Wednesday, September 15, 2004
Carmakers wrestle with Germany's cost demons
Reuters Frankfurt, September 15
Fast forward some 20 years or so and Germany might very well witness a historic event: the very last mass-market passenger car rolling off one of its assembly lines.
As incredible as this may seem, some experts warn that this might very well be the reality some day if carmakers and unions don't act quickly to put a halt to the creeping erosion of Germany's industrial competitiveness.
In Europe's largest economy, where every seventh German job depends on the car market, automakers and suppliers find themselves confronted with the dilemma of how to afford domestic production while fighting off global rivals that pay their workers far less than what German labour costs.
"You don't need highly skilled German workers building cars anymore," said auto analyst at Celerant Consulting, Max Habeck, citing the high amount of factory automation that has reduced the margin of error in the production process.
"Look at Auto 5000," he added, referring to a Volkswagen unit that builds the popular Touran compact minivan in Hanover at a considerably lower cost. "They hired 5,000 unemployed bakers, butchers and tile-layers that had no experience at all."
So when VW sits down with German metalworkers union IG Metall on Wednesday afternoon for the first round in a long series of gruelling wage talks, more is at stake than just the homegrown labour problems at Europe's biggest carmaker.
Volkswagen is one of Germany's largest industrial employers and labour market experts say its wage agreements act as orientation for other companies, trickling down through the engineering industry and eventually into the country's broader economy.
For Martin Kannegiesser, head of Germany's engineering employers federation Gesamtmetall, a failure at VW to tackle its cost demons would set a dangerous precedent for its peers.
"It's not God-given that Germany remains the most important location in Europe for the automotive industry," he said this week. "Just look at how important England was in the 60's and its pathetic descent since."
In a sign of the reigning zeitgeist, VW's finance chief Hans Dieter Poetsch recently made an unprecedented threat to axe over 30,000 jobs -- nearly a third of its staff -- if unions don't scrap their proposals for a four per cent wage hike in favour of the two-year pay freeze that VW wants.
EARLY WARNING SYSTEM
Volkswagen, which recently cuts 2004 profit target by 600 million euros ($735 million) amid likely US losses of around one billion, is not suffering from high personnel costs alone.
The climb in the euro has erased billions in profits at VW. But other struggling carmakers that have little or no dollar exposure like General Motors' loss-making German unit Adam Opel, are also desperately looking to cut costs.
Against the opposition of its workforce, Opel decided earlier this year to shift some of the production of its Zafira minivan to Poland at the expense of its Ruesselsheim factory that's considered one of the most modern in the world.
It's now asking workers to accept a pay freeze for the next five years and cuts in various bonuses and overtime benefits.
"Germany is the most expensive place in the world to build cars, no country is costlier," said Ferdinand Dudenhoeffer, head of the Centre for Automotive Research (CAR) in Gelsenkirchen.
While IG Metall often defends its demands by saying labour accounts for only about 17 per cent of overall production costs, this is the only real lever that carmakers can use to cut costs.
"Companies purchase their machinery and materials across the world, so they all end up paying roughly the same prices wherever they produce. Labour costs are then the only differentiating factor," said partner at Ernst & Young, Thilo Kausch.
According to a study his firm just conducted of 200 German automotive suppliers, half are planning to create new jobs outside Germany to help reduce their cost base.
Asked about the main factors the suppliers consider when choosing where to locate their production, 75 per cent responded labour costs were "very important", compared to just 46 per cent who cited workforce skills -- the second main reason given.
"A supplier pays 25 per cent of its costs for labour versus 15 among carmakers, so they are much quicker to look elsewhere," CAR's Dudenhoeffer said. "Germany has become unimportant as a production location for suppliers."
This is particularly worrying when one considers that they are the first to really feel the impact of increasingly bitter competition.
"Carmakers still have the suppliers whom they can lean on to save costs over the short term, but eventually they too will have to deal with this pressure," Ernst & Young's Kausch said. "So suppliers act in that sense as a sort of early-warning system for the industry."
Perhaps more alarming then was the finding that 58 per cent believed current industry trends would force carmakers to shift auto assembly outside of Western Europe. Only in areas like branding, marketing, engineering and design did suppliers believe there was a future for western European auto workers.
"We're living above our means," Volkswagen chief executive Bernd Pischetsrieder warned his workforce last week in an interview with the carmaker's employee newsletter.
If he doesn't succeed in putting VW on a radical diet, the company's Wolfsburg plant might one day be nothing more than a massive monument reminding Germans of their cherished past.
© HT Media Ltd. 2004.