The Hindu Business Line : Going lean and lean — Surviving the German corporate jungle

HERBERT Spencer, the British economist, is often credited with introducing the phrase `survival of the fittest' in his 1851 work relating to free market economics.

Companies which offer better goods and services at the right price survive better in the marketplace and tend to accumulate an ever-growing market share. Poorly-adapting companies will be forced out by better-adapting ones: `Killed' by the competition.

The European economy shows indications of both the vanquished and the survivors. In 2004-05, the number of bankruptcies increased by 4 per cent to 160,000. In Germany alone, the number of bankruptcies reached a new record of almost 45,000 companies.

As for the survival instinct, a new major shake-up of Germany's corporate sector is gathering pace just as uncertainty about the prospects for the economy is growing.

Luxury sports carmaker Porsche AG and a string of leading German companies announced cuts to their workforce and extended working hours in a bid to bring down costs in the face of intense of global competition. At Porsche production facilities, jobs that become free are not being replaced since they have been able to sharply increase output per worker.

Adam Opel AG, the German offshoot of General Motors, slashed 12,000 jobs and introduced a 15 per cent cut in wages at its loss-making European operations in a bid to save 500 million euro annually.

Starting 2006, Christmas bonus at all GM factories in Europe, will amount to just 70 per cent. Only when the company breaks even or makes a profit will it increase to 100 per cent. Along with the pay-cuts, the pact calls for a further easing of restrictions on working hours. These can now vary between 30 and 40 hours per week, with workers receiving the standard pay for 35 hours, regardless of the hours on the job. In addition, they must be available to work up to 15 Saturdays per year, without overtime payment.

A two-year wages freeze and jobs cuts totalling more than 30,000 was unveiled by Volkswagen AG.

Europe's biggest department store chain, Karstadt Quelle AG laid off 10,000 workers to save 760 million euro over the next three years. In a bid to haul itself back from the brink, the German household name Karstadt wants to reverse past moves to diversify its operations and try to refocus on core activities. At the same time, German supermarket chain, Spar, cut 1,000 jobs or about 27 per cent of its wholesale operation's workforce as part of a major restructuring programme aimed at turning around the company's financial fortunes.

As a measure of the change underway in Germany, carmaker DaimlerChrysler AG hammered out union agreements on labour costs, including extending the working week.

German airline Lufthansa reached an agreement in April 2004 with the pilots' union on a wage freeze until March 2006. The agreement also sees pilots working an extra two hours a month while newly-employed pilots is on lower pay levels. The 23-month deal is part of measures to increase productivity and cut labour costs by 6 per cent or 30 million euro. The deal includes Lufthansa's low-cost affiliate Germanwings. Lufthansa seeks to make a total of 1.2 billion euro in savings by the end of 2006. The company is expected to achieve its target of 300 million euro in operating profit for the full year despite rises in fuel prices.

The 13,000 employees at BVG, Germany's largest public transit operation, now face a massive cut in wages. On average, the new contract agreed on by the union implemented a wage cut of 10 per cent, and those workers not covered by the new contract faced a cut of 12 per cent. The different work times in East and West Berlin were lowered to a uniform 36.5 hours a week, without any compensation in wages. Holiday pay was abolished completely, and the Christmas bonus limited to a maximum of euro 1,000.

One of Germany's biggest corporations, Siemens, with a work force of 170,000, won a major victory against the workers and the trade unions last year. Siemens had threatened to sack 4,000 people and move part of their production to Hungary.

Without launching a serious struggle in defence of all jobs and in defence of wages and conditions, the trade union leaders give into the blackmail of the employers. The IG Metall leaders agreed to wage cuts in an attempt to save jobs. This two-year deal is based upon an unpaid increase in the working week from 35 to 40 hours for 4,000 Siemens workers. In addition they accepted the abolition of Christmas and holiday money in two of the company's plants and their replacement by profit related bonuses.

Following the Siemens example, another 100 went into negotiations to increase the working week to 40 hours for no extra pay at all. IG Metall, which in the past had always argued that wage cuts will not create more jobs, had in the 1980s, led week-long strike action for the introduction of the 35-hour week without loss of pay. They have now given up one of their fundamental principles!

In essence, the "Siemens model" manifests what has been an ongoing trend. A survey has revealed that the average working week for German workers is 39.9 hours. This has been possible through continuous concessions through the back door by the trade union leaders. In other cases, the unions have agreed to a reduction in the working week with loss in pay, trying to serve the bosses' need for more flexibility.

Despite a string of wage deals aimed at cutting costs and shoring up jobs in Germany, the exodus of companies from Europe's biggest economy to low-cost labour sites appears to be gathering pace.

A growing number of German firms, especially small- and medium-size enterprises (SMEs), are looking to start up or expand production outside the country for cost reasons.

The reforms are aimed at injecting greater flexibility in the nation's fragile job market as well as to trim the lumbering welfare state. The changes, combined with high unemployment, fast-paced globalisation and dwindling trade union membership, have served to undermine Germany's once powerful labour movement and helped to shift the balance in favour of employers.

As a result, employers have been using the threat of shifting out of the nation, in particular to the low-cost high-skilled neighbours of East Europe, as a way extracting new deals from the unions, including extending the working week from 35 hours to 40 hours — or in some cases more — without any corresponding adjustments to pay.

Faced with intense global competition, Germany's car industry has been spearheading the shift production to new low-cost and highly-skilled countries in central Europe and Asia, with the industry now having about 200 assembly plants dotted across East Europe.

These now represent about half the production capacity of German carmakers, and a particular position is held by the Czech Republic, which has become the third biggest foreign production site for German automotive firms after Spain and China. The trends in the car industry are reflected in other sectors as well and it is estimated that about 90 per cent of German firms aimed to pull production capacities out of the country.

Labour costs in Germany's key Western half were more than ten times higher than in the East European states formally admitted to the European Union, in May 2004. While total hourly labour costs for each worker in western Germany approximately works out to 30 euro, in Slovakia, the hourly labour cost is 3.5 euro.

Companies are also establishing R&D, engineering and administration operations outside the nation and not just simply production capacity.

Talking of survival of the fittest, I am reminded of the invincible fire ants, which are tiny insects, only three millimetres long, yet they pack a punch, are highly adaptable, unpredictable, and very aggressive. They are ready to destroy any and all enemies, regardless of size. They attack chickens, young deer, and even the occasional curious biologist. Like those fire ants, human nature, evolved over millions of years and present in our genes, expresses itself not only on the battlefield but in the boardroom too.

(The author is former Europe Director, CII, and lives in Cologne, Germany. Feedback may be sent to mohan.murti@t-online.de)

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