Germans struggle to keep in the race

25 April 1994 00:00  [Source: ICB]

Germans have been watching themselves fall out of the running in the productivity race. Now they are starting to tackle the problem, but how to raise productivity levels and bring wages more in line with other countries is provoking a bitter debate.

By Dede Williams

SINCE RECESSION came to Germany two years after the reunification boom, the pressure for change has mounted and the debate between industry, government and labour over the standort, or location, question - ie, is Germany still a good location for business, and if not who is to blame and what can be done about it? - has mushroomed into a matter that has consumed the attention of an entire nation.

Standort has become such a catchword that it has found its way into a business protection law, Standortsicherungsgesetz, and has even become the name of a new chemical trade publication, Standort Chemie. The theme recently spawned a jobs-focused joint seminar (social partners forum) between the chemical employees union IG Chemie-Papier-Keramik and the federal chemical employers association, Bundesarbeitgeberverband (BAVC).

BASF managing board member Max Dietrich Kley, never one to mince words, speaking at his company's environmental press conference this month, conjured up a vision of a country at the crossroads. On the one side are those who defend Germany as a location for business, through their capital investment (in environmental protection as well as production plant), on the other side the 'catastrophe gurus, bureaucratic regulators and romantics who oppose progress'.

In presenting the Hoechst group's disappointing 1993 results to the press, retiring chairman Wolfgang Hilger described some of the moves Hoechst is making to eliminate structural deficits. 'We are discontinuing activities in unhealthy businesses, writing off loss-making affiliates, substantially reducing the workforce and setting up provisions for risks,' he said, and hinted that the group's cost-cutting scheme will begin by tackling problems at German locations.

Hoechst is one of several German dyestuffs makers mulling plans to close production units in Germany and build up new capacities in developing countries such as India. As Hilger pointed out, major textile industry customers for dyes

By Dede Williams

and manmade fibres - another of the chemical industry's depressed sectors -have already moved to Asia.

Of course, the option of moving abroad is open only to the multinational groups, as Hoechst managing board member Justus Mische, who is also president of BAVC, reminded participants in the social partners forum. In his view, the measures the large multinational companies are now taking to improve Germany's attractiveness as a location for chemical business in the long run will also help small- and medium-size companies who have all production facilities in Germany.

Although on the whole, the German chemical industry now divides its capital spending almost equally between German and foreign markets, the industry association VCI notes that most of the spending at home goes on replacing outdated equipment and on environment-related projects, while new production facilities - increasingly involving new technologies - are being set up abroad. This applies most noticeably to genetic engineering, which still does not enjoy broad public acceptance in Germany.

Parallel to decisions to shift production to countries with lower costs, employment in traditional German production sectors is being cut back. But not all job cuts are related to plant shutdowns. As high energy and environmental protection expenditure require more complex solutions, most companies believe the place to start saving costs is on personnel, which they say is one of the most expensive production factors.

IG Chemie estimates that the chemical industry in western Germany lost 50 000 jobs between 1991 and 1993. Some 10 000 were working short hours in the first quarter of 1994. Following German unification in 1990, the chemicals sector in eastern Germany lost 260 000 jobs. Of the 50 000 still employed, 2100 work for companies that still belong to the Treuhand.

In the west, the majority of the cut-backs have been achieved through natural wastage, but this option appears to have been exhausted. While IG Chemie chairman Hermann Rappe does not see a need' for further major reductions in employment in 1994 - especially in view of a perceived upward trend in the economy - chemical employers say the downward trend will continue, albeit at a slower pace. From their perspective, the structural problems the industry faces are so severe that enormous cost savings must be achieved if Germany is to retain any degree of competitiveness internationally as a location for chemical business.

On paper at least Hoechst plans the most dramatic cutbacks. Having eliminated 12 000 jobs between the end of 1990 and the end of 1993, the group's rationalisation scheme calls for another 8000 to be slashed from the 170 161 worldwide payroll by the end of 1995. This should result in a cost saving of DM1.5bn/year, according to Hilger.

Bayer estimates that personnel costs now represent some 35% of sales, which chairman Manfred Schnieder describes as 'too high'. The group reduced staffing by 2400 in 1993, and will slash another 2100 positions, mainly in Germany, by the end of 1994. This will reduce employment to management's target of 150 000. There will be 'no more hiring' this year in Germany, except at the new Bitterfeld location in eastern Germany, Schneider stated at his spring report to the press. In 1990, Bayer employed 171 000 people, half in Germany.

By the end of 1994, BASF AG, the parent company of the international group, plans to have pared well over 7000 jobs out of its 1990 core. Some 4000 jobs are to go in the group this year, bringing down worldwide staff levels to around 108 000. BASF estimates that labour costs in its German plants account for 25% of total production costs.

When its own cost-cutting programme begins to bear fruit at the end of 1994, Hüls, the Veba subsidiary, plans to have 8000 fewer people on its payroll than at the end of 1990.

By trimming back staff numbers, German chemical companies also hope to improve per employee productivity. According to BAVC figures, in 1993 - the year of the most job cuts - productivity in the German chemical industry increased 'considerably,' while per employee sales fell 1%. At the same time unit wage costs, which had shown a nearly 10% increase in Q1, declined 0.1%.

Among methods for reducing costs while improving productivity, companies envisage pruning back wage payments to the union scale or hiving off less profitable operations into separate companies. In the manmade fibres section, many employers would like to leave the union or alternatively, the employers association, and draw up 'house' agreements for their employees. Another scenario involves devising a specialised agreement for the fibres industry, based on textile industry wages.

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Although Bayer failed in its attempts last year to switch manmade fibres employees to the 10% lower textile tariff, it may have smoothed the path for other multi-product groups by splitting off its fibres business into a limited company paying no-frills, basic union wages. Akzo and Hoechst are eyeing similar measures. But both IG Chemie and BAVC oppose moves to depart from the industry-wide agreement on wages and conditions negotiated by unions and employers associations.

For their part, the 'social partners', as the employer and employee organisations like to call themselves, continue to enjoy their usual amicable relationship, as the latest pay agreement, sealed in January, demonstrated. Both the union and the employers association - along with the political sector in Germany -praise the new agreement as a 'signal' for other branches of industry, to bring more flexibility into the German labour market.

For the employers, the new contract will mean a number of benefits, which the union hopes will help stem the flow of jobs out of the country. Unemployment has now reached 8.8% in western Germany and 17% in the east. Among other points, the agreement will allow companies to couple working time to their production requirement. A nominal wage increase of 2% was part of the new contract, but as its running time was extended, the actual pay rise amounted to less than half the rate of inflation.

For BASF's Kley, who is responsible for labour matters within the group, German chemical wages are still too high. Speaking at the social partners forum he found himself in agreement with Hans Tietmeyer, president of the German central bank, the Bundesbank, and professor Gehard Fels of the Institute of the German Economy, an industry-backed research institute.

Based on earnings figures for qualified chemical shift workers within the BASF group worldwide, Kley outlined annual per employee wage costs ranging from DM100 000 ($59 000) in Germany and Belgium to DM3500 in Asia. Considering that a German worker is paid DM60/h (including social benefits), and an Indonesian worker (with no social benefits) receives DM1.52/h, it is not surprising that 'a strong headwind is blowing across Standort Deutschland', Kley said, adding that this puts in perspective the 'often heard argument that in comparison to other countries the higher productivity in Germany makes up for the disadvantage of higher costs'.

Not only do German workers cost more, said Kley, they actually work less than their counterparts in other countries. Of the 37.5 hours/week a German chemical employee is obliged to work under the IG Chemie-BAVC contract, only 28.3 hours are actually put in, he said.

Aside from labour costs, BAVC president Mische identified other factors marring Germany's attractiveness as a location for chemical business. Along with high energy costs, which he estimated to be 12-13pfg/kWh higher than in other EU countries, he reminded the forum of protracted approval procedures for new production facilities in Germany. He recalled the Hoechst pharmaceutical division's difficulties in receiving approval for a gene-spliced human insulin complex and a research plant for hirudin. After waiting two years for approval of a hirudin test unit in Germany, Hoechst has now decided to build a fullscale production plant in France.

On another pet grievance of the chemical industry, environmental protection costs, Becker remarked that Germany stands out against other European countries in environmental charges and regulations. He called for a 'reorientation of priorities'. Instead of focusing on 'counter productive' new regulations, the government should set 'clear targets' environmental policy. How these goals are reached should be left to industry. If only for reasons of saving costs, 'we would choose the most cost-efficient measures', he insisted.

Hoechst and the chemical industry in general are no longer in a position to finance Germany's race to stay ahead of the rest of the world in environmental protection, Hoechst's managing board Karl Holubek told his group's environmental press conference last week. 'This would result in Germany losing production plants and jobs to competition in other countries who have no environmental costs,' he said.

IG Chemie, on the other hand, supports a position often taken by federal minister for the environment Klaus Töpfer, that high environmental standards contribute to Germany's attractiveness as a location for production, in that higher technological standards actually lower costs.

Chemical producers, as well as IG Chemie and the federal ministry for research and technology (BMFT), frequently express concern about the climate for innovation and research in Germany. What they describe as a 'thicket of rules and regulations' hampers innovation, says the VCI.

The association is disturbed by the federal government's draft of a second amendment to Germany's Chemicals Act, enacting the EU's Seventh Amendment into national law. In the version now being debated by the Bundestag, the amendment would extend the notification requirements to intermediates used by companies internally.

This disadvantages the German chemical industry and is a 'decisive negative factor' for Germany as a business location, says the VCI, adding that 'the synthesis of substances often requires a number of new intermediates. Testing and reporting these would make the end product unnecessarily expensive.'

ICIS Copyright © Reed Business Information 2009

Author: Grace Williams
+44 208 652 3214

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