March 21, 1998
In Germany, the Economy Grows While Jobs Stagnate
Strikes by German City Workers Frame Political Battle to Come (March 4) To Battle Kohl, a Socialist Who's Pro-Business (March 3) Germans Protest as Unemployment Reaches a Postwar High (Feb. 6) Prominent Germans Oppose Switch to Euro (Jan. 13) German Welfare State Splits the Generations (June 4, 1997) Statistics Confirm German Economic Woes (Sept. 10, 1997)
By EDMUND L. ANDREWS
RANKFURT, Germany -- It would be hard to find a more vivid example of the revival of German industry than the renowned sports-car manufacturer Porsche AG. Six years after the company came perilously close to bankruptcy, sales and profits are booming and its snappy new two-seater, the Boxster, is a hit.
But that is cold comfort for its workers. Having stretched its plants to their limit, Porsche has vowed not to build any more assembly plants and to farm out work to subcontractors.
Last September, in an unprecedented move for Porsche, it hired a Finnish company to start building some Boxsters. Though the move does not save Porsche much in costs, it frees the company from the expense of building a factory, hiring workers and laying them off if Boxster sales sputter.
Porsche is merely one example of the most striking economic feature in Germany and much of Europe: growth without jobs.
Europe is enjoying its best economic growth in years. But employers are not hiring many people. After years of layoffs and cost cutting, unemployment remains at record rates -- 11.6 percent in Germany and more than 10 percent across the European Union. Though there are signs that the problem has peaked, nobody expects the rate to drop to single digits before late 1999, if then.
More and more, economists say, Europe's economies are growing without creating many jobs. Reasons vary from country to country but high labor costs -- fringe benefits, plentiful holidays, rigid work rules -- and high payroll taxes discourage companies from adding permanent workers. The main exceptions are Britain, Ireland and the Netherlands, which have more liberal work rules and lower taxes than most of their neighbors.
The high labor costs are pushing companies to invest far from home. Last year, German companies invested $25 billion in other countries -- 10 times as much as foreign companies invested in Germany -- the biggest investment gap ever.
The political implications are potentially explosive. Unemployed workers have staged loud protests across France and Germany. Anger about joblessness in France was central to last summer's election victory by the Socialist Party, and it is a major threat to Chancellor Helmut Kohl in an election this September.
The upheaval is almost a mirror image of the U.S. experience. Hundreds of thousands of jobs were eliminated in the United States in the last decade, but the unemployment rate has declined, partly because millions of new jobs have been generated in the service economy. Workers have paid part of the price: Their income declined in real terms through most of the 1980s and '90s, though there are signs that income is growing again.
In Europe, by contrast, wages and fringe benefits have remained high, but manufacturers have avoided hiring wherever possible, and the service economy has not picked up the slack.
The trends are particularly stark in Germany, Europe's biggest economy and most powerful exporter. Though exports are soaring, the domestic economy remains anemic. Retail sales actually declined a bit last year.
After an acquisition binge, German banks are cutting jobs to improve profits. The dominant telephone company, forced into competition for the first time, is shedding 60,000 jobs.
The divided world of renewed dynamism and fewer jobs is on display in Metzingen, a southern German city that is home to Hugo Boss AG. Originally known for its avant-garde casual clothing, the company is branching into more conservative upscale apparel, including its first women's line. Boss brands and its stores are now familiar worldwide, and the company recently opened a high-profile store on Rodeo Drive in Beverly Hills, Calif.
Sales climbed 14 percent last year and the company surprised investors last month by announcing a 27 percent jump in profits.
Part of Boss' success stems from shifting production outside Germany, mostly to companies in Poland, Romania and Slovenia. Only about 20 percent of the clothing is produced in Germany now, down from about 40 percent five years ago.
"It used to be that if you wanted workers who cost $2.50 an hour, you had to travel 10,000 miles to Asia," remarked Joachim Vogt, the chief executive. "Now you just have to go 15 miles across the Oder River," to Poland.
Indeed, the main reason that Hugo Boss produces any clothing at all in Germany is to retain the technical expertise to supervise suppliers and ensure quality. Company officials in Metzingen select the production equipment, develop procedures and even train many of the managers and workers from other countries.
The result is impressive. "A few years ago, our quality-control experts could look at the color of a jacket and tell what factory it came from," said Vogt. "Today, not even the quality-control people can tell."
Thus the size of Boss' German work force has remained the same for several years and it has cut back on German suppliers. One result is that Zeeb & Hornung GmbH, a German manufacturer that makes shirts for Hugo Boss, recently announced it had cut 35 workers, nearly 20 percent of its staff, because Hugo Boss had dramatically reduced its orders.
The one silver lining is that within Hugo Boss, the decline in textile workers has been offset by an increase in better-paid managers and marketers.
"Our core competence is to bring products to market and create brands on an international level," Vogt said. "Our industry doesn't need to produce in Europe. Europe's core competence comes from its highly educated and highly skilled people, and over the last 20 years there has been migration to jobs that are more brain-oriented."
Across Europe, corporate restructurings have thrown thousands of people out of work, but they have helped revitalize one laggard company after another. For example Moulinex, a French company that makes coffee makers and other kitchen ware, lost hundreds of millions of dollars between 1993 and 1996. Under new management, the company closed two factories, announced plans to eliminate 2,600 jobs over three years and refocused on new products.
Today Moulinex has fewer workers but a slew of new appliances, including an odorless french-fries machine. Its annual sales stabilized at $1.3 billion last year, and the company earned its first profit in four years.
Porsche, on the other hand, got into trouble when recession hit the United States, then its largest market, and a plunge in the dollar's value pushed up sticker prices there. That would have been bad enough, but Porsche's production lines had slipped woefully behind the times. Cars took too long to design and build.
After a revolving door of executives, Wendelin Wiedeking was hired as chief executive in 1993 and quickly shocked company workers by hiring Japanese to re-engineer the production system. The number of hours it took to assemble a Porsche was cut in half and many workers were laid off.
Today Porsche's worldwide work force has actually increased to 8,100 people, from its low of 6,800 in 1994. But when Porsche began running out of assembly capacity in late 1996, thanks largely a surge in demand for the Boxster, Wiedeking had to make a choice of building a new plant and hiring more workers, or farming out the work.
It was not an easy decision. Though other German car companies had long since started building vehicles overseas, Porsche had always been a small, independent manufacturer with an rock-solid German identity.
Valmet of Finland, which has long run assembly lines for Saab and the Opel division of General Motors, offered to start assembling Porsches within nine months, using the same assembly lines used to make Saabs. It did not even need to hire new workers, because it was just reaching the end of a contract with Opel.
And if demand for Boxsters fell, Porsche could simply shut down production in Finland after its one-year contract and let Valmet worry about the high cost of layoffs.
In the end, Wiedeking decided the advantages were overwhelming, and 300 Finnish workers are now assembling about 5,000 Boxsters a year.
"This was not a decision taken against Germany," Wiedeking insisted. "This was a decision because we couldn't increase the production any faster."
But the decision was related to flexibility, and Porsche executives say they have made a firm decision not to build new plants for any future needs.
"It is our clear policy not to build any additional capacity," said Manfred Ayasse, a Porsche spokesman. "Porsche's view is that there is enough capacity around the world. We have almost no investment to make and we have almost no risk. If Boxster sales declined, we can stop production at Valmet within a year."
Economists in Germany and in international organizations say the combination of high wages, high taxes and tight regulations have created a major barrier to hiring and investment.
The Institute for the German Economy, a business-backed research organization in Cologne, estimates that labor costs in most European countries remain far higher than in the United States. The Organization for Economic Cooperation and Development has calculated that the return on business investment in Europe has consistently been much lower than in the United States.
German business executives blame much of this on high labor costs and taxes. German workers pay about half their gross income in taxes and mandatory social-security contributions, and employers have to match many of those payments.
The burden infuriates Arend Oetker, a fourth-generation business executive in Cologne who controls Schwartau, a producer of jams, snacks and other sweets. Oetker recently bought a controlling stake in a Swiss company called Hero and folded his non-German businesses into it because Swiss tax laws will offer him savings compared with German laws.
"I am a German, and I want to keep employment here as much as possible," Oetker said. "But the more the labor costs rise, and the more that taxes rise, the more difficult it is to remain in Germany. No one can be astonished that unemployment is going up."
In a report to the government, a group of Germany's top economic research institutes echoed that view. "Stronger growth alone will certainly not be sufficient to improve the labor-market situation," the institutes said. The American example, the report continued, shows that greater flexibility in wage costs and regulation can help boost employment.
Some change is coming, slowly.
Last year at the huge Opel facility in Ruesselsheim, local union negotiators agreed to wage concessions in exchange for a commitment by Opel to cut back jobs only through attrition and voluntary retirement incentives for the next five years.
But many German experts say the pace of change is far too slow.
A major tax-reform plan championed by Kohl was blocked by opposition parties in Parliament. Labor unions, after grudgingly accepting negligible wage hikes in the past two years, are now demanding bigger increases.
The government is trying to funnel more money toward job-creation programs and seed capital for new companies. Gerhard Schroeder, who will lead the opposition party in the fall, remains vague on what he would do if his party won the elections. But he has talked about pumping more money into the economy to stimulate consumer demand.
Many union leaders continue to press for a shorter work-week, an idea the French Parliament is weighing, on the theory of dividing the current number of jobs among more people.
But economists say that such measures will not do the trick, and that both major political parties are too divided to force deeper changes.
"We all know what is to be done," said Klaus Friedrich, chief economist at Dresdner Bank. "But they can't get it done. Why? Because we don't have a government in a position to do very much."