The state returns in the east: John Eisenhammer reports on the fall of the free market ideal in Germany

HANS WOHLFART does not know who the victim will be. But he has no doubt that somewhere - in western Germany, Britain, France or Italy - a rival will soon go under.

Mr Wohlfart is the manager of Zwickauer Kammgarn, a manufacturer of fine worsted thread in the eastern German state of Saxony. His confidence in the problems facing his competitors stems not from any form of market dominance or technological superiority. In fact ZK is making heavy losses and struggling in its market. Under normal free market rules, ZK could well be next for the receivers and liquidators.

But Mr Wohlfart knows that the rules are being bent for him, bent so far that the weak have a very good chance of outliving some of the strong.

ZK highlights the extent to which plans for rapidly transforming the old Communist planned economy in eastern Germany into a model of free market competition are being turned upside down. A new form of state tutelage is taking over where the scorned Communist predecessor was supposed to have been eradicated.

What changed things was panic in the Bonn government. Scared by the increasing speed of de-industrialisation in eastern Germany, it rushed headlong late last year into all-out intervention. Large swathes of mostly hopelessly uncompetitive industry, in machine tools, chemicals and steel as well as textiles, were to be kept alive, seemingly regardless of cost.

'We realise this is a hugely delicate strategy. But our only hope is that in the next three years, while our losses are guaranteed by the state, some other firm in the west goes bust and makes way for us,' Mr Wohlfart says with disarming candour.

Others are less than enamoured. 'We run the risk of paying just lip- service to the market economy,' warns Tyll Necker, president of the Federation of German Industry (BDI). 'Instead of fostering the creation of an efficient Mittelstand (corps of middle-ranking companies) in the east, the recently privatised or newly founded firms there - as well as western German companies - are being subjected to massive distortions of competition by this state preservation policy.'

ZK has had a good hand of cards from the Treuhand, the privatisation agency. First it wrote off DM190m ( pounds 76m) of the company's debt. Then it invested DM14m in refurbishment and machinery. The elegant, low-slung buildings, erected in 1928, are now in excellent repair and most of the spinning machinery is modern, dating back to the mid-1980s at the earliest. But the company, with turnover this year of DM30m, is still mounting up losses, which the Treuhand grudgingly covers, as it does for all the companies still sheltering under its pre-privatisation umbrella.

Mr Wohlfart's difficulties are more acute than the miserable conditions affecting everyone in textiles at the moment. 'We are perfectly competitive,' he says, 'but the problem is that we do not have a market.' Like most East German businesses, ZK looked east in its previous Communist incarnation. But with those markets gone, it is now trying to barge its high-quality products into the demanding and overcrowded markets of Western Europe. Mr Wohlfart knows the competition well. He came to Zwickau in August 1991 from the big western German textile company Schoeller-Eitorf, where he was chief executive.

'To get oneself established as a mainstream deliverer takes years, and we do not have that time,' Mr Wohlfart says, pacing up and down his office, bedecked with trophies from the Communist east. 'So the only way in is through lower prices - even if the consequence is losses.' The Treuhand has guaranteed to cover these losses for the coming three years because ZK has been singled out as a company to be preserved as part of the industrial core. After three years, the idea is that ZK will be ready to fight on its own two feet in a market whose rules can no longer be bent.

Mr Wohlfart knows he has everything in his favour. 'Most in the west would give their back teeth for what I have here - it is a dream constellation. Both production and quality are now excellent,' he says. From the 3,500 workers originally at the factory, he had the pick of the bunch, and ended up with 320 'highly motivated people'.

Because securing jobs is a higher priority among this rump workforce than pushing wages up to western levels, he thinks ZK will be able to hold on to an DM8-DM10 per hour labour cost advantage over western German rivals for the next few years. 'Someone else is bound to drop in that time'.

He will also enjoy the benefits of the Treuhand's latest big idea. Keen to stop its active operations by the end of next year, it still has to find a solution for the industrial cores that it is committed to saving that cannot be easily privatised by that deadline.

As an experiment, the Treuhand has set what it calls Management KGs to group a number of core firms. Although the Treuhand remains the majority shareholder in these new holding companies, they are run by three or four managers, ususally from western Germany, who have each put about DM500,000 into the venture.

So far five have been set up, grouping some 70 firms, ranging across electronics, machine tools and heavy plant machinery, textiles, chemicals and metal working. While the Treuhand guarantees the losses of the individual firms for a set period and makes investments, it is the managers' responsibility to turn around and sell off the companies grouped in their Management KG.

Hans Wohlfart considers ZK's prospects to be brighter than most. The breathing space in the market is all he needs and he is getting clients in Italy, France and western Germany. If the market does not collapse too much, there is a good chance of moving into the black next year.

Despite his 60 years, he says he is feeling younger than he has done for ages. Once things turn up, he could be tempted to lead a management buyout at Zwickauer Kammgarn. Once he has found his victim, that is.

(Photograph omitted)