European Companies Are Investing at Home Again

European business is coming home.

Daimler AG is planning to spend billions to get its German factories ready for an electric-car push. Property giant Unibail-Rodamco SE is expanding its shopping-mall footprint across the region and laser-equipment maker Trumpf GmbH has built a new distribution center in Germany to handle surging demand.

For years, European business has chased growth abroad, spending billions to build new factories in the U.S., Mexico, China, Brazil and other fast-growing emerging economies while investment in Europe languished. Now, as growth takes hold in Europe nearly a decade after the financial crisis, industry is investing in Europe again.

"What's changed in Europe is that growth is back," says Robert Charvier, finance chief at auto parts supplier Valeo SA "This is the main driver for investing in Europe."

The Organization for Economic Cooperation and Development forecasts 2.1% growth this year for the 19 countries that use the euro -- the fourth consecutive year of expansion -- and 1.9% next year. Consumer confidence in the eurozone is at its highest level since the financial crisis, according to the European Commission.

Business investment world-wide by eurozone-based corporations, excluding banks and insurance companies, totaled EUR1.3 trillion ($1.53 trillion) last year, an increase of 7.2% from the year before -- and a new peak -- according to the Eurostat statistics agency. The trend is continuing this year: Business investment rose 5.7% to EUR677.3 billion in the first half.

Despite the recent surge, economists say overall investment levels remain too low to drive employment. The picture is mixed throughout Europe, with nearly full employment and strong growth in Germany while the countries that suffered most from the euro crisis are still battling high unemployment.

Paris-based Unibail-Rodamco, which operates dozens of shopping malls across Europe, recently opened a brand-new shopping center in Wroclaw, Poland. The company is also adding extensions to many of its existing facilities in Prague, Barcelona and at several locations in Paris. "We are definitely seeing a more positive consumer sentiment than we did in prior years," Chief Financial Officer Jaap Tonckens said.

The automotive industry, which provides one in 10 manufacturing jobs in Europe, is investing tens of billions of euros to move from combustion engines to electric cars and to self-driving vehicles.

Daimler AG, which makes Mercedes-Benz premium brand cars, has earmarked EUR35 billion for investment over the next seven years in its German factories to build electric vehicles and to develop new mobility services such as car-sharing and ride-hailing.

The shift by car makers also forced suppliers to invest in new machines to make new products. Valeo's Mr. Charvier said the auto-parts supplier's new investment is being "driven more by the change in technologies than the growth in the production of new cars."

To meet the demand, Valeo doubled the capacity at its Eastern European plants, including expansion of production of electronics components in Veszprém, Hungary, and a new research and development center in Prague.

Spain's Gestamp Automoción SL, another car-parts maker, is investing EUR133 million in a parts plant in Nitra, Slovakia, to serve local auto makers including Tata Motors Ltd.'s Jaguar Land Rover unit, which is building an assembly plant nearby.

The changes in the auto industry are rippling through other industries.

Alberto De Paoli, finance chief at Italian electric utility Enel SpA, said he expects growth in the use of electric cars in the coming decade to drive electricity consumption higher. As a result "networks will have to be upgraded, digitized and fully updated," he said.

Trumpf, a family-owned maker of machine tools and high-end lasers, invested EUR200 million in the fiscal year that ended June 30, 46% more than the previous year, including EUR40 million to build a new distribution center in Germany. "We see a clear pickup in demand for all our products, especially in Germany and Western Europe," said CFO Lars Grünert.

Higher plant investment in Europe hasn't set off a major jobs boom. Investment remains too weak spur job creation, economists said. Investment would need to account for at least 5% of gross domestic product to spur real job-creating growth, they said. It is about half that now.

Some of the investment is in industrial robots and automation equipment. The upshot: many jobs go to machines and don't create new employment.

Companies are also mostly investing in automation -- another reason why corporate investment isn't creating as many jobs as numbers would suggest.

Eurozone unemployment peaked at 12% in 2013, but by the end of 2016 it had fallen to 10% compared with 4.9% in the U.S. and 3.1% in Japan.

Catherine Mann, the OECD's chief economist, said that the European recovery is "becoming more entrenched," but added there has been little "real wage growth, productivity growth. Until those are in place we don't think we can have a sustainable recovery going forward."

Ralph Wiechers, chief economist at German industry group VDMA, which represents more than 3,200 plant and machinery makers, said "we are clearly observing a new investment cycle." But the pickup still lacks oomph, he said.

--Nina Trentmann in London and Eric Sylvers in Milan contributed to this article.

Write to William Boston at william.boston@wsj.com and Nina Adam at nina.adam@wsj.com

(END) Dow Jones Newswires

October 27, 2017 05:44 ET (09:44 GMT)