The Germans are coming, again

AMERICA’S German roots are rich and strong. From California to New York, 48m people claim German ancestry, which would make them the country’s biggest diaspora. But when it comes to owning businesses in America, Germany has punched below its weight, with only 8% of the stock of foreign direct investment (FDI) there. It ranks 7th, behind France, Britain and Japan, among others. British and Japanese firms are especially prone to megalomaniac episodes in which they seek, and fail, to conquer America. German firms have been more cool-headed.

This year, however, things have changed. German giants such as Siemens, SAP, Bayer and Infineon have been on a spree, so far spending more than $65 billion on American firms. Of all the American companies receiving foreign bids this year, a fifth were from German buyers, measured by value. And of all the cross-border takeovers worldwide led by German firms, 60% were for American firms.

One explanation is macroeconomics. German firms’ investment at home has waned, because of high labour costs and the dim prospects for the euro zone, says Michael Heise, an economist at Allianz, an insurer. Partly because of its strong exports, Germany runs a current-account surplus of about $250 billion-$300 billion a year that must be recycled abroad. Emerging markets have slowed and China is being less hospitable to foreign firms. America is growing fast, and has relatively cheap labour thanks to stagnant wages and cheap energy because of its fracking boom.

German firms’ FDI is still dwarfed by the huge chunk of savings by Germany’s thrifty households that its banks and insurers invest on foreign financial markets. Earnings from these indirect investments provide a large proportion of Germany’s current-account surplus. However, German industry’s contribution to the surplus should grow as a result of its purchases of profitable American firms with a global reach. The seven American firms worth more than $1 billion bought by German ones this year make 65% of their sales outside America in aggregate.

Thus, Infineon is buying International Rectifier, which is based in California but makes half of its sales in Asia. ZF Friedrichshafen, a car-parts firm, is buying a Michigan-based rival, TRW, which makes two third-of its sales outside America (and its biggest customer is highly globalised Volkswagen). Siemens is snapping up Dresser-Rand, which makes equipment for the oil and gas industry: it has Russian, Chinese and Saudi Arabian clients, factories in Europe, Brazil and India and makes just a third of its sales in America.

Rather than experiencing a sudden infatuation with America, German firms are arguably continuing the steady globalisation that they have pursued for two decades: building market shares in specialised industries, expanding into adjacent businesses and building out global supply chains and customer bases. This pattern began with the opening of factories in eastern Europe in the 1990s and tilted towards emerging markets in the past decade.

Painful reminders

Hitherto German firms have preferred “greenfield” investments abroad—building factories and other facilities from scratch rather than making acquisitions. They have amassed a stock of $50 billion of FDI in China without a single big takeover. In India British companies have embarked on giant takeover deals to dismal effect, while their German counterparts have built up successful production hubs.

There was a good reason for this. In the few instances in which German firms did buy big American ones, things went badly. Daimler’s $43 billion purchase of Chrysler, in 1998, was a fiasco and was undone in 2007. Deutsche Telekom’s $33 billion purchase in 2000 of Voice-Stream, an American mobile operator (now called T-Mobile US), was a financial mess from which it is still extricating itself. Such cases have led some to argue that German firms have such strong cultures that they are unable to integrate acquisitions easily.

Germany’s new taste for acquisitions is, therefore, risky. But the buyers seem to have learned the lessons about overreach from Daimler and Deutsche Telekom. Two are simultaneously offloading peripheral assets, indicating their discipline. In May Bayer bought the over-the-counter-drugs business of Merck & Co of America (not to be confused with a similarly-named German firm). Bayer now plans to spin off its own coatings and plastics business. Siemens sold out of a joint venture with Bosch at the same time as it bought Dresser-Rand on September 22nd. The top seven deals involve almost $1 billion of cost cuts and none of the buyers is taking on excessive debts.

Those cost-cutting targets will make American employees nervous. But compared with the average foreign investor in America, German firms are typically more financially secure and spend more of their revenues on pay. Many offer good, German-style apprenticeships. There are worse things than working for an American firm that has been schnapped up.