German auto jobs are declining

Axe could soon fall on as many as 30,000 German VW jobs

Munich. Volkswagen AG could axe up to 30,000 jobs in Germany to ensure the country's position as a cost-effective manufacturing base.

VW employs 103,000 people at six West German plants. Director of personnel Peter Hartz said even before this month's collective contract negotiations that "it will not be possible to maintain the number of jobs in Germany."

Hartz is determined to improve the competitiveness of Europe's largest automobile manufacturer. He hopes to decrease labor costs by 30 percent by 2011, against union resistance.

It is a similar story at Opel and DaimlerChrysler where increased productivity, longer working hours and the transfer of production to cheaper locations abroad are hot topics for discussion.

These are not empty threats. German automakers have already invested more than 40 billion euros abroad.

VW has new plants in Portugal, Slovakia and China and is working on construction plans for a component manufacturing plant in Abu Dhabi. Audi has assembly operations in Hungary and Mercedes builds cars in India and Indonesia. Opel is also manufacturing the new Zafira in Poland and Thailand. BMW is building the X3 SUV in Austria.

So what of Germany's future as an automobile manufacturing location? A new poll by Ernst & Young is ringing alarm bells. "More and more cars will be built in Eastern Europe and China in the future. The manufacturing volume in Germany will decrease continuously."

Bernd Gottschalk, president of the VDA, the association of the German automobile industry, said: "Germany is still our most important location. With exports worth 140.6 billion euros in 2003, the automobile industry is still Germany's strongest export industry.

"However, the share of production abroad has been increasing constantly during the past few years." He added that two out of 10 German-brand cars registered in the country are built abroad.

Statistics by the forecast institute Global Insight show that in 2003, almost 4 million cars from German manufacturers were produced abroad.

The German auto industry is producing vehicles in 45 countries; capacity abroad will increase further.

VW was the first German automaker to establish a plant in China. Now it is looking at in Asia for its Audi and Skoda brands. Audi could assemble cars in Thailand beginning in autumn 2005 and Skoda is understood to be planning a capacity increase in India.

Audi boss Martin Winterkorn is also considering production in the United States if the brand achieves sales of 100,000 cars a year.

DaimlerChrysler subsidiary Smart has not produced cars in Germany. Its new mini SUV, the ForMore, will be built in Brazil starting in 2006.

Manufacturers are turning their backs on Germany for two reasons: they want to develop new markets and they want to get away from high labor costs.

According to the Institute for German Economy in Cologne, hourly wages of 27.09 euros put labor costs in West Germany among the most expensive in Europe in 2003. Labor was more expensive only in Norway and Denmark. With 16.86 euros Eastern Germany was in 16th place, only just below the European average of 17.52 euros.

At 1,557 hours, West Germany also has the fewest working hours a year of all industrial countries.

"This is a huge problem," said Stephan Wimmers of the Federation of German Chambers of Industry and Commerce, DIHT. "We will not be competitive with a 35- hour working week in the long-term."

Businesses already have drawn the obvious conclusions, particularly suppliers. According to the Ernst & Young survey, approximately 40 percent of German businesses already have their own production locations either in Eastern Europe or China.

A poll of 200 German suppliers showed that 16 percent of suppliers plan to transfer more production.

Klaus Probst, chairman of the board at Leoni, said: "In regard to the wage-intensive production of cable harnesses, Germany has not been competitive for a few years." Eighty-eight percent of his 25,000 employees are now abroad.

Company chiefs at Porsche are concerned about the "nannying of the economy through laws and regulations", while at Continental managers point to "a lack in willingness to undertake reforms." Rigid working hour models are a problem for ThyssenKrupp and too few working hours a week bother bosses at Phoenix.

Ernst & Young's survey shows that Eastern Europe remains the most important transfer destination. The new EU members' low wages and taxes, motivated work force and flexible working hours are a big temptation.

But the suppliers also move abroad to be closer to their customers.

Of a total of 33,000 employees, piston manufacturer Mahle only employs 9,000 people in Germany. CEO Heinz Junker plans to transfer further sectors to Eastern Europe.

INA-Schaeffler Group wants to extend its production lines in Romania and China in the next five years to manufacture individual products that "can no longer be produced at a world market price in Germany," boss Juergen Geissinger said.

According to Siemens VDO boss Wolfgang Dehen, the group's automobile sector also plans to significantly expand its market shares in Asia and the NAFTA region within the next few years and to "focus on employing new workers there."

ZF boss Siegfried Goll believes in expanding the business abroad. "This also includes transferring part of the work-intensive production and assembly stages for products that can no longer be manufactured at a competitive price in Western Europe to Eastern Europe within the next few years." He believes that there is still good growth potential in Asia.

The prospects for Germany as an automobile manufacturing location do not look good.

The VDA is worried. "During the past years the location factors have affected competitiveness, which resulted in a production transfer to more attractive regions," its 2003 annual report states.

It also said that the import of vehicle components in Germany had increased significantly while the added value per car manufactured in Germany is decreasing.

"One must not make the mistake however to see every engagement abroad as a result of location problems," Gottschalk warned. Those who do that have not understood the German automobile industry's global strategy, he added.

The BMW Group, for example, has quintupled its sales in the United States since it built a plant in South Carolina.

"Our 'the production follows the market' philosophy has nothing to do with an escape abroad, but is a strategy that results in lasting success," said Norbert Reithofer, BMW's head of production. He is pushing the construction of a plant in Leipzig.

Bosch boss Franz Fehrenbach said that companies want "a sensible mix between high and low cost locations. We do not believe negotiating cost reductions at our German locations is a contradiction to opening a new plant in China."

Gottschalk refuses to accept the accusations of some politicians who brand investments abroad as a betrayal to one's country. "This only shows how little they look at the positive effects this has on domestic locations. Three jobs abroad secure one job in Germany after all."

Even if the auto industry's growth will take place primarily abroad in the future, this has no negative impact on Germany as an automobile manufacturing site, said Philipp Rosengarten, analyst at Global Insight.

"A company's overall profitability," said Rosengarten, "is secured through compensatory pricing and natural hedging against currency fluctuations." He also said that Germany is "in a totally different league in regard to innovation ability than the rest of the world."

Ernst & Young's survey shows that primarily wage intensive sectors within automobile production will move away from Germany, such as the manufacture of components and final assembly. But the automotive competence remains in the country. "Marketing, engineering and design will gain more importance in future," the survey said.

Gottschalk is still not satisfied. He wants more. "A productivity, cost and flexibility offensive is necessary." He said that without such an offensive it would not be possible to maintain added value or even to bring it back to Germany.

That is why unions, management and politicians face a real challenge.

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