Fit to take on the financing competition – VDMA bets on digital solutions for small tickets in the medium-sized private business sector
GUEST CONTRIBUTION BY THILO BRODTMANN, EXECUTIVE DIRECTOR, VDMA
German mechanical engineering companies are trying to hold their ground in an increasingly difficult economic environment. The year 2019 was dominated by a weak global economy, ever more serious threats and sanctions in global trade disputes as well as far-reaching structural changes in the automotive industry – triggered by ambitious climate targets and the resulting limits imposed. Order intake is the key challenge facing medium-sized companies in the capital goods industry, with one in three reporting a lack of orders at the start of the year.
In the first ten months of the year, production in the German mechanical engineering sector fell by 1.8 % in real terms compared to the previous year, while order intake declined by 9 % over the same period. It is without doubt a challenging situation, considering the fact that medium-sized mechanical engineering companies are Germany's largest industrial employer, providing over a million jobs.
Global economic development will remain subject to a high degree of uncertainty. The situation in emerging and developing countries, which are particularly relevant in the context of Hermes-covered Export Financing, remains mixed. Over the last decade, however, we have seen China gain market share in all emerging countries. There are many reasons for this trend, and the provision of export financing has a key role to play in the response to it.
Digitisation as a business model: Another challenge facing companies in Germany is the digital transformation. The mechanical engineering industry is traditionally very technology- and product oriented. However, digitisation has for some time now played a key role in the construction of production plants and machines, expanding the sector's core competence. This has led to the creation of a market that extends far beyond the classic machine.
The key theme of Industry 4.0 promotes value creation networks (also at international level), opening up opportunities for SMEs because it is agility rather than size that counts. In the VDMA we are constantly setting up new working groups, such as "Additive Manufacturing", to strengthen networks in industry.
One of the biggest challenges for our sector is the marketing of digital services and companies from outside the sector entering the market. We must bear in mind the size classes in the German mechanical engineering industry: almost 100,000 people work in companies where fewer than 50 people are employed, while 110,000 people work in companies where up to 100 people are employed. 95 % of all capital goods manufacturers have fewer than 500 employees. Medium-sized industrial enterprises in particular rely on their innovative capacity.
Great potential exists for Hermes cover. The current "sell and finance the machine" business model is gradually being replaced. Machines are not being sold, but are instead becoming "enablers" of services and therefore of cash flows. In terms of providing guarantees for such models, Hermes cover is still in its infancy. At present, an essential requirement in order for a delivery transaction to be eligible for Hermes is that the export goods must cross the German border. It remains to be seen how Export Financing might work in future if we are exporting data sets or programming services rather than physical goods.
Digitisation as a solution to the problem of financing: Digitisation, as we see here in the examples from the capital goods industry, is a catchword that covers many different aspects. In my opinion, the same applies to the world of finance, particularly when we look at the handling of exports. Looking at just the transactions and the important documents for confidence-building in foreign trade: Our members want to see digital documents, digital releases or new settlement methods such as Blockchain delivering a new level of efficiency. Export Financing requires digitisation in order to overcome the much-complained about cost traps for small tickets. Digital, standardised processes can facilitate this cooperation in the future.
It essentially comes down to how simple the underlying export promotion instrument – Hermes cover – can be. Hermes-covered financing must not be just an isolated solution within a company's processes. Many Hermes requirements are based on documents that are otherwise not used in everyday business operations. This is a problem for companies that operate with small tickets. Digitisation therefore provides an opportunity for Export Financing to keep pace with settlement solutions from parallel worlds, such as accounting.
Will we perhaps see a new product, such as a platform granting export loans in a very short time, at the end of the digitisation process? Such a solution is still long way off, because Export Financing is a unique product. Export Financing involves a complex network of cooperation – between export credit guarantee and financial institutions, between suppliers and the borrower or buyer of the machine.
Nevertheless, the simple processing of a Hermes application or Hermes-covered financing could be a fundamental requirement for successful digitisation.
Small ticket Export Financing as a door opener: In developing and emerging countries, there is often a lack of willingness on the part of local banks to finance new investments in machinery. It is also sometimes a more attractive option for a foreign customer to obtain financing that is closely linked to the machine as an asset. State-supported Export Financing offers credit periods based on the useful life of the investment at attractive terms. For the exporter, having the right financing solution in place is the icing on the cake when it comes to making a successful deal.
In recent years there was a noticeable lack of tangible financing offers for small tickets. Banks had little interest in export transactions in the EUR 1 million to EUR 5 million range, citing their costs as a reason. Many companies therefore dreaded raising the issue of Export Financing as a marketing instrument with their customers. It was a vicious circle: finance departments didn't have a tangible Export Financing offer that they could pitch to sales as a solution to their problem. Sales adapted their market development approach and came to terms with the lack of financing offers.
Onboarding Export Financing – joining the “fitness club”: The issue of digitisation has been taken up by all stakeholders in Export Financing. The launch of click&cover Export by Euler Hermes led to the creation of a growing number of online platforms offering Export Financing solutions in 2019. A preliminary analysis of these online offerings by the VDMA shows that they cover a broad spectrum – from Hermes application processes to the arrangement of financing.
AKA clearly has a special role to play here, as this is the only online portal where a buyer credit is created directly on the basis of the company's online request. The offer is based on standardisation of the buyer credit. This gives SMEs, which were prevented from gaining experience due to economies of scale, a tangible offer with clear criteria. In the interest of a high level of standardisation, AKA is initially adopting a limited country focus with SmaTiX (Small Ticket Express) as an introductory module and assessing, among other things, the solid creditworthiness of importers as a basic requirement for an indicator. The VDMA sees the registration of medium-sized exporters with digital platforms as an opportunity, as only then can they position themselves proactively with regard to Export Financing.
VDMA as an interface for export expertise: The VDMA regards Hermes cover as a key issue for the capital goods industry and has therefore been ready for many decades to dedicate the time and resources needed to substantively deal with this funding instrument. We are happy to work with all representatives involved in the issue of export credit guarantees. We maintain regular contact and dialogue with AKA regarding the challenges facing SMEs. AKA has regularly shared concepts for small tickets with the VDMA Export Finance working group, and many of its members are also “Peer” contacts for the new AKA modules.
At the VDMA, and this is something that is important to me personally, we also cover the entire spectrum of issues relating to exports, from customs issues and export controls to Incoterms, to name just a few examples. In doing so, we are creating a solid foundation of export expertise for our members. Export Financing needs extensive experience and knowledge of export handling.
AKA – digital platform for buyer credits: The platform economy has also arrived in the world of banking. AKA has, in cooperation with its shareholders, the opportunity to take small ticket Export Financing out of its niche status. From our perspective, this means bundling and standardising requests through the online portal. We are pleased that the network of AKA shareholders (including all major and regional German banks) supports the online portal SmaTiX. In the development of this portal, AKA can draw on its tradition as a specialist credit institution with over 65 years of experience as well as its digitisation expertise.
In particular, SMEs that have virtually no experience and cannot enter into supplier loans at their own risk can benefit from the new application solution offered by SmaTiX. For small ticket orders, the digital application process is important, as are real-time indicators and a streamlined financing agreement. In the case of Hermes-covered Export Financing there are still numerous interfaces. SMEs therefore benefit indirectly from AKA's specialist team, which is in turn based on a strong network of shareholders and works closely with Euler Hermes. We also take a very positive view with regard to the planned European expansion into the DACH region. VDMA membership in the DACH region is growing, and we welcome AKA's approach of integrating credit insurance providers OEKB and SERV into the digital tool.
Conclusion: As 2019 ends and 2020 begins, German mechanical engineering companies find themselves faced with disruptive changes that will affect the very core of their product range. These mainly medium-sized companies have a strong culture of innovation, though attention is now being focused on general financing issues for new investments. Looking back at economic history, we see that the successful export business has been a major driver of this innovative capacity, as the various foreign markets have given companies the required economies of scale to produce highly specialised solutions. We need to continue to develop the state export credit guarantee as a funding instrument for financing and guaranteeing such exports.
The new AKA portal SmaTiX should also address economies of scale. It will be necessary to get industry on board for Hermes-covered buyer credits in the small ticket segment. The VDMA is making extensive use of its channels to promote small ticket solutions. I believe it is also important that German commercial banks actively support the platform. More detailed knowledge of small ticket financing requests should also provide an important basis for further simplifying the Hermes system. The AKA project for small tickets is thus a political project, through which we can promote Export Financing together.