‘Continental’ screams the huge sign I encounter during my Saturday morning cycles: ‘Tyres – Engineered in Germany’.
Until two weeks ago, this proclamation was an positive for the brand. Today, perhaps, not so much.
The recent Volkswagen scandal has the potential to tarnish the ‘made in Germany’ brand. As David Bach argues in the Financial Times, ‘because of Volkswagen’s central role in Germany’s automobile industry, the scandal is a devastating blow to the country’s global image’.
He continues, ‘for years Mercedes, BMW, Audi and Volkswagen have used German slogans and tag lines in their global advertising campaigns to link their products to the country’s engineering prowess’. Think Volkswagen’s ‘Das Auto’ or Audi’s ‘Vorsprung durch Technik’.
Marketers refer to this as the ‘country of origin effect’. It is a brand halo surrounding industries in certain countries, with customers using the country of origin as an indicator of quality in their purchase decision.
Examples include Italian fashion, French wine, Swiss watches and Australian beef. And, of course, German engineering.
If you’ve ever walked the floor of a factory or printing plant, you’ve probably seen ‘TRUMPF’ precision laser cutting machines, or ‘Heidelberg’ printing presses. Otherwise, you’re sure to have ridden in a ‘ThyssenKrupp’ elevator or atop one of their travelators at an airport.
Generally, buyers tend to see German-manufactured products as more reliable than, say, Greek- or Australian-made ones.
So the question is, might other German-manufactured products see their premium reputations damaged by the Volkswagen scandal?
It’s a possibility, rather than a probability. And I suspect customers will eventually look past the scandal (see Gareth’s recent blog post). But as a passionately patriotic Italian, I hope that other European manufacturers can seize the moment and take some market share away from their German competitors. They won the last World Cup, after all, so fair go Fritz, it’s time to spread some joy around the continent*.
The Italian and French manufacturing industries represent a large percentage of their respective economies, as measured by the ratio of Manufacturing Value Added (MVA) to GDP.
Since the Forager International Shares Fund launched in February 2013, we’ve analysed several Italian manufacturers. So far B&C Speakers (BIT:BEC) is the only one to have made it into the portfolio but we have an attractive watchlist of quality Italian manufacturing businesses that we’d like to own one day, price permitting.
In particular, we are watching several Italian producers of machines and industrial equipment. Italy has a surprisingly strong history in this area.
As you can see in the chart below, 19% of Italy’s Manufacturing Value Added is derived from the production of machinery and equipment alone – on a par with Germany. Food and fashion products, which many people relate more closely to Italy, account for 12% and less than 10%, respectively.
Three factors have now come together for French and Italian manufacturers; the recent weakness in the Euro, lower energy prices and now this latest blow to the credibility of their strongest competitor. The stars may now be aligned for them to reduce the gap their German cousins have opened up and, in some niche markets, perhaps even take the lead.
*Note – My German-descended boss okayed this line.
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Forager Funds is a boutique fund manager specialising in a value investing approach. We offer an ASX listed Australian Shares Fund as well as an International Shares Fund both aimed at delivering returns for long term investors.