Europe's Troubles Could Be an Opportunity

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There’s talk of a banking sector implosion triggered by the collapse of the housing bubble and the prospect of an EU bailout of Spain’s sovereign debt. Spain’s debt woes dwarf those of Greece, so the Euro Zone impact could be significant. The country is in a deep, dark hole that will only get deeper and darker with further austerity measures.

There are ramifications for the economies of Europe’s stronger nations and global partners, including the US and China. Earlier this week, Germany, which is the EU’s largest and strongest economy, reaffirmed its 2012 GDP growth projection of a meager 0.7 percent for 2012 and 1.6 percent for 2013. In contrast, the EU’s executive commission predicted GDP for the 17-nation Euro Zone will post negative 0.3 percent growth this year.

A recent survey of purchasing managers across the EU conducted by London-based Markit Economics found manufacturing output fell to a 34-month low in April. The downturn has been affecting the EU’s periphery nations for a while but now is reportedly engulfing the core Northern European countries including Germany and France.

This morning, the US Department of Commerce reported preliminary GDP growth for the first quarter of 2012 of 2.2 percent, down from 3.0 percent in the fourth quarter of 2011. Some analysts suggest that the European debt crisis may cause a one percent drop in US GDP growth.

The threat of continued instability in Europe has a dampening effect on OEMs that sell into Europe and that have operations on the continent. Ford reported a 45 percent profit decline for Q1 as a result of plummeting sales in Europe. Companies in the Standard and Poor's 500, for example, derive about 14 percent of their sales from Europe.

In many Q1 earnings reports and on analyst calls, CFOs are warning about the dangers of exposure in Europe and are keeping a close eye on developments for Q2 and beyond. National Instruments, for example, expressed “concern” about the continued weakness in Europe in April.

Looking out over the next 6 to 12 months, what do Europe’s woes mean for US OEMs and their supply chains? For companies that sell in Europe, there’s the usual advice to be risk averse. Pay close attention to short-term sales forecasts, be prepared to quickly adjust production and material procurement plans, and keep a close eye on finished goods inventory.

At the same time, there may be strategic opportunities. In fact, now might be a good time to consider acquisitions in Europe. A recent poll of 800 business executives found that three quarters of Asian executives surveyed were interested investing in Europe, and 45 percent actually have plans to do so in 2012. In contrast, only 7 percent of North American executives surveyed have such plans.

Indeed, China’s government and corporate sectors are both taking advantage of opportunities for investment in European businesses in this period of economic contraction, with a focus on Central and Eastern Europe. Case in point is China's Wanhua Industrial Group acquisition of Hungarian chemical company Borsodchem for $1.6 billion, reported yesterday by Bloomberg Businessweek.

Think about it: Now could be the time to take advantage of Europe’s fire sale.