Exodus from the Fatherland: John Eisenhammer reports on a crisis of confidence in Germany

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LAST week the British economy held its breath waiting to see what the German Bundesbank would do to interest rates. A rise could have forced higher rates and deeper recession in Britain. But the problem the Bundesbank was trying to find answers to lay not in Britain but at the heart of the German economy. Once apparently invincible, the country's business is heading into crisis.

It is the easiest question, says Udo Hummerich, that he has had to answer all day. If he were an Italian, British or French businessman, would he invest in Germany? 'No, certainly not,' he shoots back. And there is no hesitation in Dieter Rosenkranz's reply to the same question: 'No] Those days are gone. Instead, the trend is moving the other way - out of Germany,' he says.

Two very different men, two different firms. But the same curt and devastating message. Mr Rosenkranz, a 65-year-old with a passion for modern art, heads the family business which has been carefully built up over the last 30 years. One branch, Rosenkranz und Krause, mainly produces steel protectors for safety shoes. The other, Moenus, makes specialised textile machinery. The group employs 1,100 people - 'a number which is getting ever smaller,' says Mr Rosenkranz - and had a reduced turnover of DM300m last year.

Mr Hummerich, 41, was brought in last year as joint managing director of Eugen O Butz, whose owner decided to retire at the age of 80. The company makes car parts, such as head and armrests. Employing about 1,000 people, it had a turnover last year of DM140m.

Both companies are classic German family enterprises. They are archetypal members of the mittelstand, that plethora of small and medium-sized operations that make up the engine room of the (western) German economy.

Both have maintained their market shares, despite the difficult conditions. But the pressure to slash costs is on. 'You can imagine how difficult it would be in a firm this size to say, sorry, but we are cutting 40 jobs because we are going to shift production abroad,' says Mr Hummerich. 'But we shall have to go through with it. It is better to endure small pain now, than in five years to go under.'

Far from being exceptional, sentiments such as these are becoming a common refrain. 'This message from the mittelstand is potentially more significant than the headline- grabbing job cuts by the big firms such as Daimler,' says Gert Schmidt, the economist for Industrie und Kredit Bank, which specialises in financing small and medium-sized firms. 'If you multiply reductions of 20 or 30 people across these firms, the consequences could well be dramatic.'

Both Mr Rosenkranz and Mr Hummerich concur, pointing to the problems of high costs and an inflexible system - such as no Sunday production - which are taking their toll on a country that is rapidly losing its famed monopoly on quality. According to United States Bureau of Labor statistics for 1988, the cost of employing a German production worker - including benefits such as social insurance and holidays - was the highest in the world at dollars 17.99 an hour. That figure compared with dollars 14.16 in the US, dollars 13.75 in France, dollars 13.28 in Japan and dollars 10.65 in the UK. As the German working week has shortened since, the cost gap has widened further.

Since April 1991, 80,000 jobs have already gone in the engineering sector, and according to the Automobile Producers' Federation in Germany, 200,000 jobs may be lost in the next few years as companies rationalise, moving production and sourcing out of the country.

BMW's decision to set up a production plant in the US is symptomatic of the rethink that is under way.

'What the big firms are doing on a grand scale, so we are doing in our small way. There is no escaping the general movement,' says Mr Hummerich.

In the past few years, Eugen O Butz has steadily increased the proportion of its purchases outside Germany. 'Our buyers can no longer come up with the old argument about insufficient quality from suppliers in, say, Portugal,' explains Mr Hummerich. 'We go out there, tell people what we want, train them, and the result is good quality at a fraction of the German price.'

It is only a matter of time, he adds, before the company moves into Czechoslovakia, where hourly wage costs are about one-twentieth of those in western Germany.

'Germany has passed over the summit of its prosperity. The coming years are going to be rather rough for us,' says Mr Rosenkranz. 'Much depends on industrial relations where the fronts have, I fear, hardened considerably. If pragmatism prevails, and the necessary radical changes in wages and working hours are accepted, then things could work out all right. But maybe only unemployment will bring that about.'

Textile machinery accounts for 70 per cent of Mr Rosenkranz's business, and was largely responsible for the drop in turnover from DM350m in 1990 to DM300m last year. The company made a loss in 1991 and could well do so again this year. In response to the downturn, investment was slashed by 50 per cent. 'We had the cash if needed; after all, we had had a run of eight excellent years. But we preferred to cut because the risks have become too great,' he explains. True to German fashion, the firm made no concessions in its maintenance of training and research and development expenditure. Nearly 7 per cent of group employees are apprentices. 'To sacrifice training would be to ruin one of the great advantages German firms still have,' says Mr Rosenkranz.

But the constant pressure to cut costs has pushed him in a direction he had never seriously contemplated before. Like most German mittelstandler, he used to think globally in terms of the market, but nationally when it came to production. Now, he says, 'our expansion in Germany is finished. Instead, we are building up our production in France and Italy'. This is not so much because wages are lower, but because they offer flexibility, and in particular, the ability to make redundancies.

The most flexible country of all, he says, is Britain, where the group has a small production plant in West Sussex.

In addition to shifting manufacturing out, it is buying more parts from low-wage countries such as Czechoslovakia. Pushing costs down has also been one of Mr Hummerich's constant preoccupations. 'Each year for the past five years, the car makers have demanded a 1 to 1.5 per cent cut in our prices,' he says.

Relentless rationalisation has been the response. Eugen O Butz has managed to squeeze its hourly wage costs well below average western German levels, and almost to British levels. It has done so by investing in advanced machinery which requires few operators, and expanding those areas, such as textile finishing, which use low- cost workers. To protect its clients and its market share, the company has also followed those car makers that have been shifting abroad: Volkswagen to Spain, and Opel and Volkswagen to eastern Germany.

'The manufacturers made it clear that if we want to stay with them, we have to set up close by to be able to deliver just-in- time,' Mr Hummerich explains.

The recent 5.8 per cent wage settlement in the engineering sector has exacerbated cost pressures. 'The consequences are clear, for the capacity for further rationalisation here in Germany is virtually exhausted. We are buying and producing more abroad,' says Mr Hummerich.

His gaze is turning towards Britain. 'The strength of the Japanese car producers there means we have to think hard about getting involved. What's the old saying - if you can't beat them, join them.'

(Photograph omitted)