(Bloomberg) -- Deep in Europe’s manufacturing core, a German company is taking radical steps to cope with a perfect storm that has sent traditional economic pillars into a tailspin and put the country on the verge of recession.
Huebner GmbH -- a 73-year-old supplier of rubber and plastics that employs 3,300 people around the world -- is selling its unit that makes accelerator pedals, key pads and auto-body parts after getting squeezed by Germany’s carmakers. Instead, it’ll focus on public transport and -- in a completely new endeavor -- making lasers.
The move reflects how Europe’s largest economy -- reliant on exports and a world leader in the century-old industries of cars, machines and chemicals -- is at a critical juncture. It’s being hit by U.S. President Donald Trump’s protectionism and Brexit uncertainty just as companies struggle with a high-risk transition to greener products and smarter digital factories.
The German economy shrank in the second quarter and could do so again this quarter. The latest warning sign came on Thursday, when a nationwide gauge showed orders at factories and services companies dropping at the fastest pace in six years. More German companies now expect output to fall rather than rise over the next 12 months, the first time that’s happened since 2014.
With day-to-day business roiled by geopolitical power plays, German giants like Siemens AG (DE:SIEGn), BASF SE (DE:BASFN) and Daimler AG (DE:DAIGn) have been forced to lower profit forecasts and seek ways to cut costs. Smaller brethren like Huebner say they’re being pushed too hard in the fallout.
The shift to new markets was made because big manufacturers are mistreating suppliers by “forcing them into ever lower prices,” said Chief Executive Officer Reinhard Huebner, son of the founder who fled the advancing Russian army in the 1940s before starting the Kassel-based company.
Products such as the folding bellows that connect bus and tram carriages are “a better and safer place” than the auto industry as cities around the world invest more in public transport, he said.
Small and medium-sized enterprises such as Huebner make up the so-called Mittelstand, which accounts for 35% of corporate revenue and 58% of jobs in Germany. Often family-owned, they don’t have the cash buffers to sit out a downturn. Nor are they well-positioned to address structural challenges like a dramatic shift in the underpinnings of modern manufacturing.
“The SMEs are more-or-less sandwiched” between big companies and their customers, said Andreas Fehler, a spokesman for the Chemical Association of Baden-Wuerttemberg. “They deliver to the automotive or machinery industry, and these are the industries, well, we’ve seen in the last weeks how they’ve been holding up -- and this is a problem.”
The ultimate challenge facing German manufacturing is the transition to so-called Industry 4.0. The concept refers to the so-called fourth industrial revolution as manufacturers around the globe go digital. The aim is to combine robotics, machine learning, cloud computing, big data and the Internet of Things to create smart factories capable of better, more efficient production.
While Germany originated the term, the country is ill-equipped to deal with the transition, with deficiencies in everything from software training to Internet infrastructure.
Amid complaints about a lack of government support and a shortage of trained labor, the Mittelstand is falling behind on research and development efforts, according to a report by the Bavarian Chamber of Commerce. The state, home to BMW and Audi, only hit its goal of R&D outlays accounting for 3% of GDP thanks to spending by big companies.
Giving voice to mounting concerns over the country’s competitiveness, more than 50,000 people attended a June rally in Berlin organized by industrial union IG Metall. The goal was to prod the government to help prevent widespread layoffs from the technology shift.
While political issues such as Brexit and trade tensions are distorting measures such as the exchange rate and raw materials prices, making economic judgments “incalculable,” companies still need to look further into the future, according to Olaf Wortmann, an economic expert at the German Mechanical Engineering Industry Association.
“It’s pretty gruesome right now,” said Wortmann. “Merely waiting isn’t enough. You can prepare by trying to address all the technical challenges. But simply waiting won’t do it.”
Rubber to Lasers
For Huebner, that’s meant investing in lasers. The project -- far removed from the molding it’s done for decades -- started in 2014 with a series of acquisitions. The photonics unit now has 70 employees, with manufacturing locations in Stockholm and at its headquarters in Kassel and sales offices in Silicon Valley and the U.K. The company’s products are used for holographic films for augmented reality glasses and biomedical research.
Sales, which have doubled since the unit was established, are “growing like hell,” said Ingolf Cedra, Huebner’s managing director for materials and photonics.
He’s optimistic that Germany, which successfully rebuilt after the ravages of war and absorbed the communist east after the Berlin Wall fell 30 years ago, will ultimately weather the current turbulence.
“German industry has a fantastic chance in combining the mechanical expertise, in designing the machinery and merging that with clever software solutions,” said Cedra. “I do believe that the Mittelstand -- driven by machinery business, mechanical engineering -- they have a chance, and they will take the chance.”