Düsseldorf In Carsten Zölzer’s 25 years of activity, costs have never increased as much as they do now. He is responsible for the German business of the printing ink manufacturer Huber Group, whose products are used for food packaging and newspapers, for example.
Annual cost increases of no more than two or three percent were normal, he reports. In the past twelve months, however, the increase was 60 percent. Zölzer says: “In the summer of 2021, freight costs shot up astronomically due to disruptions in the supply chains.”
Because of the war in the Ukraine, raw materials such as sunflower or linseed oil, which the company uses to produce paints, have become scarcer and more expensive. The medium-sized company was able to pass on almost all of the additional costs to its customers. “We had absolutely no other option, otherwise the company would have fallen into an existential crisis.”
The printing ink manufacturer based near Munich is an extreme example. But it shows how the industry is struggling with unusually high increases in energy, material and personnel costs as a result of the corona, energy and Ukraine crises. 98 percent of medium-sized companies in the manufacturing industry expect additional costs this year, but only every second smaller company expects sales growth.
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After all, 66 percent of the companies were able to pass on at least some of the increased costs via flat-rate price increases, and a further five percent are planning to raise their prices. These are the results of a study by the market researcher Kantar on behalf of the consulting firm FTI-Andersch, which is available exclusively to the Handelsblatt. 100 companies from medium-sized industry were interviewed for the study.
The cost increases are so high for some companies that they even cancel or reject orders. 24 percent of the smaller medium-sized companies with fewer than 1000 employees do so or plan to do so. In companies with more than 1000 employees it is eleven percent.
Karsten Schulze, board member and partner at FTI-Andersch, says: “This is not a sustainable solution, but the cost increases are sometimes so extreme that calculations are obsolete and it is more economical for companies not to accept an order in the first place.”
Complicated price negotiations
The Huber Group and its 3,500 employees are not yet rejecting any orders, also because manager Zölzer wants to raise prices again: “The passing on of increased costs has just become a monthly craft in sales.” Some customers would not understand this. After all, they are under similar cost pressures and have to pass on the prices until they reach the consumer. Zölzer says: “If we can’t get the prices we need, it doesn’t make sense for us to deliver.”
This is how it is for the entire industry, consultant Schulze observes: “In a competitive situation, companies can rarely increase their prices in B-to-B business in such a way that all losses can really be compensated for.” Customers then switched to the competition.
Above all, smaller companies with fewer than 1,000 employees have managed to pass on increased costs through higher prices. While 77 percent state this, it is only 55 percent for larger companies with more than 1,000 employees. Schulze says: “Smaller companies often have less financial leeway and can hardly compensate for such cost increases. The buyer knows that too and is more likely to accept the price increases.”
Further measures against inflation
Industry is reacting to inflation with further measures. The Huber Group, for example, has changed its agreements. In the past, annual or half-yearly contracts were normal, but the company now only fixes a price for one month. The study shows that around 60 percent of companies, like the printing ink manufacturer, are shortening their quotation deadlines in order to be able to react better to higher costs.
The increase in costs is painful, but tolerable, according to the boss of the mechanical engineering company Koenig & Bauer.
(Photo: Koenig & Bauer)
It’s more complicated at Koenig & Bauer. With more than 5,400 employees and a turnover of more than one billion euros, the medium-sized company is one of the world’s largest manufacturers of printing machines. With such systems, the contracts are sometimes signed twelve to 18 months before delivery. The company tries to anticipate the cost increases. CEO Andreas Pleßke says: Of course they could not have guessed the current extent.
The machine manufacturer from Würzburg sees additional costs of up to ten percent overall, for example because raw materials such as copper, steel or nickel have become more expensive. “The increase is painful, but tolerable,” says Pleßke. They passed on a “large amount” of costs, especially for machines where the company had a technological lead.
Active contract management necessary
The consultants at FTI-Andersch are currently advising companies to use active contract management. You should rely on price escalation clauses or active hedging. In the case of price escalation clauses, buyers have to share in the incalculably rising additional costs. Hedging instruments are used to hedge against fluctuating market prices for energy and commodities.
>> Read more: Family businesses have above-average profits in the pandemic
However, every second medium-sized company does not use such instruments. In smaller companies, the proportion is even lower because they often do not have the necessary skills.
For FTI Andersch board member Schulze, companies are taking a big risk. In a volatile market environment, companies should manage their contracts more professionally to protect themselves against high cost increases. “Otherwise they will end up bearing the costs, which can sometimes endanger their existence.”
Koenig & Bauer boss Pleßke also admits that price escalation clauses have so far been the exception for many machine and plant manufacturers. “We are currently dealing intensively with the topic.” So far, price increases have been a tried and tested method. “If the time intervals for price adjustments are getting shorter and the amounts of the adjustments are becoming more and more dramatic, then we have to think about new contractual mechanisms.”
For the manager, rising costs are not the only problem. The company is struggling with the lack of availability of components. This slows down and complicates production considerably. “Availability is the new gold in mechanical engineering.” There would also be a shortage of skilled workers. German medium-sized companies are currently facing many challenges.
More: Risks from the Ukraine war: Four out of five companies are raising prices.