Global Economics

German Exporters Slammed by Crisis


The downturn is supposed to be easing, but Germany's legendary mid-sized industrial exporters are experiencing conditions worse than ever

Karl Schlecht is standing on the roof terrace of his company headquarters, looking down at his life's work. He moves carefully toward the railing. Schlecht is 77, his bones ache and his new hip is causing problems. But his ailments are minor when compared with the worries of Putzmeister, the company he founded 51 years ago in Aichtal, a town in Germany's southwestern Swabia region.

"It makes my heart ache," says Schlecht, as he stares out at an area devoid of human activity. There is no one to be seen on the factory grounds—no metal workers, no mechanics, no engineers. Most of the employees have been on short time since January, and the concrete pumps and mortar machines the company produces are beginning to accumulate throughout the plant—inventory for which there are no longer any buyers. In other words, dead capital.

Only last year, Arab and Asian buyers were clamoring for Schlecht's products. Putzmeister had erected a separate building for making large pieces of equipment designed to convey concrete and mortar hundreds of meters into the sky on high-rise building construction sites in Dubai, Beijing and Shanghai. "It was like a beehive," says Schlecht, referring to the amount of activity in the new building. But nothing is humming on those sites anymore.

Order volume has declined by more than half, and Putzmeister is already losing €5-10 million ($7-14 million) a month. Management consultants have analyzed the company's operations and recommended sharp cutbacks. "Well," says Schlecht, "we'll have to cut the company in half." And this at a time when others are already hoping for a turnaround in the economy?

Putzmeister, with its 3,600 employees, was until recently still being celebrated as one of those typical mid-sized, virtually unknown German companies that is a world leader in its niche market. Many of these companies are mechanical engineering companies and auto parts suppliers, produce first-class products, have exceptional expertise and export a large share of what they make. Putzmeister, for example, exports about 90 percent of its products.

The German economy is famous for such "hidden champions." These closet global market leaders have served as both an engine for growth and a job-creating machine for Germany.

Their concentration is particularly high in southwestern Germany, in small cities and towns along a corridor stretching from Pforzheim to Stuttgart to Ulm. Their benchmark was the world, and now their world is falling apart.

Orders have plunged by anywhere from 30 to 50 percent, in some cases even more. This, in turn, has created massive excess capacity. Temporary workers have long been let go, and fixed-term contracts have expired. Most of the remaining workers are now on state-supported short-time working schemes, where the government helps to make up their lost income.

A company that has lost half of its business needs to grow by about 10 percent a year for at least seven years to return to former levels. More realistically, management should consider itself lucky if there is any growth at all in the near future. The direct consequences include mass layoffs, plant closures and bankruptcies.

Is there any glimmer of hope? "I don't think so," says Peter Zimmermann, the CEO of Mink, a company based in the town of Göppingen near Stuttgart. A family business in its sixth generation, Mink is the world market leader in specialized industrial brushes. Zimmermann is incensed when he hears people say that the worst is over. "This isn't a crisis," he says. "It's a catastrophe."

Zimmermann estimates that the company has been set back by a decade. Orders have declined by 40 percent, and he is now forced to reduce staff, letting people go he would like to have kept on. The priority, says Zimmermann, is to make sure the company survives, "as horrible as it sounds."

Even the boldest of optimists are slowly realizing what a break with the past the global economic crisis represents for Germany, particularly for the southwestern state of Baden-Württemberg. More than in most other regions, the population here depends heavily on exports of its products: machinery, industrial equipment and automobiles. The region was one of the main beneficiaries of globalization, making its current plunge all the more precipitous.

This regional slump is relatively unaffected by the most recent figures from Berlin, which indicate that German industry experienced a rise in orders and exports in May. The general euphoria over such figures is difficult to comprehend, especially when one considers that the number of new orders, when compared with May of last year—the key benchmark—has declined by almost 30 percent, while exports are down about 25 percent.

Perhaps the economy is indeed bottoming out, as it reaches what Frank Mattern, the head of management consulting firm McKinsey's German operations, refers to as the "new normal" of business activity. Nevertheless, old sales figures remain unattainable for now. Even if the crisis ends soon, Germany, as a manufacturing economy, will have changed after the crisis. The question is: What will it look like?

Companies will become more cautious, taking less risk and investing less, even though nothing is more important now than to develop the products of tomorrow. But companies lack the confidence to do that.

This lack of confidence, in turn, has been most detrimental to the dynamics of the economy. "In the coming years," says McKinsey's Frank Mattern, "we will have to get used to lower growth rates."

Nowhere has the impact of economic decline been as harsh as in the region that has come to be known as Germany's Musterländle (loosely translated as "model state"). "Things are getting grim here," says Putzmeister CEO Karl Schlecht.

An economic network with roots dating back to the early 19th century is beginning to crumble. Back then, young businesses located along the Ulm-Stuttgart railroad line, including press maker Schuler in Göppingen (founded 1839), exhaust specialist Eberspächer in Esslingen (1865), auto parts maker Bosch (1886) and carmaker Daimler (1890) in Stuttgart. Companies were founded then that still shape the region's industrial landscape today.

They have survived two world wars and several monetary reforms, but now they face their toughest test yet. Sieghard Bender, the head of the local branch of the IG Metall metalworkers' union, considers 90 of the roughly 100 larger companies in his district to be problem cases. When asked how many of those companies are still doing relatively well, the union leader pauses to think for a moment. Five, he answers.

'People Are Suffering'

Bender, an easygoing man in his mid-50s, is sitting on a wooden bench in the garden behind the union's offices. The regional chapter is having a summer party, and Bender is getting himself a serving of pasta salad. He is one of the few people here who has already lived through a severe crisis. In 1991, then IG Metall Chairman Franz Steinkühler sent him to Chemnitz, a traditional location for engineering companies, to save what could be saved after the demise of East Germany. That experience helps him today, says Bender.

For months, he has been rushing from one employee meeting to the next. He senses the discontent brewing among workers, who face growing problems and expectations that are essentially unrealizable. On the bright side, he says, the regional chapter is gaining new members again, at a rate of about 50 a month.

The summer party has given Bender an evening of respite, with the exception of the music booming from the building. The union officials have taken refuge in the garden, where they are discussing the depressing nature of short-time work. "The people are suffering, the way a dog suffers when it has nothing to do," says Bender, slapping a colleague on the back. The man, Roland Weber, is 38 and can easily spend a quarter of an hour giving an impromptu lecture on how a piece of metal achieves the desired strength through a process of heating and cooling. This is his field, and he clearly knows it inside and out.

Weber, a metal hardener by trade, has worked for Index, an Esslingen company that manufactures machine tools, for the past 15 years. He was working six days a week until last fall, but now he works only three days a month. Short-time work has turned his life upside down.

Nowadays, Weber handles many of the household responsibilities, driving his children to sports practice or shopping for groceries. He runs into other Index employees at the supermarket, where he sometimes has a cup of coffee with them. Weber has quit smoking, saving €200 ($280) a month as a result. The family has been forced to cut corners, no longer going out to steakhouses in Stuttgart and canceling its beach vacation in Italy. Nevertheless, Weber estimates that they are still short by about €600 ($840) a month. "There's too much month left at the end of the money," he says.

Weber prefers not to think about how much longer the short-time work will last, what happens after the company's annual summer shutdown, and whether his profession as a metal hardener has a future. "If I did, I would drive myself crazy."

Hundreds of thousands of skilled workers like Weber are now idle, people the center-left Social Democrats 10 years ago were touting as the new "center" of society. They are people who were convinced that happiness is granted to those who work hard, and that success is based on performance.

The sociologist Heinz Bude calls them the "core social classes of the German model." Recently they have been feeling that they are trapped in a downward spiral, and their self-confidence has been undermined. "Fear is rampant in the places where value is created in Germany," says Bude.

In Göppingen, a traditional Swabian industrial town, the numbers reflect this fear. A year ago, the unemployment rate in the district was 3.5 percent, lower than almost anywhere else in Germany. It has since risen by at least a third. In June, 19,913 people were registered as unemployed. But this number only tells half the story.

Another 20,000 workers are on short time. Göppingen has become the capital of short-time work and, as a result, the town's reputation is changing.

Schuler, the world's largest manufacturer of presses, is in the red and has cut 600 jobs. The slump in the luxury vehicle market has sharply affected automobile parts supplier Bader, which specializes in leather trim. The well-known model railroad manufacturer Märklin has declared bankruptcy. Hard times are ahead for Göppingen. Mayor Guido Till, a member of the Social Democrats, clings defiantly to every sign of hope.

Only recently, says Till, a producer of construction machinery held a topping-out ceremony to dedicate a new building, in the midst of the recession. And he estimates that the town's commercial tax revenues this year will be almost as high as they were last year. In fact, Till insists, the crisis has not really made itself felt in his town, and it is "not even an issue" for the city council.

A few blocks from the town hall, on the first floor of the municipal employment agency, there is a meeting of a group of people with a completely different take on the crisis. They are employers from the region who have come to the agency to learn more about short-time work.

"Feel free to ask me anything you like," says Ralf Schneider, an expert from the Göppingen labor agency. Schneider knows that it takes some business owners a long time to overcome their misgivings about asking for help.

One of the attendees speaks up. He wants to know whether workers have to use up all of their accumulated vacation days from previous years before they can go onto short-time work. "Yes, the leftover vacation must be used up first," Schneider responds. But what if some have accumulated more than 100 days, going as far back as 2006? "Oh my goodness," says Schneider.

Another attendee asks whether apprentices can be put onto short time. Yes, in principle, says Schneider, but if apprentices fail their final examination later on, they can claim that they weren't properly trained. The employers nod their heads, as it dawns on them that they will have to do more than simply fill out an application form. "Your personnel department won't have to go on short time, I can promise you that," says Schneider.

Until recently, the biggest challenge for the employment advisers in Göppingen was to provide companies with enough skilled workers. Now they are struggling with a completely different set of problems.

For instance, apprentices who have not been offered full-time work after completing their training programs are increasingly claiming unemployment benefits. The number of unemployed workers under 25 has grown by 82 percent within a year. And, says agency director Martin Scheel, those who are coming to the agency to look for work are, for the first time, mainly people who have completed a vocational training program. "This time, we can't say that it's only affecting unskilled workers."

Many people have come to the bitter realization that even the kind of specialized expertise which was always prized in Germany is no guarantee against losing one's job. This is a consequence of global competition, which is becoming considerably more cutthroat now that the prosperous boom years are over.

Today, engineering companies and auto parts makers from Asia are penetrating deeply into markets for high-quality goods, markets once dominated by German specialists. The Chinese competitors are making products "of a quality that would leave you speechless," says Putzmeister founder Karl Schlecht.

Schlecht has a certain amount of admiration for his Asian competitors, for their discipline, their business acumen and their thriftiness—all traditional Swabian virtues. "They will soon be making the things we make here just as well as we do, but for a much lower price."

For industry veterans, this raises fundamental questions, questions which are on the minds of everyone in the export industry today. Would it have been possible to prevent this sharp downturn? What should companies do now? How can they bring down labor costs even further?

Daimler has led the way in this regard. Roughly 60,000 Daimler employees now earn and work almost 9 percent less than they did before. But is this enough? Or will companies have to shift even more of their production away from Germany? Moving production abroad was in decline until recently, but now corporate strategists are rethinking their calculations.

Or could the solution be for export-focused companies to abandon their niches and expand their range of customers and products? Some companies have already taken this approach. Auto-parts maker Bosch, for example, is expanding its renewable energy business. But this is only effective to a certain extent, because Bosch's customers in the wind and solar power industries are also struggling and are often unable to secure the financing they need.

The options are unsatisfactory. "We did everything right," insists Mink CEO Zimmermann. He says that he consistently emphasized quality, delivered his products on a just-in-time basis, and maintained a broad base of 20,000 customers and 300,000 products. Even more importantly, his company produces brushes, a product which wears out and needs to be replaced. "We thought that was our life insurance policy," says Zimmermann.

Zimmermann and his son Daniel, who belongs to the seventh generation of Mink owners, walk through a building that smells of fresh paint. State-of-the-art hole-punching machines are lined up on the floor, virtually untouched, precisely placed behind yellow marker lines. Zimmermann constructed the building specifically for Trumpf, an engineering company based in Ditzingen near Stuttgart, at a cost of €3.5 million ($4.9 million). Trumpf needed plastic panels with embedded brushes, which it uses to prevent pieces of sheet metal from being scratched during shipping. But then demand also slumped at the Ditzingen company.

The Mink/Trumpf relationship is indicative of how interdependent companies are in Swabia. When the auto industry is ailing, it no longer needs hole-punching machines from Trumpf. And when Trumpf loses orders, the demand for Mink's brushes declines.

The challenge now is to ride out the recession, says Zimmermann. But there is one thing he refuses to do: sell the company. He points to his son and says: "The two of us will be the last to go."


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