Nov. 2 (Bloomberg) -- Deutsche Telekom AG, Europe's largest telephone company, plans to eliminate 32,000 positions in the next three years after more than two years of shrinking revenue at the traditional phone business in Germany.

Sales at Deutsche Telekom's T-Com fixed-line unit fell 5.4 percent in the second quarter as customers switched to mobile phones and competition hurt prices. T-Com employed about 110,000 workers at the end of June, or 46 percent of the total workforce.

The cuts will cost 3.3 billion euros ($4 billion), Deutsche Telekom said in a statement to the Frankfurt exchange today. The company plans to hire 6,000 workers and help 7,000 people find new jobs through its Vivento employment agency. The net effect will be 19,000 fewer jobs at the Bonn-based company, or about 8 percent of the total at the end of June.

``It's not a choice, it's a must with competition increasing and technology moving more and more to Internet Protocol,'' said Philippe Kiewiet de Jonge, who helps manage a fund of technology and phone stocks worth about $480 million at ABN Amro Asset Management in Amsterdam, including Deutsche Telekom shares. ``It's essential the total headcount number drops at Deutsche Telekom.''

Deutsche Telekom's stock rose 2.6 percent to close at 14.87 euros in Frankfurt. Before today, the stock had lost 13 percent, more than the 0.8 percent drop in the Bloomberg Europe Telecommunication Services Index.

Chief Executive Kai-Uwe Ricke, 44, said in March he plans to cut the German headcount by 5 percent a year to reduce labor costs to 20.9 percent of revenue by 2007 from 23.4 percent last year. The company employed more than 170,000 workers in Germany at the end of 2004. A 5 percent cut would mean about 8,500 jobs a year.

Changing Industry

European phone companies have been eliminating jobs as they struggle to make up for falling fixed-line revenue with wireless and broadband Internet services. France Telecom SA said in January it planned to reduce its workforce by 8,000 this year through early retirement. Royal KPN NV in March announced plans to cut 1,500 to 1,750 positions a year through 2007 and may shed a further 3,000 in the following two years.

``The worldwide realignment of the industry, the rapid pace of technological development and, in particular, the tough competitive environment in the fixed network and broadband sector in Germany imposed by the regulatory situation, intensify the challenges facing the entire Deutsche Telekom,'' the company said.

Deutsche Telekom joins German companies including DaimlerChrysler AG and Siemens AG in cutting labor costs in their home market. Western German wage costs are the world's second- highest after Denmark, according to the IW economic institute in Cologne, Germany. The country's unemployment rose to a record 12 percent in March and stood at 11.6 percent in October.

Cost Savings

The cuts will be made via voluntary measures including severance payments and part-time work, the company said.

Deutsche Telekom expects to see cost savings from the program starting in 2009, spokesman Mark Nierwetberg said in a phone interview. Nierwetberg, who declined to give details on the savings, said the plan will run from 2006 through 2008.

``The real question will be whether the number Deutsche Telekom has now mentioned will actually leave the company's payroll or whether they will be parked at company subsidized Vivento,'' ABN Amro's Kiewiet de Jonge said. ``If people move to Vivento, I want to know when they leave the company's payroll.''

New positions will be created to strengthen Deutsche Telekom's T-Punkt network of retail stores and in areas such as specialized training, Nierwetberg said, without elaborating.

Labor Market Restrictions

Firing workers at Deutsche Telekom is difficult because many of those on the company's payroll are classified as civil servants and can't be fired. Deutsche Telekom, 37.5 percent owned by the state, employed more than 46,000 civil servants as of June.

The company said today talks with the federal government about early retirement plans are necessary because it had promised not to make any compulsory redundancies before end of 2008. Deutsche Telekom also said it has begun talks with labor representatives.

``We are against the plan presented and will challenge each individual measure in the coming negotiations,'' Ver.di labor union representative Franz Treml said in a statement posted on the group's Web site.

Deutsche Telekom set up the Vivento in-house personnel agency in 2002. Vivento assigns temporary positions inside and outside the company to workers who are no longer needed. Since Vivento was established, Deutsche Telekom has moved 33,000 workers there and at the end of June, about 16,500 were still at Vivento.

More Job Cuts?

Ricke has cut Deutsche Telekom's workforce by more than 11,000 since he took over as CEO in November 2002. The company's revenue per employee has risen 31 percent in the four years through 2004 to 236,590 euros. That compares with 213,000 euros at France Telecom and 193,000 euros at Telefonica SA, according to data compiled by Bloomberg.

Deutsche Telekom in March forecast revenue at T-Com will drop to 23.2 billion euros in 2012 from 26.2 billion euros this year, before rising again thereafter.

Deutsche Telekom, which is investing as much as 3 billion euros in a high-speed fiber-optic transmission network to tap growing demand for Web services, said today ``regulation in this new market'' may jeopardized another 5,000 jobs at the company.

Germany's phone regulators told Deutsche Telekom to give competitors access to the network to serve their own users, dpa- AFX news agency reported Oct. 24, citing Bundesnetzagentur President Matthias Kurth.

DaimlerChrysler, the world's No. 5 carmaker, said in September it will eliminate 8,500 jobs at the Mercedes Car Group in Germany to help revive profit. Siemens, Europe's largest engineering company, in the same month announced plans to eliminate 2,400 jobs at the German computer-services division.

To contact the reporter on this story: Kenneth Wong in Berlin at kwong11@bloomberg.net

Last Updated: November 2, 2005 12:08 EST