INSIDE STORY : When East marries West, for better . . . or worse

Click to follow
The Independent Online
REDLAND, an early bird into East Germany, could scarcely believe the fatness of the worm it caught. One of the world's leading suppliers of construction materials, the Surrey-based company ventured into the country in the spring of 1990 - and into a system in full collapse. Soon, it was earning a fortune helping to rebuild it.

Through its German majority subsidiary, Braas, Redland is now the leading roof materials supplier in the biggest and most vibrant construction site in Europe. In just over two years, Braas had already achieved a positive cash flow, and by the end of lastyear Redland had got back in cash flow half of its overall investment of DM400m.

"We had the luck of pioneers," says Erich Gerlach, chief executive of Braas. "But you cannot be a pioneer with a board that questions every move and demands detailed forecasts. Redland had a lot of courage. They said go for it."

Redland and Braas had begun by setting up a 50-50 joint-venture with several state-owned East German companies, well before most people were seriously contemplating unification. Production started on 1 July 1990, by coincidence the first day of currency union.

But what was meant to have been east-west co-operation with a five-year modernisation plan rapidly became a three-year revolution. The eastern partners were absorbed by the Treuhand, which insisted on immediate full privatisation.

So Redland and Braas suddenly found themselves buying out the four production sites, and realising that if they were to hold back the competition now pouring into the East, they would have to expand further. But the negotiations with the Treuhand to buy further businesses were increasingly difficult. The building boom was starting; this was one sector where investors were queueing up.

But Redland was one of the very few, in those chaotic days, with a track record of firms already producing, and investments made. "We put everything into our bids," says Gerlach. "Some rival CEOs just nipped in and out by helicopter. I stayed for days, meeting the local mayor, playing cards with the firm's works council. In the end they begged the Treuhand to let us take them over."

With sales of DM400m in eastern Germany last year, Redland is at present producing twice the volume with one-third of the workforce of the old eastern companies. "It has been a fairy-tale, but they only come true if you know how to take risks," says Erich Gerlach.

IT WAS meant to be the perfect east-west marriage. After 45 years of enforced separation, Carl Zeiss, the renowned western German manufacturer of optical and electronic instruments, was re-united in 1991 with its other half, Carl Zeiss Jena.

For the symbolic price of one mark, the western firm acquired from the Treuhand 51 per cent of Zeiss Jena, the rest held by the eastern state of Thuringia. It was confidently expected the western Zeiss would soon take 100 per cent as it conquered the world.

No one dares to recall such optimism today. Last October, Jobst Herrmann, the head of western Zeiss, resigned, as the company unveiled crisis plans to head off a debacle. About 3,000 jobs are to be cut from a workforce of 16,000, part of the urgent effort to find cost savings of DM250m. The marriage with Zeiss Jena was threatening the whole company, as the western managers failed to come to grips with the realities of integrating and streamlining the two businesses.

The misery of Zeiss Jena highlighted the Achilles' heel of countless companies in the East - even with good products, they face enormous difficulties in getting access to the established markets of the West.

In 1994, Zeiss Jena made a loss of DM140m on sales of DM206m, contributing the lion's share of the total DM180m loss of the Zeiss group. Not that the western Zeiss was itself suffering from this drain. Not yet. For the Treuhand had generously blessed theeast-west marriage with a dowry of nearly DM600m of taxpayers' money in 1991.

But instead of being invested, as envisaged, the money has largely been used to cover losses. It was the imminent prospect of such subsidies running out that prompted the western managers to undertake belated crisis management.

"Zeiss Jena is a prime example of the triumph of political pressure and Treuhand generosity over business sense," says Heiner Flassbeck, chief economist of the DIW economics institute in Berlin.

"It was officially encouraged as a symbol of entrepreneurial commitment to unification, and ended up as the biggest scandal of privatisation."

Comments