German firms look to offshore production as energy prices soar

BERLIN—Germany’s €200bn ($197bn) energy aid package offers limited relief to companies and may deter companies already considering moving to cheaper manufacturing bases abroad is low.

The German government last month announced an energy relief package, including curbing petrol prices and cutting fuel sales taxes, to help households and small and medium-sized enterprises (SMEs) cope with rising prices.

“The proposed energy relief package does not change anything on the immediate agenda,” Mats Ryder, CEO of Bavaria-based porcelain maker Rosenthal, told Reuters.

The 143-year-old German company is considering moving some of its production out of Germany to cut costs, and Ryder said plans for gas brakes are still vague. Rosenthal could not be persuaded to reconsider the plan.

This week, the German government is expected to announce details of the gas brakes and other aspects of the relief package, which will run until spring 2024.

Due to high labor and other costs in Germany, many companies are either relocating some or all of their operations to cheaper locations in the emerging European economy or elsewhere, or considering doing so.

Lars Feld, economic adviser to German Finance Minister Christian Lindner, said the energy crisis, which has seen gas prices soar after Russia’s invasion of Ukraine collapsed after Russia’s gas supply to Europe collapsed, could be of this kind. He said he had a decision on his mind.

“The industry is thinking about the transition and waiting to see how the energy price brake works. It is an important psychological boost. I would,” Feld said.

As German manufacturers face energy bills up to 10 times higher than they paid two years ago, a fifth of engineering firms are aware of the risks of moving at least part of their operations abroad. A survey by the German trade union IG Metall last month showed that

High energy prices pushed German consumer inflation to 10.9% in September, the highest in more than a quarter century, putting upward pressure on wages and increasing labor costs.

Looking for plan B

Industry groups have initially welcomed the energy relief package, which includes temporary electricity price cuts to subsidize basic consumption by consumers and small businesses, and some businesses are optimistic.

Textile maker Wuelfing said it would shelve plans to move production from Germany to Portugal or Pakistan if the government limits energy prices to double 2020 levels.

Wuelfing Managing Director Johannes Dowe said:

The German Association of Small and Medium Enterprises said it saw no concrete signs of increasing outsourcing of production abroad as the energy price crisis has affected all European countries.

“The situation is different with the expansion plans currently under consideration,” DMB executive director Mark Tenbieg told Reuters.

According to a Deutsche Bank study, rising energy prices will cause German production to fall 2.5% this year and 5% in 2023.

“Looking back at the current energy crisis about a decade from now, this could be the starting point for an accelerated deindustrialization in Germany,” said the study.

Large German companies can move production elsewhere depending on costs and customers, but the crisis will hit harder for small and medium-sized enterprises, the backbone of German industry.

“For German SMEs … adapting to the new energy world will be a major challenge, with some failing,” the study added.

Auto parts supplier Boegra, based near Düsseldorf, cut output last month due to rising energy prices. The company, which already outsources part of its production to the Czech Republic, is now looking for Plan B.

“Next week I will be traveling to the Czech Republic to explore the possibility of expanding our business there,” Voegra managing director Tobias Linser told Reuters on Friday.

By Riham Alkosaa, John O’Donnell, Patricia Weiss

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