German Businesses Head for Lower-Cost Shores

As it becomes easier to operate in Poland, Hungary, and Czech Republic, even smaller companies are starting to relocate

Several times a day, a barge slowly makes its way across the Oder River from Poland to Germany, carrying a cargo upon which much of Berlin's economy rests. Literally. Aboard the vessel are freshly washed and pressed bedsheets bound for Berlin's finest business hotels.

Not that German workers aren't capable of doing laundry. In fact, Fliegel Textilservice, an overnight-linen service for Berlin hotels such as the five-star Adlon, is German-owned, and it is equipped with German-made industrial-washing equipment. But Fliegel President Hubert Emming believes that northwest Poland is a better place than Germany to do business, even if the laundered pillowcases often have to travel partly by ship to avoid traffic jams at the border. Polish workers typically earn less than one-fifth the wages of their German counterparts. Moreover, Fliegel's 250 workers in Nowe Czarnowo rarely call in sick, and turnover is low. "The desire to work is a lot stronger than in Germany, that's for sure," says Emming.

If things keep going the way they are, Germany will be sending out more than just laundry. Managers are deeply discouraged by what they consider to be unfair new tax laws planned by the government of Chancellor Gerhard Schroder. That only adds to the current disadvantages of doing business in Germany, such as high wages, rigid labor rules, and a smothering bureaucracy. As a result, according to a November poll by the Berlin-based Working Group of Independent Entrepreneurs, 7% of companies surveyed, ranging from small businesses to major corporations, have already decided to leave Germany out of dismay over Schroder's policies. An additional 32% are thinking about it.

No doubt some managers are simply in shock at the Schroder government's unexpected tax hikes. Still, there's a real danger that German businesses will conclude that their home market is just not a good place for their capital. Domestic investment is on track to decline in 2002 for the third year in a row, and foreign investors are finding more attractive places for their money. "I'd be very surprised to hear of any company coming to Germany to build a new production facility," says Rainer Mück, tax director for General Electric Co.'s (GE ) German unit.

Multinationals such as Siemens (SI ) and DaimlerChrysler (DCX ) have been building up their overseas operations for years, sometimes because costs are lower but also as a way to open up new markets. It's clear, though, that Germany is losing industrial jobs simply because it is so expensive to do business there. In the 1980s and '90s, Germany lost much of its textile and consumer-electronics industry to Eastern Europe and Asia. Now, in a year when Germany has a 9.7% jobless rate and more than 4 million unemployed people, the country is bracing for a new exodus that could damage whole industries as well as the vaunted small-business sector, the backbone of the economy. "This has been the trend since 1990, but it accelerated in the last couple of months," says Diether Klingelnberg, president of the German Machinery & Plant Manufacturers Assn.

This time, signature industries such as machinery and banking could be affected. In a December survey conducted by Klingelnberg's group, 54% of German machinery makers said they plan to shift some production abroad in the next two years, compared with 24% who have done so in the last two years. Already, Deutsche Bank's (DB ) investment banking operations are based in London, where employees pay lower income taxes.

The mighty German auto companies won't abandon the country soon, but their suppliers already are: In November, Stuttgart-based Bosch announced it will move starter production to Miskolc, Hungary, where a worker costs an average of less than $4 an hour, compared with $26 in Germany. Service industries such as transportation and distribution are also vulnerable as it becomes ever-easier to operate just over the border in Poland, Hungary, and the Czech Republic.

Even smaller companies are starting to bolt. Earlier this year, Grieshaber Transportation & Logistics, which provides trucking, packing, and other services for corporations, planned at first to hire 26 workers near headquarters in Bad Säckingen, Germany. But, discouraged by German red tape, the company instead expanded just across the border in Hombourg, France, where it invested $6.5 million.

Co-owner Heinrich Grieshaber says the outfit was able to acquire a piece of land in Hombourg, get building permits, and erect a new building within six months. German officials would have taken months longer, says Grieshaber. "We've always seen Germany as our home, but not anymore. There's too much bureaucracy," he adds. His company already is scouting real estate in the Czech Republic. Grieshaber sees little hope that conditions in Germany will improve and faults the chaotic policymaking of Schröder's government, which, since winning national elections in September, has scrambled to plug a budget gap with dozens of ever-changing tax proposals. "Policy has to be predictable," he says.

Germany is exporting white-collar jobs, too. Early this year, Berlin-based drugmaker Schering (SGP ) moved research and development for its Special Therapies business, which focuses on cancer, multiple sclerosis, and heart disease, to Montville, N.J. Schering wanted to be closer to the universities that produce leading-edge research--a backhanded slap at German academe. Schering also feared that Germany's 48.5% top tax rate would make it hard to attract and retain the best scientists. Taxes spook other German businesses, too. Schering CEO Hubertus Erlen doesn't predict a panicked rush for the exits by German companies: "You won't hear a big bang," he says. But he warns of a slow and steady loss of investment unless conditions improve.

In principle, there is nothing wrong with exporting jobs to developing countries. Living standards in those places rise, which in turn creates new markets for wealthy nations. In fact, the Polish hotel-laundry business created a new customer for Herbert Kannegiesser, a maker of industrial-washing equipment in the north German city of Vlotho. But company President Martin Kannegiesser, who also is president of the machinery and auto-industry association known as Gesamtmetall, frets that jobs lost in Germany aren't being replaced by new ones. "That's the big danger," says Kannegiesser.

Kannegiesser continues to produce almost exclusively in Germany: No other country in the world offers such a concentration of engineering expertise. Kannegiesser says it is unlikely he'll relocate, but he won't vouch for other businesses. "At some point," he says, "the weaknesses may start to outweigh the strengths." More and more German managers think that point has already been reached.

By Jack Ewing in Frankfurt

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