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Last Updated: Thursday, 15 September 2005, 07:33 GMT 08:33 UK
Reshaping Germany's companies

By Jorn Madslien
BBC News business reporter in Hemer, Germany

Team workers
Grohe workers wanted the company to reconsider its cuts

It was in North Rhein-Westphalia, Germany's gritty industrial heartland, where Germany's Chancellor Schroeder was dealt the political body blow that made him call federal elections on 18 September - a year early.

In May, chairman of the governing SPD social democratic party Franz Muntefering was given a beating in a local election by workers angry at the way jobs were being moved to cheaper countries and worried about the erosion of workers' rights.

Seeing the writing on the wall, Mr Muntefering had tried to blame foreign private equity investors for Germany's economic ills, labelling them "locusts" who were asset stripping companies, sparking large job losses in the process.

A plan by Grohe Water Technology to cut thousands of jobs and move production to China made matters worse for Mr Muntefering.

Not only because the kitchen and bathroom fittings manufacturer's home town Hemer lies within his electoral district.

But also because Grohe is owned by two private equity firms, TPG (Texas Pacific Group) and CSFB (Credit Suisse First Boston).

"The company planned to cut 3,200 jobs [from its workforce of about 4,500], based on a proposal by the consultants McKinsey," says regional IG Metall union representative Joerg Weigand.

This, says Mr Weigand, would have ended Grohe's industrial production in Germany and dealt a devastating blow to the people of Hemer, who have even named their town square Grohe Platz.

Union victory

The manufacturer's plan sparked a savage response from German unions as it came to be seen as a symbol of what is wrong with the way the country's troubled economy is managed.

There was no plan B until IG Metall came up with one
Ralf Bartel, DGB trade union federation

Yet, rather than launching industrial action, IG Metall proposed a compromise - accepting almost 1,000 job cuts and one factory closure, in return for fresh investment at remaining German factories to secure future employment.

Grohe - wary of negative publicity - swiftly took the union's recommendations onboard and sorted out the dispute internally.

There was praise for IG Metall's efforts in the dispute and the union's membership, which had been slipping steadily for years, was given a much needed fillip.

"It is always difficult to call it a victory when several hundred jobs are lost, but compared with the alternative it was a victory," insists Mr Weigand.

But there was no such luck for Chancellor Schroeder who was left with the precarious media balancing act of mollifying the unions as well as calming the fears of international investors, wary about his party colleague's anti-capitalist rhetoric.

Control issues

Underlying it all was a philosophical debate about control - who should be in charge of German industry and decide how companies should be run.

Grohe factory at Hemer, Germany
Originally Grohe's German factory faced closure

Ralf Bartel, of the German trade union federation DGB, believes unions and workers are often better than managers and owners at making the right decisions.

From an Anglo-Saxon point of view, there may be little rhyme or reason behind such a view.

But consider this: IG Metall's response to Grohe's plan was to hire what it describes as "better consultants" to pick apart the McKinsey report and hammer out an alternative plan that would both improve efficiency and safeguard hundreds of jobs.

McKinsey had not taken into account the value of existing know-how among Grohe's workers, the cost of moving to China, potential damage to the trademark of moving out of the Made in Germany zone, and the possibility of increasing productivity at existing plants by 30%.

"There was no plan B until IG Metall came up with one."

Balancing act

Grohe's director of labour affairs Detlef Spigiel is keen to downplay the importance of the McKinsey report and insists the firm never intended to go along with all its recommendations.

Instead it aimed to achieve "the right balance between added value and sales, and that is the reason why we must shift some production to Asia and the Nafta area".

Only 20% of Grohe's sales are in Germany, so it wants to reduce the proportion of production in Germany from 80% to 60% - still high when compared with the car industry for example, Mr Spigiel says.

Grohe skilled worker
Skilled workers are strong supporters of trade unions

Product development, design and research, as well as the firm's head office will remain in Germany - although the headquarters may move to Düsseldorf.

When entering Grohe's sprawling factory in Hemer, it soon becomes apparent that the plan IG Metall is so keen to take credit for is well under way to be implemented.

Making upmarket kitchen and bathroom taps involves a complex process; yet one where highly skilled workers are rapidly becoming obsolete.

Last year, there were about 1,000 workers at the factory. Now there are 880. Next year there will be just 660.

"Ten years ago, there was one robot, a pilot one that didn't really work. Now we have 80," head of production control Ulrich Moneke.

"We have to have a strategy to reduce labour costs," he adds, explaining how new working practices are also being introduced.

Staff only get paid if the products are properly made, and workers are paid as teams of two or three who then split their pay-packets - thus enhancing performance through peer pressure.

And yet, "the atmosphere in our plant is better than half a year ago", says Mr Spigiel. Mr Weigand, who is in charge of the Grohe case at IG Metall, agrees.


But, there are deeper worries.

Mr Weigand is deeply unhappy about the way "a strong traditional family company was asset stripped, with all it needs to produce and sustain jobs taken away".

Despite the fact that [the hedge funds and private equity firms] don't have a majority, they can run the show
Michael Ganal
BMW director

"Nearly half the capital was taken out of the company by its private equity investors," he insists.

Adds Mr Bartel: "This is a dangerous development for an economy."

Mr Bartel makes a clear distinction between what he deems proper foreign direct investment -where money flows in and jobs are created - and situations where cash reserves are withdrawn, where debts accumulated against remaining assets and jobs axed.

"Investment to secure jobs is welcome, but those who take money away are not," he says.

New focus

Mr Spigiel's rebuttal is strong.

He believes private equity companies can improve matters by "re-engineering" companies over a period of several years, as they do not have to face the short-term demands of the stock market.

"They want to sell the company five years down the line. They don't take any dividends during that time, and we have time to change the company in a private atmosphere," he says.

Computer lab at Grohe
Grohe aims to make production more hi-tech

"Now, with the strong position of Grohe, is the time to do this [restructuring]. We are able to finance the social plan."

Those laid off are employed for a year - at 80% of their former salary - by a specially constructed subsidiary that retrains them and finds them new jobs.

This burden is jointly carried by Grohe, which pays about a fifth of the cost, and the state which pays the balance. It is obvious that workers' rights are still strong in Germany.

"The IG Metall people are clever," acknowledges Mr Spigiel, "but they have too much power".

This is the fourth in a series of reports from Germany; in the run-up to the election we are also looking at the country's economy, its unemployed, and how its companies are trying to beat the slump.

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