What Next for German Auto Industry?

The threats issued from the boardrooms of the global car giants are clear: bring down the cost of production or jobs will be cut. In July, Daimler-Chrysler told its Stuttgart workers that either wages will be cut or production of the C-Class Mercedes will move to South Africa.

General Motors followed in October, announcing a €387 million ($500 million) cost-cutting drive that could see 10,000 jobs slashed at its German Opel plants. And this month, Volkswagen, facing its seventh consecutive decline in quarterly profits, told its 100,000-strong workforce that costs will have to be reduced by €2 billion ($2.6 billion) -- or 30 percent -- by 2011.

Long-term sustainability in jeopardy

Against this background of job cut threats, strikes and a patchwork of short term workplace agreements, the long-term sustainability of the German car industry in a globalized economy is now under close scrutiny.

Automotive analysts say car makers should have seen the warning signs of an oversupply in vehicle production approaching. German economic growth is sluggish, consumer spending depressed and new car registrations down again for the fifth consecutive year.

Opel says it misjudged the market and didn't hit the brakes on production earlier. Over at Volkswagen, a decline in their US and Chinese market saw management looking to boost profits by cutting production costs at its German plants. A new work deal between VW and the IG Metall union will see wages frozen for 2 years. In return, VW offered its workforce a one-off payment of €1,000 ($1,300) and a pledge of job security until 2011.

Two steps forward, one step back?

Investors, however, are now wondering if deals that guarantee jobs in the future regardless of performance are two steps forward and one step back for car makers. Will it let the industry meet the future demands of a global economy?

Jürgen Pieper from Metzler Equities in Frankfurt believes the VW deal comes a few years late, but is nonetheless an industry breakthrough.

"It's the first compromise which I think is more in favor of the company than in favor of the unions," he told DW-RADIO. "This time they have zero percent for almost two and a half years, and what is even more important is that every new employee will have completely different conditions and wages than the old employees. I think it's the first step in the right direction to make the industry more competitive."

The cost of paying less

But is there still a competitive advantage of using the skills of highly trained German car workers? Christoph Stürmer is the author of the recently published book "Premium Power," an in-depth examination of the German auto industry. He says that labor costs need to come down. However, he was quick to point out that compared to other countries, the German car worker is more self-reliant on the factory floor.

"If you let people interact with what they are doing, if you listen to what they are doing, even on the simplest assembly job or on the simplest pre-assembly jobs," he explained. "You will find that everybody has an opinion, everybody has an idea of what they’re are doing, and everybody has a deep understanding of what he is doing."

He believes there's change afoot. "There are increasing doubts that this simple model of paying people less and employing more machines can really help the auto industry survive with all the players that are in it as present."

Job opportunities in eastern Europe

Along with more factory automation, cheaper labor in new EU countries is also becoming more attractive for German car manufacturers. Bob Hancke is an expert in European industrial relations at the London School of Economics. He says western European unions have attempted to influence workers in eastern European car factories to push for higher wages, but without success.

This is because unions in new EU countries know that a car factory creates big job opportunities -- even beyond the factory gates.

"Take a country like Poland, which has an unemployment rate of 25 per cent," he said. "A big car plant settles down in a region -- that means with the suppliers, with the services, that you associate with that kind of a plant -- that probably means some 10,000 jobs," he went on. "Ten thousand jobs in a region that has a 25 percent unemployment rate is not something that any trade union anywhere can let pass by."

Given this cycle of over-production, wage disputes and strikes, does the German car industry have a sustainable future?

Hancke thinks not. "At the moment the German car industry has manoeuvred itself in a position where cost-competitiveness is the only way they can go," he explained. "I think the German car industry is going to be in a lot of problems because there is going to be a big chance, given how much skills the car manufacturers have pulled out of the production process."

The enlarged EU has permanently changed the landscape. "They can now probably more easily make the same models of cars in countries like Poland and the Czech Republic, and probably a few others in a few years in Eastern Europe," he added.

Shifting focus

Christoph Stürmer says the German car industry's future sustainability ultimately lies in how manufacturers see themselves as car makers. For example, a giant like Volkswagen may need to produce less cars overall but make more models that can attract a higher sales value. But he argues the upheavals of 2004 show that the industry as a whole needs to revamp its strategic outlook and direction.

"Many in the industry hope that this process is going to lead to a very thorough reconsideration of corporate strategies and of the interaction between the management level the worker level, the unions and the government as to how it is they want the car industry to look in the future," said Stürmer. "And only if we see this reconsideration process, will there be a sustainable auto industry in Germany."

But Stürmer also stressed that some car companies are getting it right. In the past nine months, BMW has sold nearly 900,000 cars and overtaken Daimler-Chrysler in luxury vehicles. Stürmer says Audi, Porsche and BMW are showing that car making in Germany can indeed be profitable.

"These companies evidently have the capability of keeping the high cost level below the revenue threshhold," he observed. "So between the high costs that they have and their even higher revenue, they can make quite a good living."