COMMENT: Reform bottleneck in German automobile industry

Franz W. Rother is Editor-in-Chief of Automobilwoche

Opel has an Olympic-sized task with its "Project Olympia" restructuring program. Ford is struggling from one milestone to the next. And now Volkswagen, in dire straits, also has come up with a restructuring plan. It has a nice name: "ForMotion."

In Germany, the high-volume auto manufacturers are in deep trouble. Almost all of them suffer from overcapacity, wage costs that are too high per unit, a strong euro and continuing low demand for new cars. The conditions are anything but easy.

The European auto market had a weak start in 2004. In Germany in particular middle-class auto buyers -- VW, Opel and Ford's target market -- have started a sort of boycott.

If the climate doesn't improve soon, the industry's sales plans for 2004 will have to be revised downward significantly.

But the problems of the German volume manufacturers are due not only to recession and consumers' insecurity about pension and tax reform in Germany.

The problems are mostly homemade: for example, Volkswagen pays most of its employees in Germany wages that are up to 15 percent higher than the industry's collectively-agreed rates.

But instead of solving the problem by cutting pay rates, a clever VW management thought it better to keep introducing new working time models. Yes, it gave the VW group a breather and kept the peace with the trade unions, but it did not eliminate the basic evil but the reform bottleneck in Germany has become increasingly painful in this age of globalization.

Another problem facing VW -- an out-of-date model range that is no longer market-specific -- cannot be eliminated quite as quickly. Opel and Ford managers, who realized deficits three years ago and revised their business plans, know a thing or two about that.

Money that VW needs today for the engineering of sporty convertibles and quirky compact vans was spent yesterday buying luxury brands or designing super sports cars. Now the money has to be earned again and that is difficult when new vehicles are being sold at huge discounts before and after their launch.

Some of the lost money probably can be recovered through process optimization and reduced purchasing costs -- but product quality and brand image may suffer, not to mention the jobs that suppliers will need to cut as a result.

The problems of VW and other automakers may no longer affect just the volume manufacturers. The whole German auto industry may be damaged. Everything possible should be done to eliminate the reform bottleneck as quickly as possible. Otherwise the crisis also may hit those companies that are still fairly healthy.

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