The manager fears that the German economy will slip into a technical recession in the second half of the year.
(Photo: Marc-Andre Hergenröder)
Dusseldorf CFOs of leading German corporations are preparing their companies for a longer phase of rising prices. “Everyone must be aware that inflation is no longer a short-term phenomenon,” says Thomas Toepfer, CFO of plastics manufacturer Covestro. He assumes that the European Central Bank (ECB) will take countermeasures in the summer. According to Siemens CFO Ralf Thomas, the ECB’s reaction – such as an interest rate hike – could be “stronger than expected”.
The Siemens board does not expect much from the short-term effect. Thomas criticized the ECB’s hesitant attitude at the Handelsblatt’s “CFO Summit 2022” on Tuesday. “The issue of inflation has been foreseeable for a long time, but the core task of price stability has remained in the background,” he said in Düsseldorf. “Now we are already talking about the specter of stagflation, which can no longer be countered with just traditional monetary instruments.”
Many top managers understand the dilemma, since the central bank must also consider the fragile economic situation. Nevertheless, the ECB will soon have to do something to counter inflation, said Astrid Hermann, CFO of consumer goods manufacturer Beiersdorf, at the “CFO Summit”.
However, the companies do not want to wait for the ECB, but have been activating internal plans for a long time. “We are assuming that inflation will last for a long time and, in dealing with it, we trust above all the levers that we have in our own hands,” said Siemens CFO Thomas. For him, this includes a mix of improving productivity, securing the supply chains and passing on the higher costs to the customers via the sales prices.
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But not everyone succeeds equally. Siemens sees itself as a technology leader in its core markets, such as digital factory control, and therefore has strong pricing power. The same applies to Covestro, whose plastics are still in demand in electromobility, wind power and consumer goods.
Because consumer demand is still intact, the skin care specialist Beiersdorf can also raise prices with strong brands like Nivea. But all companies are concerned with the question of whether and when inflation will affect consumer sentiment.
The manager criticizes the hesitant attitude of the ECB.
(Photo: Marc-Andre Hergenröder)
“One cannot and must not rely on being able to pass on rising raw material and energy prices to customers without any problems,” said Toepfer. Covestro is increasingly looking for ways to manufacture the required precursors in its own chemical plants and thus have to buy less on the market at top prices. Own added value should make the group less dependent on inflation. At the same time, the Leverkusen-based company wants to secure new supply contracts for renewable electricity with prices that can be planned.
The corporations keep the money together
However, the CFOs are not only reacting to the foreseeable high inflation. At the Handelsblatt’s “CFO Summit” they spoke of an unprecedented mix of different crises: scarcity of raw materials, expensive energy, the effects of the China lockdown and the Ukraine war.
The CFOs can hardly keep up with the scenario planning. “In the past few months, the worst scenario we designed has always occurred,” says Beiersdorf CFO Hermann. The situation has calmed down a bit lately. But the manager fears that the economy will technically slide into a recession in the second half of the year.
>> Read here: ECB representative brings sharp rise in interest rates into play – euro exchange rate increases
That’s why Beiersdorf keeps costs under control. Financially, the group sees itself well positioned for the crisis because of its lavish cash holdings. Before the expected rise in interest rates, other companies procured new outside capital and prepared themselves for uncertain times with thicker liquidity cushions.
All companies keep the money together and improve productivity and efficiency wherever possible. For Siemens, for example, as a manufacturer of industrial goods, it is extremely important to continue to score points with a strong cash flow – also with investors, as CFO Thomas explained. Most companies are not yet reducing their investments and budgets, but are checking the project schedule and prioritizing them. “For the time being, we’re going on sight when it comes to marketing expenditure,” says Michael Söhlke, CFO of the spirits manufacturer Semper idem Underberg.
At the same time, companies are increasing their warehousing in order to remain able to deliver in the coming months. Because the supply chains are still very tense. Above all, the difficult situation in China after the lockdowns remains uncertain. Covestro CFO Toepfer expects the supply chains there to relax again at the end of June at the earliest – provided that the strict corona policy does not spread to other regions of China.
More: Lockdowns in China, inflation in Europe, downturn in the US: the global economy is in jeopardy