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Q&A: Employers Association president sees threats to German competitiveness

In an interview with Automobilwoche Martin Kannegiesser, president of the Gesamtmetall employers' association, criticized high labor costs in Germany.

Mr. Kannegiesser, is Germany still internationally competitive as an automobile manufacturing location?

Currently yes. The automobile industry is still benefits from being located in Germany. There is a lot of know-how in this country. Over the years a supplier network has developed around original equipment manufacturers. On top of that there is a sufficient number of motivated and qualified workers in Germany.

What is the threat to competitiveness?

High labor costs. We managed to balance this out for many years through higher productivity and product advantages. Our customers acknowledged this and therefore they were prepared to pay for it. But I fear that this willingness will diminish in the coming years.

Why?

Because other countries have improved significantly. Their plants are almost as productive as ours now and their products are of similar quality. They are only different to us when it comes to costs and there our country clearly has a disadvantage. The result is that, in an international context, the rates of return achieved in Germany are at the lower end of the scale.

A growing number of businesses are moving their production abroad. Is this an escape from the high costs in Germany or is are companies developing new important markets?

In principle it is both. At the beginning of the 1980s the main reason for moving production abroad was the development of new markets. This continues to be a primary factor in Asia or the United States. Within Europe the cost factor is a decisive one and it is becoming increasingly important for businesses.

Specifically after the European Union expansion eastwards?

Yes, Eastern Europe is very attractive to medium-sized businesses. The construction of plants in Asia or North America is much more difficult for smaller companies. For them it is easier to move to Eastern European countries not in view of lower wages but also because they are closer to Germany, have a comparable mentality and similar training.

Do you believe that this could result in something like a pull effect, with suppliers moving because of OEMs and the other way around?

This mainly depends on us. The danger that this might happen is big. The potential of other locations has continued to develop significantly during the past few years. It is not god-given that Germany will remain the strongest automobile location in Europe. Just look at how huge England used to be as a car manufacturing location in the sixties and how low it has fallen since.

Why is it primarily the car industry that is affected by migration to other countries?

A certain minimum size is necessary for the construction of new plants; otherwise it is difficult to realize a transfer. In the German automobile industry including its suppliers the majority of businesses has this minimum size. Contrary to mechanical engineering. This industry is just as big as the automobile industry with respect to sales and number of employees. However, with fewer than 200 employees per company, their average workforce is much smaller. That is the reason why the mechanical engineering industry is starting much later with establishing manufacturing locations abroad.

Does the expansion of production capacity abroad only eradicate jobs in Germany or does it also help secure them?

Both. It is similar to fire. It can keep you warm but it can also burn you. Production can be made more cost-effective through getting hold of components from cheaper productions abroad and by thus stabilizing the business as a whole. We have seen this happen decades ago with the textile industry, which also transferred certain parts of its production. Meanwhile the textile industry in Germany has more or less disappeared and with it one million jobs. In the end every location has to bring in some money on its own account. Cross subsidies within one corporation are only a short-term but no long-term concept.

Will the automobile industry's destiny be similar to that of the textile industry?

Currently there are no signs that this will be the case. The scale of the investments in people and machinery that haven't yet been amortized is incomparably larger within the automobile industry. At the beginning of the 1990s the car industry was also experiencing a crisis. But it recovered enormously by developing and pushing engineering and production concepts. This cost the companies blood, sweat and tears but it has helped them to the top again. Now we have reached another threshold. We will see if the automobile industry will be able to make another significant leap forwards. However, compared with the situation 15 years ago it has become more difficult.

In which context?

Because of the technological changes that have taken place it is easier to reach similar quality levels and technological progress anywhere in the world. The know-how in other regions has grown. There are good infrastructures in some cases. Therefore it is becoming increasingly difficult to be ahead of others. But generally the automobile industry proved its strength once before. And the potential to remain an important location is there.

What needs to be done now?

The auto industry must not only live off its good foundations but has to keep renewing itself. And this does not only include the development of engineering but also that of cost structures. There is no way around it: if we make no progress in that respect - and that is the difference to the situation 15 or 20 years ago - our current lead position can not be maintained in the long-term.

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