Germany's east wind of change: John Eisenhammer talks to consultancy guru Roland Berger

GERMANY needs to move sharply in the direction of de-industrialisation, says Roland Berger. The 55-year-old guru of German management consultancy views eastern Germany as a model for tomorrow's western Germany, with greater emphasis on services and a shift away from labour-intensive manufacturing.

Either businessmen now move strategically in this direction, or in a few years they will find themselves 'trying to react when the water is up to their necks,' he forecasts.

Such outspokenness is typical of the head of the second biggest consultancy in Europe, with a turnover last year of DM260m.

Mr Berger sees unemployment in Germany reaching 4 million during the first half of next year. As the process of de-industrialisation continues, it may not stop there.

'It is not that we shall stop producing things. The question is what we produce. There are too many businessmen still trying to play yesterday's game.

'They cannot see further than manufacturing the best-quality product, and are driven by ever higher costs into ever narrower market niches,' he says.

With the erosion of Germany's quality premium in so many traditional areas, such as machine tools, cars and chemicals, the country will gradually have to move away from its over-dependence on mature areas of manufacturing. 'One should no longer think of Germany as a production centre, but of companies such as Volkswagen or Bayer as production centres. Each will be present in many different countries.'

The process of de-industrialisation must be speeded up, and the recession provides an opportunity for this, he argues.

The only investment that makes sense in Germany now, in the east as in the west, is hi-tech and extremely capital-intensive, Mr Berger explains.

'Anything else is stupid when just 200 kilometres from Munich you are in the Czech Republic, where wages are 10 per cent of those in Germany, and where workers are well-qualified.'

The decision by the Volkswagen subsidiary, Audi, to build its new engine plant in Hungary is a 'sign of things to come - many more will follow', he forecasts.

The opening up of Eastern Europe is, in his opinion, one of the most important elements provoking the structural upheaval in German industry.

'When moving abroad to low-cost production, there is a great difference between having to go to Portugal or Malaysia, which demand big logistic costs and offer no meaningful home market, and going to west Poland or Hungary,' he says.

At a minimal distance, these countries offer potentially important markets. A combination of the comparative advantage of a region right on Germany's doorstep and the successful challenge, mainly from Asia, to Germany's quality premium is what makes this current recession-cum-structural crisis very different from its predecessors.

The great strength of the German businessman has been his knowledge of the product, Mr Berger says. But the disadvantage is that too much time and money have been invested in marginal product improvement, and far too little in process improvement which could have reduced costs.

At present, Mr Berger's consultancy business assists many companies in their frantic dash to reduce costs by simplifying production techniques and, if necessary, the product.

One of the areas that must compensate for the heavy job losses that will result from this structural upheaval is the service sector. Germany lags badly behind its main competitors, he argues, in terms of size and efficiency. Excessive protection and regulation have been largely to blame for this.

Although Germany is near the top of the international league table for exporting goods, it ranks only eighth in services. 'Also, our service industries are on average 25 per cent less productive than those in America or France, for example. Remedying this will be the major challenge of the Nineties,' Mr Berger says.

(Photograph omitted)