German Companies Seek Global Production:

Economy, DM and High Costs Launch Search for Alternatives
by Frederick M. Shepperd, Quadral Group, Ltd.

A few years ago, former presidential candidate Ross Perot warned Americans of a "great sucking sound" – companies and jobs moving to lower-cost countries if the North American Free Trade Agreement was ratified. The same pressures feared by Perot have resulted in an even greater imbalance between Germany and the world. This imbalance is so great that the winds of change are clearly about to be heard in every corner of German business.

German companies are running for cover. There is a massive exodus developing as Germans look for ways to be competitive in the new global economy. Some have gone to Eastern Europe; others are on a blind quest for "emerging markets" in the Far East. Still others are looking at a strategic investment in the U.S., North America or elsewhere in the Western Hemisphere.

Germany has just experienced the worst recession since the World War II. Why, then, are the numbers crumbling in perhaps the most successful economy in the world? The recession was not only a time of economic downturn at the end of an unprecedented era in the German economy, it was a time of restructuring to adapt to a new pan-European economy.

The only continental-based economy that could be used as a guide by the Germans is the United States. While companies were starting to use U.S. logistic and distribution models, a second trend developed in the U.S. – and it has caught German companies totally unprepared. The catch phrase is "globalization," which operates on the assumption that anything can be produced anywhere and at any time with free and open markets. If sourcing of pan-European requirements with a single source is good, sourcing global requirements is even better. Further, companies should focus production in key low-cost areas and supply their customers from these strategic bases with extensive logistic support.

In the New Global Era, all companies are on the same playing field in one global market, and it's a battle for market share. The pride of German industry, its preoccupation with complex engineering, multi-step production and high-end niche market approach, is little match for the sheer volume, simplicity in production and efficiency demanded in the global market.

The challenge is the same for companies throughout the world, but the New Global Era will have a particularly negative impact in Germany. In order to meet the new challenges, companies have to quickly reorganize, retool or retire. Successful companies in the global process are often quadrupling sales.

Few local suppliers to German companies have the size of machinery, the production area, or the capital to expand to meet the global requirements of a customer. Company reorganization also means restructuring of personnel. Social and labor laws in Germany come into direct conflict with the new demands in a global economy.

As a result, it is necessary for German companies to go to strategic markets where there is a flexible social system, ample area to create new production and ample capital quickly available to help companies expand, acquire additional production and maintain overall lower operational costs. Those who cannot afford to directly invest abroad are seeking various joint venture and production relationships.

One of those strategic countries is the United States. The U.S. has supplied a continental market for over a century. The size of the production facilities, size of equipment, ease of capital formation and relatively flexible social system are natural points to attract the German company serving global markets. Some companies are not provided with much of an option. Either you supply our North American operations, or you can't supply in Duesseldorf.

Companies looking to avoid this trend or fight its influences will soon find the error in their decision. Old, well-known companies will quickly disappear from the horizon, if they continue to rely on traditional supply relationships.

Many German companies are finding an American competitor often 30 percent below the cost of the German product. It’s not just the currency difference. The American company often supplies much higher quantities of production. Fixed costs are amortized over more parts. Parts are engineered for ease of assembly and use on several ranges of products. Volume purchasing and volume assembly (with only minor technical, quality or performance differences) creates the efficiency that is forcing the German Mittelstand to look in some way to U.S. technology, capital markets and manufacturing locations.

It is not a race to lower wages; it is a race to lower unit costs. High German wages alone have not caused this phenomenon. Rather, the combination of high wages, high social costs, high benefits, restricted capital markets and a rigid social system that has placed a high premium on "security" has resulted in an insecure business environment.

The most famous moves to America now include Mercedes-Benz and BMW. However, the wave is continuing with numerous suppliers, subsuppliers and companies in other industries following their customers’ global path. Although much news is heard about the southern United States, the real volumes in industry and infrastructural support lie in the traditional manufacturing heartland of America. Supplies to the relatively small production in Vance, Alabama (Mercedes, approximately 65,000 units per year), or Greer, South Carolina (BMW, about 65,000 units per year), pale in comparison to existing production in Lordstown, Ohio (GM, about 300,000 units per year).

As a result, German companies, to be successful, must look to supply beyond the traditional customer base and create volume-based efficiencies that are globally competitive. The German company must also look to the supplier base for their industry, which can also vary greatly from state to state.

The winds of change as a result of globalization are truly sweeping many companies out of Germany. It is a risk to those companies who cannot adjust, but it is also an opportunity for growth of unprecedented proportions. That growth is creating permanent supply advantages and freedom from local economic swings that translate into long-term security for the company back home.

This article appeared in HANDELSBLATT and WHIRTSCHAFTS WOCHE,
April 18, 1996. Reprinted with permission.