This article originally appeared at Bloomberg

Zeppelin GmbH, a German machinery provider that traces its roots to airship pioneer Count Ferdinand von Zeppelin, is used to political turbulence.

The company, which sells and services construction and mining equipment after breaking with aviation in 1950, endured a production stoppage after World War I and a U.S. embargo on helium supplies to fuel its airships after World War II.

Now, caught in the backdraft of the Russia-Ukraine conflict, Zeppelin faces a sales decline of about 40 percent in those two countries as well as losing market share to Asian competitors in the process, said Chief Executive Officer Peter Gerstmann.

“We are losing complete fleet businesses to Korean competitors and in parts to Japanese rivals,” said Gerstmann in an interview.



“Chinese and local manufacturers are also pushing into the market with increasing force.”

Zeppelin is one of thousands of German companies whose sales are being weakened by sanctions imposed by the European Union on trade with Russia. The embargo risks accelerating a trend over the last decade that has seen Chinese companies increase share in the Russian market for machines from Germany, said Monika Hollacher, VDMA machine makers association’s Russia expert. Firms like Zeppelin, hit by sanctions on so-called dual-use exports that serve the civil and the defense industries, are particularly vulnerable.

Dual-Use Goods

“Manufacturers of machine tools are heavily affected by the dual-use good restrictions as those machines can be used both in the civil and defense industries,” said Hollacher.



“Germany risks losing its position as the number one importer of machines in Russia to the Chinese.”

While Italian, U.S. and Japanese manufacturers have maintained market share in Russia, German companies lost more than 10 percentage points to 19 percent between 2004 and 2013 as Chinaexpanded its share to 15 percent from 1.9 percent, according to VDMA data. Figures for 2014 aren’t yet available, she said.

“Whenever there is a Russian tender, Chinese companies are there to bid or have already done so,” said Hollacher.

About 6,200 German companies are active in Russia, while some 350,000 German jobs depend on economic trade with the former Soviet country, according to the Committee on Eastern European Economic Relations in Berlin.

Asia Laughing

“It’s particularly difficult for specialized medium-sized companies to quickly realign their business to other markets,” Eckhard Cordes, the committee’s head, said in an e-mail.



“From the economic point of view, this conflict in Europe only produces losers, while Asia is the laughing third party.”

EU sanctions contributed to a 16 percent decline in German exports to Russia in September, and a 26 percent drop in August, according to the Federal Statistics Office in Wiesbaden. Shipments are down 16 percent to 5.2 billion euros ($6.4 billion) in the nine months through September.

“We can’t get spare parts for maintenance and repair jobs in Russia and Ukraine,” said Gerstmann.



“Some EU sanctions are intended to hit operations on oil drilling platforms, but we need the same parts for construction machines.”

Russia has retaliated with measures of its own, introducing a ban on Russian state and municipal purchases of foreign-manufactured cars and machinery to support local producers.

China Ties

The disengagement from the West is accompanied by a strengthening of ties with China, said Hollacher.

China’s largest SUV maker started building a $520 million plant in the Russian city of Tula in August, according to the official Xinhua News Agency. Russian President Vladimir Putin is also seeking to shift energy exports toward Asia with plans to build a second gas pipeline to China.

“The sanctions impact the decisions of Russian customers who are troubled not knowing whether the deliveries from Europe will continue to be as safe as they were before,” said Ulf Schneider, managing parter and founder of Russia Consulting, a tax and finance advisory based in Moscow.



“This awareness is another reason for Russians to look toward Chinese suppliers rather than Germans,” Schneider said in an e-mail today.

Larger German companies have begun to pack up and leave. Volkswagen AG’s Seat brand last week said it will withdraw from Russia on shrinking demand for compact cars and hatchbacks.

“Russians buy 2.5 to 2.8 million cars a year, which is almost as many as the 3 million sold in Germany, so it’s a very important market for auto-makers,” said Frank Dreeke, the CEO of Europe’s top car logistics provider BLG Logistics Group AG & Co. KG. Bremen-based BLG handles about 7.5 million cars a year at port, rail and road hubs, according to its website.

Economic Slump

Car exports from German seaports to Russia have dropped about 11 percent so far this year, Dreeke estimates.

“We can feel the economic slump in Russia and the sanctions haven’t intensified but accompanied that,” he said.

German automotive exports to Russia slid 28 percent in the first nine months of the year, statistics office data show. The port of Hamburg, which serves as a transfer hub between Asia and the Baltic Sea region, saw a 5.7 percent drop in Russia container traffic in the first nine months, the harbor’s marketing unit said today.

“The problem is Russia’s flagging economy, which is additionally burdened by the crisis situation,” said board member Ingo Egloff.

Zeppelin, which has 7,700 employees globally, has cut one in 10 jobs at its Ukraine unit since the end of 2013 and installed a hiring freeze. It also plans to introduce shorter working hours for some of its Ukraine staff as it expects sales there and in Russia to fall to about 480 million euros this year from about 750 million euros in previous years, said Gerstmann.

Sales to Russia and Ukraine before the sanctions accounted for about one-third of its total, which stood at 2.4 billion euros in 2013, and contributed about half of its earnings.