Europe's Workers Bite The Bullet

They've made wage and benefits concessions -- but that may not keep jobs from moving abroad

For Antonio Ribeiro de Sousa, who builds Mercedes-Benz diesel engines at a factory in Stuttgart, the writing is on the wall. On July 23, DaimlerChrysler (DCX )'s unions agreed to scrap an expected 2.8% pay raise and extend some employees' workweeks from 35 to 39 hours. In exchange, workers won promises that 6,000 jobs covered by the agreement will remain in Germany for at least eight years. But, says Ribeiro de Sousa, a 32-year veteran on the assembly line, "Next time, they'll say they need a 40- or 42-hour workweek, or they'll send production to South Africa."

De Sousa does a good job describing the dilemma facing both workers and bosses in this summer of labor tension on the Continent. The well-paid hands of Western Europe's biggest manufacturers have no choice but to make concessions on hours and pay: The competitive lure of low-cost manufacturing elsewhere is just too strong. And even after wringing concessions from their workers, companies will eventually come back and ask for more -- or move production abroad to stay ahead in a ferociously competitive world.

This dynamic is shaking up not only Daimler employees, who'll now be working longer hours with no extra pay. In June, workers at two Siemens (SI ) telephone-equipment factories in Germany agreed to increase their workweek from 35 to 40 hours, after the company threatened to move jobs to Hungary. Auto maker Seat, which earlier had shifted some manufacturing from Spain to Slovakia, won concessions from Spanish unions in May that will require workers to put in extra hours during peak production, without overtime pay. Even France is having second thoughts about the maximum 35-hour workweek enacted in 1998. On July 20, employees at a Robert Bosch auto-parts factory near Lyon voted overwhelmingly to start working an average 36 hours weekly, after the company said it might move operations to the Czech Republic.

That's quite an about-face. Over the past three decades, Western European workers, backed by tough-as-nails unions, have negotiated some of the world's cushiest work schedules. Just since 1990, the average number of hours worked annually has fallen 10% in France and 6% in Germany. Many Europeans work fewer than 40 hours a week and get at least five and sometimes as many as nine weeks paid vacation.


In all likelihood, though, recent concessions at Daimler and other companies will only slow the outgoing tide a little. The wage differentials between Western Europe and emerging-market economies are just too huge. "When we find a certain product can be made with a 50% decrease in salary costs [in another country], we cannot avoid that if we want to stay competitive," says Bernhard Schreier, CEO of Heidelberger Druckmaschinen, a printing-gear company in Heidelberg, Germany, that's weighing operations in China.

Companies in Western Europe do not have to travel as far as China if they want to trim their payrolls. Workers in the Czech Republic and Poland earn less than one-third the average wage in Germany and France, while spending some 500 more hours on the job each year.

True, Western Europe still boasts some advantages. Productivity per hour worked is more than twice as high in France and Germany as in the Czech Republic and Slovakia, largely because of better worker training and superior infrastructure -- everything from IT systems to high-quality supplier networks. Those factors underlay BMW's recent decision to choose Germany, rather than the Czech Republic, as the site for a new factory. "If we push production to [a less-developed market], our knowledge network would be broken," says Burkhard Goeschel, the auto maker's production and technology chief.

But for every BMW, there are many other companies willing to make the trade-off, especially as workers in Eastern Europe, China, and elsewhere improve their skills and productivity and as companies build more state-of-the-art plants in emerging-market locales. "Long term, there are going to be fewer factories in Europe," says Gérard Hauser, CEO of Nexans, a Paris manufacturer of electrical and telecommunications cable that has been scaling back production in France and Germany while ramping up in Asia and Latin America.


One result of this process could be the strength of Western Europe's labor unions. Emboldened by the recent labor accords, companies ranging from Volkswagen in Germany to appliance maker Groupe SEB in France are pushing for more worker concessions on pay and hours worked. Until recently, business leaders assumed unions would block any such arrangement -- and indeed, Bosch's union bosses staunchly opposed its plan to lengthen the workweek. But the membership overruled the leadership, voting 98% for the plan. "It was blackmail," fumes Philippe Martinez, a leader of the metalworkers' unit of the Confédération Générale du Travail representing Bosch workers. "They were told: 'Either you sign, or you're out of a job."' (Bosch counters that the deal requires minimal sacrifice from workers.)

The rank and file now figure that the old hierarchies of organized labor can't protect them as they once did. "The union had more power 15 years ago," says Daimler's Ribeiro de Sousa. "Now, there's pressure everywhere." The result could be more flexibility in Europe's factories. But in many cases the lure of cheap workers abroad will still prove too potent for companies to ignore.

By Carol Matlack, with Katharine Schmidt, in Stuttgart and Jack Ewing in Frankfurt

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