Europe's pain is registering with Minnesota firms

Frank Baeumler monitors Europe's economy from his desk at a small business in Anoka, and he worries.

The company he works for, Mate Precision Tooling, manufactures the part of a punch press machine that cuts holes in metal. Half of the firm's sales are international, mostly in Germany.

Industrial giants such as Siemens and Rittal buy Mate's punch press tools to help them build electrical boxes for railroad switches, appliances and wall outlets. Demand for those boxes, and therefore Mate's punch press tools, depends on European economic stability.

"We're nervous," said Baeumler, vice president of business development for Mate. "It's just incredibly difficult to imagine how this is going to get better over there."

The long-running economic turmoil in Europe is taking a bite out of Minnesota's economy. Exports to the continent are down noticeably. Growth in Mexico and Asia has made up for some of the lost orders, but businesses remain on edge about the situation in the giant European market.

Sales of Minnesota goods in the 17 countries where the currency is the euro fell 5.7 percent over 2010 and 2011. Mate's European sales have been flat in 2012, coming in below projections, Baeumler said, and the forecast is not good.

A breakthrough at a summit in Brussels, Belgium, triggered a rally in financial markets on Friday, as European leaders agreed to make it easier for banks to receive bailout funds set aside for struggling governments. But markets have swung up and down on news from Brussels many times in the past two years, while Europe has gradually cooled as a market for Minnesota exports.

The Department of Commerce estimates that every billion dollars worth of exports supports 5,080 jobs, and the indirect job impact is greater. The United States exported $1.5 trillion worth of goods in 2011. Minnesota's share was $20.3 billion, making it the 19th-ranked state for exports.

Over the next five years, the state wants to double exports. Odds are that Europe won't be driving that growth.

Three years ago, 28 percent of Minnesota exports went to European countries, especially industrial goods, medical devices and machinery made by companies like 3M, Medtronic and smaller firms such as Mate, which employs 375. Now Europe accounts for 20 percent of Minnesota exports.

Economic gateway

The sharpest declines in Minnesota exports to Europe have been in Ireland, according to figures from the Minnesota Department of Employment and Economic Development (DEED).

That's where Ireland, which has low corporate taxes, comes in. Companies ship parts there, assemble them into finished goods and then ship the goods elsewhere in the European Union. Medtronic employs 2,000 people at a facility in the western Irish city of Galway, while 3M has a facility near Dublin.

By 2009, Ireland had become Minnesota's third-largest trade partner, behind only Canada and China. Minnesota firms shipped $898.3 million in goods there that year, according to DEED figures. Exports to Ireland plummeted 63 percent in 2010 and 2011.

"Those goods were going to get processed in Ireland, and then shipped all over Europe. And just the demand for those goods is way down now," Kehoe said.

Cautious outlook

The crisis also affects companies, like 3M and Medtronic, that make products in Europe.

Growth hasn't picked back up. European sales declined in the first quarter of 2012 in every business segment except for consumer and office, which was bolstered by 3M's acquisition of a French company.

"We do expect Western Europe to be challenging throughout the entire year," David Meline, 3M's chief financial officer, told an analyst in June.

Bloomington-based Toro Co. has also seen sales decline in Europe, dragging down international sales as a whole.

"Europe is where the pressure is," chief executive Michael Hoffman said in May. "So many of those countries are now formally into a recession. To what degree will that recession play out?"

There are exceptions. Medina-based Polaris and Plymouth-based Arctic Cat posted strong 2011 results in Europe. That's because their customers are mostly in the healthier, northern countries, and good weather this winter boosted sales of the snowmobiles the companies make.

Europe remains a huge market for the United States and Minnesota, but the crisis has helped shift many Minnesota companies' attention elsewhere. Booming sales in Canada, Mexico and China have driven 30 percent growth in exports for Minnesota companies in the past two years, and less developed parts of Europe are growing as well.

Medtronic, for instance, has been more insulated from the crisis, projecting mid-single digit growth for the year in Western Europe. But the company is focusing harder on growth markets in Central and Eastern Europe, where sales were up 27 percent in its fiscal fourth quarter, which ended April 27.

"Although we are watching the situation closely, we are not taking any other unusual steps that we do not normally take to minimize currency exposure," the company said in a statement provided by a spokeswoman.

Ryan Kanne, director of the U.S. Commercial and Foreign Service office in Minneapolis, said smaller firms are showing more interest in exporting to Brazil, India, China, Eastern Europe, the Middle East and even Africa. The service helps firms in researching markets, making connections and finding customers overseas.

"Companies are reevaluating what trade shows they'll participate in," Kanne said. "Some of the smaller ones in the E.U. region, companies are saying, 'I'm not sure if I'm going to put my dollars there, or should I go to the show in Shanghai.'"