German blue chips fear eastern rivals (FT)

Germany’s largest industrial companies are increasingly shaping their strategies based on the competitive threat from Chinese and Indian companies, which they fear could one day take them over, say top chief executives and bankers.

Groups such as Siemens, Volkswagen and BASF are investing billions in these countries and other key markets, such as Russia, to remain internationally competitive and to tap both their stronger growth and the larger number of engineers they produce each year.

But the blue-chips are also acting in the belief that companies from fast-growing countries could soon follow the example of steelmaker Mittal and buy some of Europe’s industrial giants.

“The dominant theme in German boardrooms at the moment is whether a company from one of these countries will one day – say in five or 10 years – be able to take over a big company,” said the head of an investment bank in Frankfurt. “Nobody feels safe – from Eon and Siemens [the two largest companies by market capitalisation] downwards.”

The catalyst for such discussion is the takeover of European steelmaker Arcelor by Mittal, a group largely unknown five years ago whose assets are predominantly in developing countries such as Kazakhstan and Ukraine. “That is the problem,” said another senior German banker. “Nobody is quite sure yet what the name of the aggressor could be but they can see it coming and are trying to do all they can to head it off.”

Eon, the utility, has the largest market capitalisation in Germany with €69bn ($88bn) and is trying to take over Spanish rival Endesa for €55bn including debt, but the German group is dwarfed by Gazprom, the Russian energy group worth more than $200bn. Other groups such as Siemens, MAN and Linde are shedding unprofitable or non-core businesses and buying in areas with better growth.

The head of a large listed German industrial group admitted: “It is definitely possible that a competitor from a developing country could buy us in the future. The most important topic for management right now is to deal with this threat. And the best way to do that is to push the share price as high as possible.”

Franz Fehrenbach, chief executive of Bosch, the privately owned engineering giant, which cannot be taken over owing to its ownership structure, said industrial companies from India and China were becoming more competitive at a daunting pace.

But executives still believe Germany remains attractive and can stay competitive. Mr Fehrenbach said: “We will have to use our strengths to an optimal level but I am still very optimistic.”
Copyright The Financial Times Limited 2006