German heat pump bonanza test industry's resilience in Russian gas crunch



By Thomas Escritt

HOLZMINDEN, Germany, Aug 18 (Reuters) - In a way, Stiebel Eltron has never had it so good. The heating manufacturer’s main factory has gone up to working 24 hours a day making the energy-efficient heat pumps that Germany needs to wean itself off Russian gas.

But it also has never had it so tough, with supply bottlenecks, labour shortages, and surging energy costs making it all but impossible to meet nearly limitless demand.

"I've worked here for 25 years and I've never experienced such wildly fluctuating and high material prices," said Kai Schiefelbein, the company's chief operating officer.

Thousands of medium-sized, family-owned companies like Stiebel Eltron, with some 4,000 employees and less than a billion euros in turnover, are the engine room of Germany's economy, accounting for half its output and some 40 million jobs. Their ability to adapt will be the key test of whether Germany's prosperity, built on its manufacturing excellence and exports, can survive into the new era ushered in by Moscow's invasion of Ukraine.

"Germany built up a business model that relied on cheap Russian gas," said Economy Minister Robert Habeck earlier this week. "This model has failed and it's not coming back."

Heat pumps, reverse refrigerators that suck heat out of the environment to warm houses and water through the winter using just a quarter of the energy of a gas boiler, are in heavy demand as Germany prepares for a winter with less Russian gas.

But Stiebel Eltron, like many other "Mittelstand" medium-sized family owned companies, has now found itself short of everything that made up Germany's winning formula - smoothly functioning global supply chains, skilled labour and cheap energy.

Supply chains, already stretched by the coronavirus pandemic, have been further frayed by the war in Ukraine, while the cost of raw materials has soared, including that of the copper from which coolant pipes are made, or the silver with which sections are welded together.

"We've bought processors that normally cost 42 cents for 45 euros," said Schiefelbein, pointing to a tiny component on a half-assembled unit at the company's main factory in Holzminden, a picturesque town by the Weser river in central Germany.

The surge in demand is a bonanza for the company, founded in 1924. It sold 50,000 heat pumps last year - a third of the 154,000 sold in Germany - and expects to sell 80,000 this year. Revenues are expected to hit a billion euros, up from 837 million euros last year. But it could have sold 50,000 more if it could keep up with the demand.

'THAT'S THE JOB'

With solid demand growth, Stiebel Eltron has it easier than many: in the autos sector, life is harder, with many suppliers finding their heavy engineering expertise is less valuable in an age of electric vehicles.

Earlier this year, auto components supplier Robert Hofmann announced it was cutting up to 70 jobs because of demand shifting away from combustion engine vehicles. Managing Director Oliver Hofmann told broadcaster BR that the company, a 3D printing pioneer, was seeking new markets in aviation and healthcare.

Many companies are weathering the storm, but the overall picture is grim: an Ifo institute survey of the mood in the Mittelstand showed it hitting its lowest in two years in July, with soaring energy costs a major concern.

The Nord Stream pipeline from Russia is delivering just 20% of its normal volumes, and many fear Moscow could yet screw the taps completely shut, bringing rationing and further misery to an economy on the brink of recession.

Schiefelbein has little time for those who predict a gloomy future for Europe's manufacturing powerhouse, saying the time he spent running a Stiebel Eltron factory in China has given him a "half-Asian" can-do attitude.

"These are simply the conditions we face," he said. "And our job, my job especially, is to make sure people keep their jobs and that the company keeps growing."

That involves recruiting from abroad where there are staff shortages. Since 2015, the share of people with immigrant background at the company has tripled, according to Rebecca Knauer, the company's human resources director.

With time, the company will add new production lines, allowing stretched staff to return to working days only, said Schiefelbein said as he greeted staff streaming out at the end of the dawn shift.

Most recently, they have recruited Ukrainian refugees, partly through personal networks, with staff who had chosen to host new arrivals recommending them to the company, which sought volunteers among the company's 2,500 staff in Germany to translate for those whose German is not yet up to it.

The number of Ukrainians working in Germany is still relatively low: of a million Ukrainians, 84,000 were employed in June, according to the German labour agency. Earlier refugee waves, though, such as the 2015 influx from Syria, eventually led to strong employment growth, with some 400,000 refugees in work by 2019.

Alyona, whose family remains in the Russian-occupied Zaporizhzhia region of eastern Ukraine, and declined to give her full name to protect them, found her experience as a seamstress had prepared her well for precision welding in central Germany.

Like many of Germany's Mittelstand businesses, Stiebel Eltron welcomes recent government moves to make it easier for foreigners to come to Germany to work, but despairs at authorities' continuing insistence on checking whether foreign education certificates match up with Germany's intricate vocational qualifications.

The company is spending 1.4 million euros to link itself up to existing liquid natural gas distribution pipelines to ensure gas will continue to arrive even if Russia completely closes the tap, but it is also investing in new robots that weld using electric induction rather than gas.



FACTBOX-German local utilities' plans as natural gas gets scarce

German gas storage levy adds to energy consumers' woes German investor morale dips as inflation fuels recession angst



Reporting by Thomas Escritt Editing by Tomasz Janowski

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