Making a mark
By : Roseanne Gerin
Metal fatigue: Scaffolding supplier Mostostal Siedlce is one of a handful of Polish companies that has seen a drop in trade with Germany this year.
Times may be tight in Germany, with the economy sliding to near zero growth for much of the first half of the year, but for Polish traders like Ryszard Polanski it's still business as usual. As with other Polish businessmen trading with Germany, the economic gloom west of the Odra River has yet to have any serious side effects for him.
Polanski is president of Lodz-based clothing producer Wolczanka (http://www.wolczanka.com.pl), whose major export market is Germany. And while he admits there have been signals that German demand for his company's exports has dropped slightly, the economic downturn is not to blame.
"The decrease is caused by the fact that the German retailers are simply searching for cheaper manufacturers in Slovenia and Romania," Polanski said.
Despite Germany's economic downswing, some major Polish exporters such as Wolczanka will continue to remain largely unaffected, industry analysts said. Furthermore, some Polish exporters point to other factors causing temporary dips or a leveling off in Germany's demand for their products.
Since the beginning of the year, the German economy has staggered along with the general economic stagnation in the entire euro-zone community. The Bundesbank, Germany's central bank, reported that growth ceased in the second quarter of 2001. The government has lowered its forecast for this year's growth in gross domestic product (GDP) or the market value of the goods and services a country produces from 2.75% to 2%, while skeptical German economic think tanks predict it will be even less for the rest of the year. The latest economic forecast estimates the country's GDP will only be slightly above 1% vs. 3% a year ago.
Yet Polish exports to Germany have increased. According to figures issued last week by the Central Statistical Office (GUS), the country's exports to Germany rose 15.7%, while imports were up 1.8% during the first six months of 2001. In the same January-June period, Polish exports to the entire euro-zone region were up 16.1%, while imports rose 1.4%. At the beginning of the year Poland racked up a $361 million trade surplus with Germany, the first positive trade balance since 1995, according to the Economy Ministry.
While the economic slowdown makes the increase of Polish exports to Germany slightly more difficult for some exporters, it's not life threatening.
A stich in time: Germany still remains a huge market for clothing producer Wólczanka.
Appealing partners
Iwona Goral, an expert in German trade relations at the Economy Ministry's department of European integration, said exports to Germany are still growing since many factories and exporters have good relations with German partners. Such partnerships shield exporters against any fallout from Germany's economic slump.
"Polish companies are more and more integrated, (and) they are no longer marginal suppliers (to Germany), but regular partners; (therefore) Polish exports suffer less than before," said Witold Orlowski, the director of economics at the Lodz-based Independent Center for Economic Studies (NOBE) (http://www.nobe.pl). "When there is an (economic) slowdown, you cut from the marginal suppliers."
Although analysts said the German economic slump has had little impact on Polish exporters, many firms cite several other factors affecting business with their Western neighbor.
As in the case of Wolczanka, Germans are seeking out countries that can provide less expensive goods with the same or better quality. While Polish furniture exports to Germany, for example, are peaking, they appear on the verge of falling as Germans are able to buy sofas and chairs for less money from southern European countries, said Matthias Rehm, the public relations director of the Polish-German Association for Economic Promotion (http://www.twg.pl). "Exporting from Poland to Germany is too difficult because the technology and quality of the products is not as high as in the German market," he said.
Wlodzimierz Poths, the deputy commercial director at Towarzystwo Handlowo-Przemyslowe Metronex (http://www.metronex.com.pl), a Warsaw-based company serving as an intermediary in exporting measuring devices and contract laborers, said his firm's exports to Germany have fallen during the past few years as the company has lost out to other foreign producers.
"There were tremendous exports in the past ... but Germany stopped purchasing (pressure gauges from us) and bought them from the Far East or produced them themselves at the beginning of the 1990s," Poths said.
Although exports to Germany accounted for about 40% of Metronex's $5 million in turnover last year, Poths said Germany was a less important market now as his firm also ships to France, Egypt and Russia. He expects the firm's exports to Germany this year to be about the same as in 2000.
Some observers agreed that German firms are looking to other countries for higher quality products at lower prices. "For exports to become an even bigger growth factor, producers will have to continue working on the competitiveness of Polish products," said Herbert Quelle, the head of the economic section at the German embassy in Warsaw.
The quick-fire appreciation and then drop of the zloty earlier this year also dented the value of exports to Germany for some Polish firms. Wolczanka, for instance, has exported the same quantity of clothing to Germany for several years, but it saw the value of its exports drop when the exchange rate of the zloty to the deutsche mark became unfavorable, Polanski said.
"Since November 2000, the rapid improvement of Poland's current account, an attractive level of interest rates and the expectation of rate cuts triggered investment inflows, which caused the zloty to considerably appreciate in June 2001," said a Deutsche Bank Research report. But in early July the zloty lost about 10% of its value when Argentina risked defaulting on its $128 billion debt and imploding its currency. The contagion spread to other emerging market currencies, although the zloty managed to recover somewhat and stabilized at about 3.70 per euro and 4.20 per U.S. dollar.
Rehm said the exchange rate of the zloty to the deutsche mark a few months back was 2 to 1, while some weeks ago it was zl. 1.70 to 1 DM. "For exporters it's very bad because for the money they get in Germany, they get fewer zlotys in Poland," he said.
Some Polish exporters in traditional businesses, such as timber production, felt the sting in the zloty's gyrations. "It's harmful to gross margins and makes overseas sales less attractive," said Robert Kozlowski, president of Paged (http://www.paged.com.pl), a Warsaw-based producer and exporter of furniture, plywood and processed timber.
Prizing open the market
The liberalization of some Polish industries during the past decade has opened the export market to an increasing number of competitors and weakened the stronghold of many former monopolies that sold their products mainly to Germany.
Paged, for example, which has been exporting to Germany for some 30 years, enjoyed a state monopoly under the former centrally planned economy as the only company that traded timber products. But while the German market accounted for about 10% of the firm's total turnover of $40 million in 2000, its exports to Germany have since dropped. The slump is mainly due to the demonopolization of the Polish timber market and Paged's cooperation agreements with timber and furniture manufacturers that it doesn't directly control, Kozlowski said. He added that Paged's furniture export business remains stagnant due to market saturation as well as decreasing German purchasing power and the reluctance of hotels, bars and restaurants to buy new furniture.
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"We depend on the German market to a lesser extent," Kozlowski said. "It's a period of stagnation (but) it's not solely due to the performance of the German economy." To combat stagnating export sales, Paged has increased the number of countries it exports to so it "can absorb (a demand decrease) through diversification," he said.
Despite most Polish exporters reporting that their businesses have remained largely untouched by Germany's economic slump, some admit their businesses have felt the pinch. Mostostal Siedlce, which produces steel frames, scaffolding and construction accessories, has seen a drop in German demand for the scaffolding produced by its subsidiary, Baumann Mostostal. Aldona Borczynska, a saleswoman in Baumann Mostostal's exports department, said exports to Germany may have fallen off by as much as 20% during the first half of the year due to the economic downturn.
Germany has been Poland's biggest trading partner since 1990. That year the country carried a positive trade balance of $4.8 billion with its Western neighbor, with $14.3 billion in exports and $9.5 billion in imports, according to GUS statistics. A decade ago, Poland mainly exported raw materials such as coal and sulfur to Germany. Now exporters ship finished products, which account for 80% of all Polish exports to Germany, while raw materials comprise 12% and agricultural products less than 7%, according to the Economy Ministry. Textiles and apparel, wood and wood products, iron and steel products, vehicles and electrical equipment are the products that Poland most often exports to Germany.
While Poland's exports to Germany accounted for 25.1% of the country's total exports in 1990, the figure jumped to 34.9% last year when exports totaled $31.6 billion and imports from Germany $48.9 billion, according to GUS statistics.
The last significant slump in the German economy came during the Russian and Asian economic crises in 1998 and early 1999, which triggered a drop in German imports. As a result, Polish exports to Germany comprised only 13% of all exports during the first half of 1998 and then dipped to 7% during the second half of 1998, and was followed by a strong recovery.
"This time there is not so strong an impact because the exchange rate and Polish exporters are in a better position, and the structure of Polish exports has improved," said Dirk Woelfer, managing analyst for Central and Eastern Europe at Standard & Poor's MMS in Frankfurt. Woelfer referred specifically to the shift from the production of base materials to processed goods that are more resistant to economic cycles. He also said he was optimistic that the German economy, the worst performer in the euro-zone countries, would recover from early 2002.
With several factors affecting their exports to Germany, some Polish exporters are increasing their business domestically. Robert Kozbial, a marketing specialist at Anwil (http://www.anwil.com.pl), a chemical producer and exporter in Wloclawek, said that while the German economic downturn could indirectly affect his company, Anwil would continue selling its products mainly to the domestic market.
Wolczanka is following the same path. "(We) are trying to balance our exports with our domestic sales at a 50:50 level," Polanski said. "Sales of exports give us liquidity, but they aren't profitable, while domestic sales are more profitable (but) have longer payment deadlines."
