`The Exodus Of German Industry Is Under Way'

During a recent visit to New York, Daimler Benz CEO Edzard Reuter delivered a warning that was ominous for Germany but good news for the U.S.: He complained that the high cost of German labor was eroding Germany's competitive edge. As a result, "we will have to think about transferring production abroad." Indeed, he added, "this process is already on its way."

Reuter was signaling the beginning of what may be a big German push into North America. Germany's top companies have concentrated on pumping money into eastern Germany and central Europe for the past two years. But now, with their labor costs--already the world's highest--set to jump again, they are looking to move production from their home turf into major markets.

The U.S. suddenly looks mighty attractive to these companies. Lower wages are one draw. Another is a promise of the vast, integrated market that could be created through free-trade negotiations among Canada, Mexico, and the U.S. Says Alexander T. Ercklentz, a Germany specialist at Brown Brothers Harriman & Co., the New York investment bank: "Many German companies feel they should have manufacturing in this country. They want cheaper labor, and they are concerned about barriers going up."

CAR TALK. In recent weeks, Germany Inc. has shown a strong interest in pursuing American activities (table). On May 5, Deutsche Bank board member Ronaldo H. Schmitz unveiled a drive to boost lending to U.S. corporations--moving into a vacuum left by cash-strapped Japanese banks. And Daimler Benz, which has U.S. sales of $7.5 billion from such units as Freightliner, Mercedes-Benz, and power- and electronics-equipment maker AEG, is developing what Helmut Werner, newly designated as Mercedes' next CEO, calls "a fully integrated concept for the Western Hemisphere." It's likely to include building Mercedes sedans in Mexico, initially for South American markets--but perhaps later for the U.S.

But BMW, Mercedes' rival, is mulling an even bolder move. Like many German companies, BMW has pursued an export strategy. But in a sharp break with tradition, it is studying sites for a $1 billion plant outside Germany. While locating the plant in the U.S. is not a sure thing, two leading contenders are known to be Spartanburg, S.C., and Omaha. "The exodus of German industry is getting under way," says Eberhard von Kuenheim, BMW's CEO.

Auto analysts figure BMW could easily produce cars 20% more cheaply in the U.S. than in Germany. The gap is sure to widen: At home, BMW is facing a strike threat from the powerful IG Metall union to back up its demands for a 9.5% wage increase. Like other German manufacturers, BMW doesn't think it can compete anymore from a domestic base that has the shortest workweek, longest vacations, and highest business taxes in the industrial world.

Germany's giants are responding by positioning themselves as strong players in Europe, the U.S., and the Far East. But the Far East is a tough nut to crack. Daimler Benz, for example, has been trying to negotiate strategic alliances with the Mitsubishi group for nearly two years. But in the U.S., the brakes are off. Daimler has already earmarked $185 million for new investments in its Portland (Ore.) Freightliner operations. Having won a leading 23% share of the U.S. heavy-truck market, it is now pushing into midsize vehicles.

GONE SHOPPING. While many German companies prefer the tack of beefing up existing plants or starting from scratch, others are on the prowl for U.S. acquisitions. Current price tags look alluring, because many U.S. assets have been battered by recession and a torrent of downsizing sell-offs. In addition, the dollar--now worth 1.63 German marks--is still only half its mid-1980s peak. On May 7, electronics giant Siemens plunked down the final installment of an estimated $1.2 billion to buy Rolm Co., a maker of telecommunications equipment, from IBM. "We must push more production outside Germany," says CEO-designate Heinrich von Pierer. Last year, Siemens spent more than $270 million on U.S. acquisitions and investments, and an additional $450 million in research and development.

The backbone of Germany's economy--the small and midsize companies known as the Mittelstand--is also trying to boost its competitiveness through establishing American presences. One aggressive outfit, machine-tool maker Trumpf & Co., is spending $1.5 million a year expanding its Farmington (Conn.) operation. "The American market pushes us to innovate faster," explains Chairman Berthold Leibinger. Already, one-third of its U.S. output is being exported to Europe and Japan. Some cheeky companies are even planning to use the U.S. to take on global giants. CD-maker Pilz is planning to square off with world leaders Sony Corp. and Bertelsmann by churning out 30 million CDs a year in the U.S.

In a sense, the Germans are playing a game of catch-up in America. Although a quarter of Germany's $130 billion-plus in foreign investment is stashed in the U.S., Germany has lagged way behind its British, Dutch, and Japanese peers in recent years. But with plenty of incentives to leave the fatherland, they may soon be in the thick of the race.

      BASF        Acquires a Mobil plastics unit for $300 million
      BENCKISER   Buys fragrance-maker Coty from Pfizer for $440 million
      BMW         Looks set to build its first U.S. car plant
      DEUTSCHE    Pumps up its lending to top
      BANK        U.S. corporations
      ROBERT      Sets up fuel-injection venture
      BOSCH       with Penske
      SIEMENS     Completes buyout of telecom maker Rolm from IBM
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