Is Siemens Still German?

The jobs are going where the customers seem to be -- abroad

Two years ago employees at Siemens' (SI ) power generator factory in the east German city of Erfurt made Siemens CEO Heinrich von Pierer an honorary member of their workers' council. The membership was a gesture of gratitude for von Pierer's efforts to keep open the plant, a relic of the communist era that Siemens acquired in 1991. But in a meeting with Erfurt workers on Apr. 23, von Pierer delivered a sober message: Only those employees who are innovative and flexible can be sure of their jobs.

These days Siemens employs so many people abroad it's reasonable to ask whether it's still a German company. Von Pierer didn't address that question in his Erfurt speech. But it's what Siemens' unions increasingly want to know. On one level, the question seems absurd. Siemens is Germany's fourth-largest private employer, with a payroll of 167,000. Top management is predominantly German, and the focus on engineering is a hallmark of German excellence. True, von Pierer cut Siemens' head count in Germany by 51,000 in the past decade, but many of the jobs stayed in the country. Siemens reduced costs by spinning off units like Infineon Technologies (IFX ), which kept most of their German workers.

But worker representatives at the company have concluded that Siemens is contemplating something far more drastic -- the elimination of 74,000 jobs from Germany in the next decade. That projection is based on public statements by Siemens management. As in the past, some would no doubt be spun off rather than eliminated. But that would still represent a 44% decline in Siemens' domestic workforce, double the rate of the last 10 years.

CEO von Pierer calls the speculation "sharply divorced from reality." But the top brass has been talking a lot recently about the high cost of labor in Germany, where skilled union workers can make $60,000 a year. "We must anchor our activities close to customers in dynamically growing markets," von Pierer said on Apr. 28. Germany accounts for 23% of Siemens' sales, while German workers currently account for 40% of the workforce. So unless there is a spurt in domestic business, Siemens' German payroll should drop to 95,000 from 167,000 to be in sync with sales.

Why is the issue of Siemens' jobs heating up now? After all, sizable German manufacturers have been moving production to Eastern Europe or Asia for years. First, German bosses are quietly concluding that after years of half-hearted reforms by politicians, Germany's labor market will remain one of the most rigid in the world. Second, even German companies devoted to their local workforce are signaling they have to cut costs or find ways to reduce staff. Volkswagen, which is part-owned by the state of Lower Saxony, has long resisted job cuts. Now the auto maker is warning workers it must cut labor costs 30% in the next seven years just to maintain its current workforce.

More than just labor costs are at issue. While Siemens' profit in the most recent quarter climbed 42% to $960 million, the company faces a crisis in its train-building business and suffers from low margins, particularly in mobile phone handsets. And as the economy has stagnated, the nation has become less important as a market for the big German multinationals. Increasingly, Siemens is booking orders in places like China, where the company in April won a contract to install wireless data transmission equipment for 100 million cell-phone users.

So don't be surprised if Siemens' restructuring enters a more brutal phase. The union reps say the pressure is unrelenting. "It's a declared Siemens program," says Wolfgang Müller, a member of Siemens' supervisory board who represents employees. "They tell us: 'If you're not cheaper, we'll move overseas."' While insisting it doesn't plan massive exports of jobs, Siemens has been warning workers at the local level they must make concessions to avoid layoffs.

Production facilities will be the hardest hit. Take Siemens' mobile-phone factories in the cities of Kamp-Lintfort and Bocholt, which employ 4,500. The plants have absorbed workers from the declining steel and mining industries, but with profit margins on mobile phones a meager 1%, Siemens is under pressure to cut costs. As a result, it is considering moving most of the production to Hungary.

SMALLER BONUSES. The move would reduce costs 30%, according to Siemens. But it would also mean sacrificing 2,000 German jobs. Some may be saved, but workers will probably have to agree to work 40 hours instead of 35 for the same pay, and accept smaller Christmas bonuses tied to profit. Even that won't guarantee their jobs for more than a few years. Meanwhile, any future production of streetcars is likely to shift from Krefeld, Germany, to the company's newer plant in Prague, where average labor costs are one-sixth that of western Germany. "Today it's Hungary, tomorrow it will be Lithuania and Estonia. We're not going to be able to keep up with every low-wage country," says Heinz Cholewa, a representative of the IG Metall union in Bocholt.

Not just assembly-line jobs are at risk. Siemens has declared its intent to shift more software development to India and other low-cost locations. Worker representatives say that, Germanywide, more than 10,000 Siemens jobs are in imminent danger. (Siemens puts the total at half that.) Such reductions will only add to Germany's already dismal unemployment rate of 10.5%, or 4.4 million jobless people. Meanwhile, the drag on domestic economic growth caused by high unemployment hastens the resolve of companies to seek lively markets overseas. The result: a vicious circle in which declining demand feeds unemployment and vice-versa.

It's not all bad news. Most of the workers in groups that Siemens spun off over the past decade have kept their jobs, and Infineon has invested heavily to build up production in Dresden. But workers also did their part, working 40 hours a week and accepting night shifts and shorter vacations. "Infineon is well positioned," says Max Dietrich Kley, the company's interim CEO.

Some Siemens groups say they won't cut German jobs. Siemens Business Services says its service-oriented workers must be close to customers, half of whom are in Germany. The group reduced working hours for its 16,000 German workers during the downturn, but avoided layoffs. There may also be a limit to the number of operations Siemens can realistically move because factories increasingly are dependent on sophisticated machinery. "I really don't see them doing a seismic shift out of Germany, because I don't think the machines will run optimally," says Adrian Hopkinson, London-based analyst for Westdeutsche Landesbank.

Siemens managers disagree. They say that with major parts suppliers operating worldwide and an increasingly skilled workforce overseas, there are no longer any real obstacles to manufacturing telecom gear in, say, Brazil. There, Siemens simply sends workers home during slow periods, something German unions have never accepted. The German worker is in for a rough ride.

By Jack Ewing in Frankfurt

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