invest huge sums in the coming years. Why not use the opportunity to move production sites to places where energy is already far cheaper? Or to places where renewable energies will soon be available in large quantities?

A blast furnace at a ThyssenKrupp factory in Duisburg

A blast furnace at a ThyssenKrupp factory in Duisburg

Foto: Sean Gallup / Getty Images

Should that happen, then the current situation is no longer a question of a couple of difficult years, but of the sources of the country’s future prosperity. After all, that prosperity is supposed to come in part from energy-intensive technologies such as battery cells. Volkswagen alone plans to invest 20 billion euros in Europe in battery production, and even the Chinese global leader CATL intends to build a gigafactory in the German state of Thuringia. Such plans could be "reconsidered and recalculated," warns Ferdinand Dudenhöffer, director of the industry think tank Center Automotive Research. Putin’s energy war could currently be in the process of destroying "the vital establishment of the new automobile industry" in Germany.

Last Wednesday a report in the Wall Street Journal shocked the sector, according to which Tesla has decided to suspend plans for building a battery factory outside of Berlin, preferring instead to focus production in the U.S. Is Germany’s future already in the past?

The sector is still hoping to avert such a fate. VW insists it is staying true to its investment plans. "We need our own battery factories for the mobility and energy revolution in Europe," says advisory board chair Pötsch. At the same time, though, he is demanding immediate political action so that Europe doesn’t lose its competitiveness. Energy prices, he says, must be capped for the next couple of years.

That demand, to put it mildly, sounds kind of odd coming from a senior executive in a capitalist economy. And it is one that begs the question: Have company and political leaders made mistakes of their own in the last several years? Did they contribute to the country suddenly being so vulnerable? Did everyone underestimate just how sensitive this phase of transition might be?

Fuest, the economist, believes that Germany’s cardinal error was that of disassembling its energy system based on nuclear, coal and gas power before the new system, based on renewable energies, was ready. That is the primary cause of the insecurity felt by industrial companies, a feeling that has been magnified by the current gas and electricity price catastrophe.

Hildegard Müller, president of the German Association of the Automotive Industry

Hildegard Müller, president of the German Association of the Automotive Industry

Foto: Carsten Koall / picture alliance
"The situation of small and medium-sized companies is becoming increasingly dramatic."

Hildegard Müller, president of the German Association of the Automotive Industry

It is likely also true that the transformation has proceeded far too slowly, to the point that nobody can say when our dependency on fossil fuels might come to an end. Which means that nobody can make any reliable predictions regarding how much we might be paying for gas and electricity a few years from now. "As such, companies should be shifting into crisis mode,” says consultant Henzelmann. "And you don’t run away in a crisis.”

What has already become apparent is that this crisis is shaking the very foundations of our economy. Whereas the pandemic reserved its most deleterious effects for restaurants and cultural offerings, Germany’s industrial giants are on the front lines this time, gigantic companies with complex processes. Restaurants are relatively easy to close down and open back up again. Chemical factories are not.

Markus Steilemann is head of the chemical company Covestro. A former Bayer subsidiary, Covestro produces plastics from oil-based raw materials that find their way into car headlights, foam mattresses and building insulation. There is hardly another company out there that is as dependent on gas and oil as Covestro. The enterprise is doing all it can to rely more heavily on materials that use more biomass than oil. It is conducting research into recycling foam mattresses and is capturing CO2 to use it for the production of plastic. And yet the vast majority of the company’s production still depends on oil and most of the electricity and steam they use comes from natural gas-fired power plants.

Steilemann fluctuates between optimism and despair. The end of natural gas deliveries from Russia "could result in production sites in Germany losing their competitiveness," he says. On the other hand, though, high prices for natural gas don’t automatically spell the end for all energy-intensive industry in Germany. Whereas some prices, such as that for primary products used in manufacturing synthetic fertilizers, are up to 80 percent dependent on the cost of natural gas, it plays only a minute role for highly specialized chemicals, says Steilemann.

Chemical industry giants aren’t likely to leave the country anyway. Their processes are simply too complex and the companies are too intricately connected to other companies. Even global market leader BASF isn’t thinking seriously about leaving Germany, despite the fact that no other factory in the country uses as much natural gas as does BASF’s plant in Ludwigshafen. BASF has reduced the amount of ammonium it produces and is purchasing it on global markets. But because the production of numerous different chemicals is intricately linked in its factories, making them highly efficient, it makes little sense to break off individual, highly energy intensive steps in the process and take them out of the country, the company says.

Plus, BASF and other chemical companies have production facilities on every continent, making the products that are needed there. If the European economy is laid low for an extended period, though, chemical companies are likely to expand capacity elsewhere. BASF is currently in the process of building a new, 10-billion-euro factory in China. Any shift out of Germany for the chemical company seems likely to be more gradual in nature rather than a sudden bang.

So does that mean that the country will see its industry fade away in slow motion in the coming years?

The response to that question from one representative of old fashioned, energy intensive industry is a bit surprising for its optimism. "We should view the crisis as an opportunity and as a catalyst for the transformation,” says Gunnar Groebler, head of Salzgitter AG, the second largest steel manufacturer in Germany.

Groebler has just finished making the rounds at the Munich exhibition center, where the Salzgitter subsidiary KHS is presenting a bottling system as part of the beverage industry trade fair Drinktec. The mood is good, and not just because the fair is traditionally timed to overlap with Oktoberfest.

People have to drink no matter what the economy looks like, but even Groebler’s core business, steel production, has recently been producing healthy profits due to the high price of steel. He is lucky because his blast furnaces are largely fired by coal and coke rather than natural gas. But Groebler is stuck in a dilemma nonetheless. By 2033, he hopes to completely shift to electric power – from renewable sources.

"Green steel is the only chance for steel production in Europe to survive," he says. Rather than idealism, the statement is the product of sober calculation. As part of its climate protection program "Fit for 55," the European Commission is slowly raising the price for CO2 emissions. Already, Groelber says, the production of every ton of steel leads to CO2 costs of 160 euros – and that, he says, isn’t sustainable in the long run. If the sector doesn’t switch to renewable sources of energy, Europe will indeed lose "one of the most important primary product industries the continent has."

Salzgitter plans to invest several billion euros in the decarbonization project by 2033. Whether that investment ultimately proves profitable largely depends on the price of electricity. And whether customers are prepared to pay more for green steel.

Groebler is convinced that they are. "We want to produce green steel in Germany and keep the entire value-added chain in the country as well, and that’s what our shareholders want," he says. But for that to happen, the electricity market has to be organized such that the expansion of renewable power sources results in lower prices in the long term.

The German government has recognized the dimensions of the problem the country is facing. One number is making the rounds in Berlin: One tenth of the country’s GDP could soon be devoted to purchasing natural gas in the country. An unfathomable share.

At German Employers’ Day in Berlin, Economy Minister Robert Habeck encouraged those present to "have faith in the state’s firepower,” only to then qualify his statement by saying that the state cannot compensate for all losses caused by high energy costs. Shortly after his appearance, he presented his plan to SME representatives for providing state subsidies to companies hit particularly hard. All those who have to spend more than 3 percent of their balance sheets on energy costs are to be given assistance, whether or not they are profitable. Over time, the limit is to drop to 2 percent.

How much help will be made available hasn’t yet been determined, and the companies won’t likely receive funds quickly. Habeck wants to allow time for a program his ministry introduced to reduce energy prices to develop. He fears nothing more than a repeat of the debacle surrounding his ministry’s clumsy attempts in late summer to prop up the country’s stumbling natural gas providers by spreading the pain to German consumers. Should it be necessary, the aid money will be applied retroactively to September, but the funds will only help in reality once the companies receive them.

And such financial injections won’t solve the real cause of the problem anyway. For that, Europe needs a joint energy strategy that addresses two problems simultaneously. It must protect companies from going bankrupt due to the high energy costs. And it must ensure that the continent becomes the cradle of green industry.

This plan for the future is one that Commission President Ursula von der Leyen has sketched out in the Green Deal. To ensure that the EU reaches the goal of climate neutrality by the middle of the century, wind and solar power are to be massively expanded, complemented by nuclear power and natural gas-fired power plants to ensure continuity.

The Russian invasion of Ukraine has destroyed that plan. If things go poorly, Europe’s steel and chemical companies could leave the continent faster than they decarbonize. To ensure that doesn’t happen, von der Leyen introduced a new emergency measure in her State of the European Union address last Wednesday that would cap revenues earned by electricity companies and introduce a levy on oil and gas companies. The Commission president said the measure would raise 140 billion euros, which would then be used to support poorer households and limit consumption. But will it work?

In recent months, European governments have already burned through 230 billion euros for energy assistance, and only 15 percent of those measures were "targeted and limited in time," according to an internal Commission list.

And EU member states are standing in the way of each other. France is opposed to the expansion of a gas pipeline to Spain because it wants to protect its own domestic energy market. Germany wants to shut down its three remaining nuclear plants even though its EU neighbors are urging Berlin to keep them online. The Netherlands is reluctant to continue exploiting natural gas deposits in the region near Groningen after a number of earthquakes there have been linked to the exploitation. Everyone is doing their own thing.

Experts from the Brussels-based think tank Bruegel say that an EU-wide trading platform is necessary, through which national governments in Europe would first consider the continent’s needs before addressing national and party-specific considerations. But very few member states are interested in doing that. At the end of the day, they argue, energy policy is a national issue.

But the only person who benefits from the fragmentation is Vladimir Putin. And it is European industry that is ultimately likely to suffer.

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