SYS-CON MEDIA Authors: Adrian Bridgwater, Yeshim Deniz, Elizabeth White, Sean Houghton, Glenn Rossman

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Huge Investment Opportunities Return to Western Europe, according to IHS Study

Findings from a multi-sector study carried out by IHS Inc. (NYSE: IHS), the leading global source of critical information and insight, were released at the IHS Forum in Berlin. As Western Europe returns to growth, the automotive, renewable energy and technology industries offer billion-dollar growth opportunities.

Key findings:

  • IHS Economics: The gap between Germany and the rest of Western Europe is growing; France is struggling to keep up;
  • IHS Chemical: German and European chemical producers expect marginal growth in 2014; German producers slightly optimistic about outlook, but European chemical companies must adapt quickly to be competitive;
  • IHS Energy: The European energy sector is experiencing a transformational shift driven by EU energy and climate policy; Renewable capacity to grow fastest in the UK;
  • IHS Automotive: Europe will overtake North American sales to be the second largest light vehicle market in the world before 2020; Germany will be Europe’s largest automotive market for next five years;
  • IHS Technology: Western Europe will invest €30 billion in next generation broadband to tap into future economic and social benefits;
  • IHS Defence: NATO will account for less than half of all defence spending by 2020 as Russia’s defence budget triples in three years.

Germany economy goes from strength to strength as it leads regional growth

“The developed economies are pushing growth back to the Eurozone. But, Germany’s star will rise faster and higher than the rest in the next three years,” Nariman Behravesh, chief economist for IHS said.

Germany’s most reliable leading indicators, the purchasing managers’ and the Ifo business expectations indices, have recovered markedly since hitting cyclical lows during the second half of 2012, and the moderate downward correction in February–March 2014 is expected to be an interruption, but not a trend reversal.

“Domestic strength due to structural labor-market conditions, expansionary monetary and fiscal policy as well as rising domestic demand all underpin Germany’s economic growth,” Behravesh said. He added that “Germany does face some serious competitive challenges in the medium- to long-term because of rising energy costs and poor productivity growth.”

France struggles to keep up

“The prospects for the Eurozone have improved in recent months. However, as growth returns to the region, France is struggling to keep up,” said Diego Iscaro, senior economist at IHS.

“We expect France to continue to lag behind Germany over the coming years. Although the measures announced by the government in recent months, which included lowering employers’ social security contribution and cutting some taxes, are positive and go in the right direction, France needs to do more to fix its deeply rooted structural problems, such as high labour costs and a rigid labour market,” Iscaro said.

Confidence returns to European and German chemical industry

The German chemical industry’s outlook is slightly more optimistic than the rest of Europe. “Even though growth is expected to occur at a slow pace, German producers are more optimistic than others in Europe,” John Page, vice president of consulting at IHS Chemical said.

“This optimism is largely because the German economy is one of the strongest economies in the region, the country has a much larger and more robust manufacturing base than the rest of Europe, and their facilities are more up-to-date from a technology standpoint than the rest of Europe. Most companies expect the German chemical business to pick up in the coming months, also in part due to increasing domestic demand,” Page said.

“At IHS, we expect an overall increase in German chemical production of 2 percent for 2014, so we are talking about sluggish growth here, but it is growth nevertheless,” he said.

Competition will force evolution of Europe’s chemical sector

Over time, the European chemical industry has seen a gradual change in its fortunes, with growing costs and a competitive market with many players. Faced with uncompetitive energy prices and stagnating demand, European chemical companies must adapt quickly or suffer the consequences.

“European chemical companies will face continued tough competition from Middle Eastern, Chinese and, increasingly, US producers benefiting from cheap energy and feedstocks,” said Michael Smith, vice president at IHS Chemical.

2030 EU energy and climate policy targets push energy sector reform

The EU’s ambitious 2030 target of 40 percent greenhouse gas reduction in Europe requires continued investment in renewables and a fundamental transformation of the European energy sector amid rising concerns over subsidy costs and competitiveness.

By 2030, renewable capacity in Europe is expected to grow by 297GW led by the UK and Germany.

The shale gas boom has shifted the global context for European energy policy, with low US energy prices adding further pressure to reduce costs of the European decarbonisation process.

Technology improvements and changes in policy and market design are necessary to support the build out and integration of renewables in a cost-effective manner in Europe as the decarbonisation policy has resulted in rising energy prices for end consumers.

Europe will overtake North America to be the world’s second largest light vehicle sales market

According to IHS Automotive forecasts, by 2018/2019, Europe will overtake North America to be the second largest light vehicle sales market in the world. The 21 million light vehicle units sold in Europe will be second only to China.

IHS Automotive forecasts European production volumes will grow by 21 percent by 2020, on par with a 19 percent increase in European export volumes.

“Despite increasing competitiveness in the global marketplace, Germany will be the biggest light vehicle market in Europe until the end of the decade,” said Carlos DaSilva, manager at IHS Automotive.

“By 2020, Germany will have increased its light vehicle production output by 17 percent, approximately 840,000 units, while other major European markets, like France, UK, Italy and Spain will see their output decrease or remain flat,” he said.

Mario Franjicevic, a senior analyst at IHS Automotive, added: “By 2020, German OEMs are anticipated to be responsible for 70 percent of the global production output of premium brands. We also anticipate that by 2020 German OEMs will have an estimated global plant capacity utilization of about 88 percent compared to an 80 percent global industry average estimate.”

Western Europe’s €30 billion broadband boost

Over €30 billion will be invested in the next three years in Western Europe’s broadband sector. Across Germany, France, UK, Italy and Spain, government bodies and telecommunication companies will spend €200 per household on next-generation broadband rollout.

“Across Europe’s big-five, companies and governments are looking to tap into the future economic and social benefits of having a future-proofed broadband network,” said Richard Broughton, head of broadband analysis at IHS Technology.

Germany’s Deutsche Telekom made headlines when it committed in 2012 to a headline investment of €30 billion in high-speed broadband technology in the years to 2015. Deutsche Telekom intends to ensure that 65 percent of homes are covered by its fibre-to-the-cabinet (FTTC) network by 2016, with new ‘vectoring’ technology being deployed to raise transmission rates to 100Mbs.

In 2013, the French government set out plans to invest €20 billion of public and private funds in next-generation fixed and mobile broadband, aiming to cover half of the population by 2017, with the remaining homes covered within a further five years.

“Crucially, the government’s plans have stratified investment, asking ISPs to fund urban coverage, while providing a mixture of state and local government funding to ensure that semi-urban and rural areas are connected,” Broughton said.

Almost €9 billion will be invested across the UK, Spain and Italy as governments set targets to expand next-generation mobile and broadband networks.

European defence sector struggles as Russia booms

“In 2013, 13 of the 20 fastest shrinking defence budgets belonged to NATO member states,” said Craig Caffrey, budget analyst IHS Aerospace, Defence and Security.

“As a result, NATO will be outspent by the rest of the world for the first time by 2020 despite being home to nearly two-thirds of global defence spending as recently as 2009. When we look at the last three years, defence spending in Asia and particularly in the Middle East has grown rapidly and this shift Eastward in global defence spending will be a trend that will continue over the remainder of the decade,” Caffrey said.

By contrast, Russian spending on defence doubled between 2007 and 2013, and will have tripled by 2016. Russia’s defence budget reached $78.1 billion in 2014, making it the third largest defence spender globally. Defence and security-related spending now accounts for 33 percent of the state budget, compared with 23 percent in 2010. By 2020, Russia’s defence budget is expected to reach $130.8 billion.

“Russia has increased spending on defence rapidly over the last three years. The country averaged 18 percent yearly growth since 2010 and under current plans this rate is set to increase to 22 percent in 2015,” Caffrey said.

About IHS (www.ihs.com)

IHS (NYSE: IHS) is the leading source of information, insight and analytics in critical areas that shape today’s business landscape. Businesses and governments in more than 165 countries around the globe rely on the comprehensive content, expert independent analysis and flexible delivery methods of IHS to make high-impact decisions and develop strategies with speed and confidence. IHS has been in business since 1959 and became a publicly traded company on the New York Stock Exchange in 2005. Headquartered in Englewood, Colorado, USA, IHS is committed to sustainable, profitable growth and employs more than 8,000 people in 31 countries around the world.

IHS is a registered trademark of IHS Inc. All other company and product names may be trademarks of their respective owners. © 2014 IHS Inc. All rights reserved.

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