This is an audio transcript of the FT News Briefing podcast episode: ‘Manufacturing on the ballot in Germany’

Marc Filippino
Good morning from the Financial Times. Today is Thursday, February 20th, and this is your FT News Briefing. A major private equity firm made a splash with its bid for Thames Water. And HSBC is taking an axe to its spending. Plus, Germany’s battered manufacturing sector takes centre stage in this weekend’s election.

Patricia Nilsson
The industry is in crisis and a lot of people are starting to get worried.

Marc Filippino
I’m Marc Filippino, and here’s the news you need to start your day.

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KKR submitted a preliminary bid for a majority stake in Thames Water. We learned yesterday that the private equity firm is offering ￡4bn in equity. Thames Water is the UK’s largest water utility and is in a ton of debt. KKR isn’t planning to break up Thames Water. That’s really different from some of the other groups that are interested in the utility. The company overseeing the bidding process is expected to select the most credible offers by the end of the month.

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HSBC released its full-year earnings report yesterday and a lot is on the chopping block. It wants to cut $1.5bn. CEO Georges Elhedery announced a sweeping reorganisation in October designed to lower costs. Elhedery announced a bit more detail on the planned restructuring on Wednesday. Here to talk about it with me is the FT’s Kaye Wiggins. Hi, Kaye.

Kaye Wiggins
Hi.

Marc Filippino
So first off, tell me about the headline figure from this report yesterday. What does the $1.5bn figure mean exactly?

Kaye Wiggins
That is the amount of money that Georges Elhedery wants HSBC to cut from its annual cost base starting from next year. And what he wants to do with that is he wants to reinvest it into areas where he thinks the bank has a competitive advantage. So his priorities for getting a share of that money are areas like wealth management, transaction banking and also UK business banking, where he thinks the bank needs to increase its presence.

Marc Filippino
Yes. So what’s the back story here? Tell me a little bit more about the developments at HSBC that led up to this announcement.

Kaye Wiggins
So the background is this is the biggest overhaul-restructuring that HSBC has seen in a long time. And HSBC have always seems to have been in some form of restructuring. But this one is very dramatic. So what it involves is he is separating HSBC operations into two geographical units, eastern and western. He’s closing completely key parts of its investment banking business. So M&A advisory work and equity capital markets business in the UK, Europe and the US. Then he’s merging two of the three main units of the bank. And in the process of doing all of this, he is abolishing a kind of really expensive layer of senior bankers who will no longer be needed.

Marc Filippino
So how is this restructuring plan going to be implemented?

Kaye Wiggins
Well, so far, it’s a lot of job losses, essentially. There are lots of bankers who have had to reapply for their jobs because the job that they used to do has been deemed to duplicate a job that is being done elsewhere in the bank. So that’s gone from being two roles to one. So lots of bankers have been reapplying for the jobs and the people who didn’t succeed in getting that job have left. And we’ve seen a whole range of senior-level departures already. We can expect there may be some more to come as this goes on.

Marc Filippino
OK. So a lot of cuts are going to happen; could change the complexion of the bank. What are you looking out for when it comes to HSBC going forward?

Kaye Wiggins
Yes. One risk when banks do these kind of wide ranging dramatic restructurings is you can end up losing some of the better people that you might actually have wanted to keep and as they start looking for roles elsewhere because there seems to be a lot of uncertainty. One way they could get around that is by paying them higher bonuses if they stay. So it’s quite interesting in the results that we see that the bonus pool hasn’t been reduced. So you have to assume from that that there will be more money available to the senior bankers that stay, potentially.

Marc Filippino
Kaye Wiggins is the FT’s Asia financial correspondent. Thanks, Kaye.

Kaye Wiggins
Thanks.

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Marc Filippino
The UK’s fight against higher prices just hit another bump in the road. Inflation ticked up to 3 per cent in January. That’s the highest it’s been in 10 months and more than what economists were expecting. The increase was driven by things like the price of food, non-alcoholic drinks, even private schools and airfares. And it’s all complicating the Bank of England’s plan to cut interest rates. The BOE has slashed rates three times since last summer, but analysts now think it’ll have to slow the pace a bit going forward. Traders are still betting on two more quarter point cuts this year, just maybe not at next month’s meeting.

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Germany is holding early federal elections this weekend. If you remember, they were triggered after current Chancellor Olaf Scholz pulled the plug on his coalition late last year and then lost a no-confidence vote. Now, there is a lot of focus on the economy as Germans go to the polls. The country’s industrial heartland has been hit real hard recently. I’ve got the FT’s Frankfurt correspondent Patricia Nilsson with us to talk about it. Hi, Patricia.

Patricia Nilsson
Hi, Marc.

Marc Filippino
So lay out the situation for me, Patricia. Just how rough has it been for German manufacturing in recent years?

Patricia Nilsson
So if you look at employment figures, Germany has lost nearly a quarter of a million manufacturing jobs since the start of the pandemic. A lot of Germany’s largest industries have been hit pretty badly. For example, Germany’s car industry. BMW, Mercedes-Benz, Volkswagen are all selling fewer cars and struggling with high costs when it comes to the transition to electric vehicles. But Germany also has a lot of energy-intensive industries such as chemicals or a steel industry, for example. And these types of companies are really reliant on cheap energy, which before Russia’s invasion of Ukraine, they had plenty of access to. But in recent years, prices have increased significantly, which has forced many companies to reduce production and warn of job cuts.

Marc Filippino
So energy, the cost of energy is a major problem. What else is driving the manufacturing decline in Germany?

Patricia Nilsson
It’s been a triple whammy in a way. First, you had the pandemic and the sort of general consumer malaise. People are not buying as much as they used to. You had the inflation, but most significantly, German industry has for — the past couple of years and even decades — been very reliant on China as a market. And this is changing. The Chinese market that the German companies had access to before has really turned into a Chinese rival, especially car companies. You see a lot of EV start-ups coming into the German car manufacturers’ whole market.

Marc Filippino
OK. So there are high energy prices. China is eating Germany’s lunch when it comes to manufacturing. What are German politicians promising to do about this ahead of Sunday’s election?

Patricia Nilsson
So Friedrich Merz, the leader of the Christian Democratic Union, is polling as the frontrunner to become Germany’s next chancellor. He has promised broadly to cut taxes and reduce energy costs and slash bureaucracy. Two Christian Democrats are currently polling at around 30 per cent. What has been happening over the past couple of weeks, however, is that immigration has become a huge point of discussion. Alternative for Germany, which is currently polling at over 20 per cent, is very anti-immigration. And of course it is impossible to ignore that Germany was the growth engine. And when things started going a bit worse a couple of years ago, it is noticeable that that has coincided with the rise of support for a party that portrays itself as being an alternative to what Germany had before.

Marc Filippino
OK, so immigration is on a lot of voters’ minds, especially the ones who support the AfD. But voters are also worried about manufacturing jobs like we’ve been talking about. Patricia, I guess, regardless of who gets voted in, what happens if they cannot turn things around for the German economy?

Patricia Nilsson
Hundreds of thousands of jobs. The industry is in crisis. Germany’s most energy-intensive companies are currently producing about 20 per cent less than before the pandemic. That’s a lot of jobs. That’s a lot of tax revenue. That’s a lot of wealth that is disappearing from Germany. And a lot of people are starting to get worried. Are we going to be as well off in the future as we used to be?

Marc Filippino
That’s the FT’s Patricia Nilsson in Germany. Thanks, Patricia.

Patricia Nilsson
Thank you.

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Marc Filippino
Before we go, don’t forget that you can get 40 per cent off an annual digital subscription to the FT right now. Just go to ft.com/briefingsale. That’s ft.com/briefingsale. We’ll have that link in the show notes. This has been your daily FT News Briefing. Check back tomorrow for the latest business news.

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