`A Serious Blow To German Competitiveness'

After an 11-day strike in Bavaria, Germany's IG Metall labor union appeared to hit the jackpot on Mar. 7. The union's 3 million members in industries ranging from steelmaking to electronics to autos will get three pay hikes, a shorter working week, and higher Christmas bonuses.

But it's a settlement that could blow up in labor's face. Faced with soaring wage bills, companies will now have to cut costs savagely. A widespread hiring freeze is expected in manufacturing, dampening prospects for reducing Germany's 9.9% unemployment rate. And things could get much worse if the Bundesbank raises interest rates. "This [settlement] will certainly mean that jobs will be cut and more production will be moved out of Germany," says Hubert Stadler, head of a Hesse employers' group.

The union won the sweet deal after officials of Gesamtmetall, the employers' federation, bungled the negotiations. They went for big concessions before talking money. They threatened a lockout, which the union quickly countered by threatening to take the strike national. In the end, a resolute IG Metall triumphed.

"SERIOUS BLOW." Now, executives are howling over the deal. Warns David J. Herman, chief executive of General Motors Corp.'s Adam Opel unit, based near Frankfurt: "It is a serious blow to German competitiveness." Initially, IG Metall wanted a one-year contract with a 6% increase. Instead, it got a two-year deal: After one retroactive hike, the union won a 4% rise in average nominal pay rates this year and nothing in the second year.

But the actual cost to employers will be far higher than it appears on paper. Because of the bonuses and the shortened workweek without any reduction in pay, figures Thomas Mayer, chief economist at Goldman, Sachs & Co. in Frankfurt, hourly wage costs will rise 5.5% this year and 5.1% next year. That's already more than double the current 2.4% inflation rate.

Worse yet, the dynamics of the complex deal are such that the main hit comes near the start of the contract. By the end of this year, it will produce a staggering increase in wage costs compared with a year ago. "In December, our wage costs will be 10.4% higher than in December, 1994," complains Bernd Pischetsrieder, CEO of Munich-based luxury carmaker BMW. Such a jump is enough to wipe out last year's 10% productivity gains by German manufacturers.

The settlement is fast becoming a standard across German manufacturing and services industries. Within days of the agreement, insurance and chemical workers cut similar deals. Now, bank employees and civil servants want the same, and construction workers think they can do even better. The IG Metall deal, says Goldman Sachs' Mayer, "[has] effectively ratcheted up wage settlements in other sectors."

The upward trend already has some companies closing the door on substantial expansion in Germany. Likely beneficiaries are Eastern Europe and Asia as well as low-cost countries in Western Europe such as Britain and Italy. "Our basic strategy is now to preserve and protect our German investment," says Louis R. Hughes, head of GM's international operations. "But if we need additional capacity, we will get it outside of Germany."

The wage settlement comes just as a sky-high German mark is helping drive up costs. The combined impact is dramatic. When BMW decided in 1992 to build an auto plant in Spartanburg, S.C., it figured its U.S. labor costs would run about 30% less than in Germany. "Now, [U.S.] costs are 50% lower," says Pischetsrieder. Still, he doesn't plan to add production at the plant, which started up last month. To ensure that quality is up to snuff, he insists that BMW will for now stick with its original plan to produce 90,000 roadsters a year in Spartanburg.

The hundreds of small and medium-size companies in the Mittelstand, Germany's manufacturing backbone, are in an even tighter squeeze. As suppliers, they are under increasing pressure from the giants to cut prices. Yet not only did their negotiators fail to deliver cost-saving concessions from the union as part of the package, but the final deal was cast largely in terms of what big companies could pay.

Any hopes that German unions were adopting a more moderate stance as global competition increases seem crushed by the IG Metall settlement. Labor had shown some willingness to compromise during Germany's short, sharp recession. Now that the economy is growing smartly again, moderation seems to be a lost cause.

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