By Paul Carrel
BERLIN, Sept 6 (Reuters) - Germany's engineering excellenceand grip on emerging markets have helped generated record growthand will help protect it from any slowdown in the U.S. economyand among its euro zone peers.
German companies have spent much of the last two decadesestablishing a firm foothold in emerging markets in Asia andLatin America, positioning themselves to supply theinfrastructure these economies need to grow.
The strategy has been helped by corporate Germany'sproficiency in making high-end engineering goods. Such is thedemand for these products that machinery and commercial vehiclesaccount for almost 50 percent of German exports.
"We're very well represented in many markets that are nowvery important but which were not so important previously --better represented than others," said Volker Treier, chiefeconomist at Germany's chambers of industry and commerce (DIHK).
This exposure to growth markets is translating into ordersfor German businesses even as mature economies -- led by theUnited States -- struggle to recover.
German manufacturing orders rose by 3.2 percent on the monthin June, rounding out a strong second quarter that saw Europe'slargest economy expand by 2.2 percent from the previous threemonths -- the fastest quarterly growth in a reunified Germany.
Businesses are already profiting. Of the 30 companies in thebluechip DAX index, 23 beat market expectations with theirearnings in the quarter to end-June and 12 hiked their outlooks.
Investors have also taken note.
Audrey Kaplan, manager of a $790 million fund at U.S.-basedFederated Investors, has increased the exposure of her portfolioto Germany this year and it is now overweight in German stocks.
"We've watched the German economy picking up due largely toemerging-market strength and demand for the German products thatare highly technical products," she said.
Germany signed a cooperation agreement with Brazil late lastyear to help the country prepare to host the soccer World Cup in2014 and the 2016 Olympics. Companies like industrial groupSiemens are set to gain from infrastructure projects.
Germany's strong export profile comes with a downside. Inthe depths of the global economic downturn last year, Germanexports slumped and the economy shrank by 4.7 percent -- morethan the 4.1-percent contraction in the euro zone as a whole.
"It was the sensitivity to exports that brought the Germaneconomy down in 2008 and 2009 and is now returning it toremarkable growth," said Niels Thygesen, professor of economicsat the University of Copenhagen.
During the downturn, foreign companies often foundthemselves unable to access the financing to buy Germanmachinery, explained Treier at the DIHK.
"Often, the financial structure wasn't there. It didn'tmatter if you said a machine only costs 19,000 euros instead of20,000," he said. "However, orders are coming back now."
Germany's strength in engineering is deeply embedded in theMittelstand -- the small- and medium-sized companies that formthe backbone of the economy.
Often family-owned, many of these companies have developedtheir expertise over decades, aided in part by trust-basedrelationships with state-backed regional banks that affordedthem relatively favourable funding conditions.
The Mittelstand is looking at alternative sources of fundingnow that the regulatory environment for banks is tightening buttheir engineering expertise is well entrenched.
"For this technical development you need to take the longview, and not focus on short-term rates of return," said Treier.
HOUSEHOLDS PERK UP
The export-led recovery is filtering through to households.
German consumers, notoriously fond of saving, helped buoythe economy in the second quarter after weak private consumptionhit gross domestic product (GDP) at the start of the year.
Construction has also played a role in Germany's robustrecovery, bouncing back in the April-June period after a harshwinter impeded activity in the sector.
"We're starting to see some signs on the consumer side,"said Kaplan at Federated Investors.
"We are tilted more towards exporters such as BASF andSiemens and also Daimler but we want to also participate inother parts of the German economy because we think the entireeconomy is going to be strong," she said.
Economists expect the economy to grow at least 3 percent in2010 and trade unions want to share the spoils.
German unions have accepted meagre wage gains over much ofthe last decade in return for job security and their restrainthas been another factor in enhancing Germany's competitiveness.
Now union IG Metall wants a 6 percent pay hike for 85,000steelworkers -- a demand far above Germany's 1 percent inflationrate that could set the tone for other wage negotiations.
Higher wage deals could erode some of Germany's hard-woncompetitive advantage -- but not enough to hit the economy hard.
"It might undo one year of wage restraint in the past butnot 10 years of wage restraint," said Thygesen in Copenhagen. (Additional reporting by Annika Breidthardt, editing by MikePeacock)