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Last Updated: Wednesday, 7 September 2005, 07:13 GMT 08:13 UK
How German firms fight the slump
By Tim Weber
Business editor, BBC News website, reporting from Germany

The German economic model appears broken: unemployment is high, growth low and foreign competition tough. So what makes life difficult for German companies, and how are they coping?

Unemployed people waiting to see their job centre case officer in Germany
German calculation
Jobless: 4.76 million
Unemployment rate: 11.6%
ILO calculation
3.94 million
source: Bundesagentur fuer Arbeit

The label 'Made in Germany' hasn't really lost its lustre; after all exports are booming.

It's just that these days German bosses have stopped playing Mr Nice Guy.

In the search for profit and faced with global competition, they are squeezing suppliers, axing jobs and shifting production to low-wage countries like never before.

This week Volkswagen announced that its German workers are just too expensive. Thousands of jobs are likely to go, Portugal may benefit.

The news will have pained Chancellor Gerhard Schroeder, who faces a tough general election on 18 September and could lose it over economic issues.

Going east

Such cutbacks are repeated across the country.

Take the picturesque medieval town of Coburg in Northern Bavaria. In just 18 months some 5,000 jobs have vanished.

Klaus Pohl, shop steward at Corning Cable Systems in Neustadt bei Coburg
Shop steward Klaus Pohl hopes flexibility can save jobs at Corning

Once there were 30 firms making furniture in the region; today nine are left - and many are struggling.

In nearby Neustadt, US firm Corning Cable Systems plans to axe 230 jobs.

Customers like Britain's BT have demanded cost cuts of up to 40%, and with German employees costing five times as much as Poles the only viable option is to move glass fibre production to Lodz in Poland, Corning told its workers.

Klaus Pohl, local shop steward at Corning, is devastated and wonders how long the factory will be viable, because the remaining 200 workers make relatively low-tech copper cables.

In Neustadt unemployment already runs high at 15%, and Corning workers are unlikely to find new jobs locally.

The relocation is a sensitive issue, politicians have become involved and Corning refused to talk to the BBC for this article.

Start-up problems

But Germany has bigger problems than demanding foreign factory owners and activist shareholders like hedge funds.

Rather, in a globalised economy Germany can't afford to do business the old way anymore.

Just getting a company started can be a problem.

Seven case studies that show how German companies are beating the slump

Alan Dunbar has come from Aberdeen to Jena in Eastern Germany to set up Ezono, a company that wants to make high-tech medical diagnostics cheap enough to deploy them in doctors' surgeries.

Ezono is glad to be in Jena, a centre for biotech and medical instruments, adds Mr Dunbar, but the cost and complexities of getting the new company incorporated nearly threatened the whole project.

"We are dealing with 19th century law here," he says.

Running a firm is not much easier.

Labour laws and environmental regulations impose demands on small companies "that are incredible," says Dr Ute Bergner, founder of Vacom, a small Jena-based firm specialising in vacuum technology.

Global challenges

Economic globalisation, meanwhile, is creating its own problems and opportunities for German companies and their workers - not just at Corning or Volkswagen.

Sirs-Lab laboratory work
Jena's cluster of bio-tech firms helps Sirs-Lab thrive

Some decisions are straightforward.

Dr Stefan Russwurm runs Sirs-Lab, a biotechnology start-up developing medical test kits: "In one case a German supplier was 50% more costly than a Polish competitor, at the same quality."

"Now most of our production and the majority of our suppliers are in Poland, it saves the 30 jobs here at Sirs-Lab," he says.

Many workers, though, face the downside of globalisation.

"During the past few years more and more firms are coming to us and warn 'production will be moved if wages don't come down'," says Michael Ebenau, a regional organiser with the IG Metall trade union in Jena.

"But we can't compete with China on wages," he argues, "because workers here can't live on Chinese wages".

Flexibility rules

In the hope of persuading companies to stay here, the government has lowered labour costs and made it easier to hire and fire.

And workers are getting the drift.

"When people tell you "do this, your job is at stake', you'll do it. I'm happy to make sacrifices as long as I keep my job," says Silke Tischer, a union official at Corning's threatened Neustadt plant.

At Corning, workers already go with the flow of contracts, switching at short notice between shift cancellations and extra shifts, including weekends.

Smoke filter parts at Saint-Gobain Roedental
High-tech ceramics for smoke filters need to be hand-finished at Saint-Gobain

Union officials hold out little hope, but want to talk to Corning management and see whether a "counter offer" - including lower wages - can save jobs.

A few minutes drive away, in Roedental, the mood is more optimistic.

The French multinational Saint-Gobain is expanding the town's industrial ceramics factory.

Part of the investment package was a lengthening of working hours from 38 to 40 a week.

"When we presented staff with the plan they didn't discuss whether to work longer, but how best to use the extra time," says Saint-Gobain Ceramics' head of personnel Rainer Bosecker, and eight months on he still sounds a bit surprised.

One reason for the flexibility: Saint-Gobain has a local profit-sharing scheme, and the lure of up to 250 euro extra pay a month has increased productivity and sharply reduced the number of accidents.

The key to Roedental's success, though, is the know-how of its workforce.

"Workers need so much experience and training to get the product right, we can't just go to China with this business," says Brigitte Wirth, who looks after Saint-Gobain Ceramics' marketing.

The struggle to stay competitive

A few valleys away, in Kronach, consumer electronics firm Loewe tries a mixture of flexibility and innovation to stay competitive.

Flat screen assembly at Loewe in Kronach
Top-of-the-range flat screens have turned Loewe's fortunes

To sidestep the flood of cheap television sets and DVDs from Asia, the 80-year old company has long been pitching for the high-end premium market.

But two years ago traditional cathode-ray tube televisions went out of fashion, and 50% of the firm's market disappeared.

Loewe's problem: Flat screens hadn't really taken off either.

To get through the dry patch, Loewe's boss Dr Rainer Hecker and the IG Metall trade union hammered out a package of lower wages, flexible working and job cuts.

About 300 of Loewe's 1,250 workers had to go, but Loewe's flat screens are now all the rage.

"It's a constant struggle to keep costs down and stay competitive," says Dr Hecker, but by the end of the year he expects to be back in profit again.

Dr Rainer Hecker, chief executive of Loewe AG
Loewe's Rainer Hecker says premium brands can survive

And even though most of Loewe's electronics is designed, manufactured and assembled in high-wage Germany, the company has started developing and manufacturing high-end television sets for Japanese electronics giant Sharp.

How does Loewe do it?

"We have to innovate all the time", says Dr Hecker, and by keeping design and manufacturing under one roof "we can implement innovations straight away", while being in Europe makes it easy to produce bespoke television sets for customers.

Labour costs are not that much of an issue anyway, he says, as they account for just 5% of production costs.

The Czech republic may be just 45 minutes drive away, but "even if Czech workers are paid half the salary and I save 2.5% of costs, with the extra logistics and drop in quality, it's just not worth it to relocate," says Dr Hecker.

The flight to quality

The common thread of these stories? Standardised mass production is rarely competitive in Germany.

Customisation and cutting-edge technology are the keys to success.

Dr Ute Bergner, founder and chief executive of Vacom
Ute Bergner: "We are small but have to invest all the time"

That's true for small firms like Dr Bergner's Vacom, who sees her company as a "winner of globalisation".

Her large German rivals have standardised production and relocated to Asia. Many customers, however, need bespoke vacuum components and come to Vacom, which expands to fill the profitable niche.

But to stay competitive, she says, "we have to invest all the time... and work as effective as possible". One example: a computerised logistics system packs 450 square metres of storage space on a 20 sq metre footprint.

On a much larger scale, Jenoptik has a similar approach.

Having emerged from communist East Germany's largest technology conglomerate, the new Jenoptik specialises in laser tools, precision optics and sensor technology.

Jenoptik laser
High-technology saves companies, but doesn't create that many jobs

Every year the company invests up to 10% of turnover into research and development.

After the fall of the Berlin Wall Jenoptik started out with a lot of know-how, but no products. The company decided to ignore state-of-the-art products and invest in cutting-edge technology instead.

Sensors for the aerospace industry, high-performance diode lasers and military-grade flight simulators - used by the US Navy and German airforce - are among its product range.

Toiling away in clean rooms, Jenoptik engineers build lasers with nanometre accuracy.

"As a high-tech company we've got everything in place to be successful," says Alexander von Witzleben, the boss of Jenoptik. "Germany is more competitive than ever before."

"I can't and won't complain about our situation. Working hours (in Eastern Germany) are longer and wages lower than anywhere else in Western Europe," he adds.

The German advantage

Once the complaints are out of the way, most bosses are surprisingly bullish about their situation.

"I can't join the collective whingeing about doing business in Germany," says Sirs-Lab's Dr Russwurm.

The living is cheap in Jena, and a good healthcare and pensions system helps to attract specialists from across Europe, says Ezono's Alan Dunbar.

Production of industrial ceramics at Saint-Gobain in Roedental
Old industries need high tech formulas to survive

"Everybody talks about Poland, but there we would have to bribe everybody and his dog to get anything done. Here we have stability," he says.

And Vacom's Dr Bergner chimes in: "The costs for expensive raw material are the same everywhere. In the end wages are just a small fraction of the equation."

But that's exactly Germany's problem.

High-tech knowledge-based industries are doing fine, and having high-earners around helps to keep local shops and service industries going.

However it doesn't add up to a huge amount of new jobs.

"I just wish we'd get a few normal manufacturing industries to settle here," says trade unionist Michael Ebenau in Jena.

Right now, says Saint-Gobain's Rainer Bosecker, Germany is a place to invest in high-tech, not much else.

To quote a German car maker's advertising slogan: Germany has "Vorsprung durch Technik" - the technical edge.

It's little comfort to Germany's many low-skilled and long-term unemployed though.

This is the second in a series of reports from Germany; in the run-up to the election we will look at the state of the country's economy, its unemployed and the fate of Eastern Germany.

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