German industry is facing major challenges: high production costs and falling demand are making it increasingly difficult to compete. Is leaving Germany the solution?
A large empty space has been left in the middle of the production hall. Until two weeks ago, a machine that produced tires was located there. “What is gone, never comes back. We must not delude ourselves,” says CEO Gernot-Alois Feiel. This is the fourth production line he has moved to Hungary this year.
For 50 years, KACO in Kirchhardt, Baden-Württemberg, has been producing parts for the automotive industry. Rising cost pressures are also hitting this medium-sized company hard. A few weeks ago, a major customer reduced the price of a large order by 10 percent. This is putting the company in a serious position. “While the prices of our products are falling, production costs, energy costs and inflation are rising. The profit margin is getting smaller and smaller. At some point, production in Germany becomes completely unattractive for a company,” he says. The basic raw material, raw rubber, is now mainly processed in Hungary and no longer in Baden-Württemberg.
MORE ORDER ABROAD
A study by the consulting firm Horváth, conducted with 1,000 company executives based in Germany, shows that almost 60 percent of them expect job losses in Germany by 2030. Many companies are already pursuing the “Local-for-Local” strategy, according to which products are produced in the markets where they will be sold. This is intended to avoid problems with supply chains and customs tariffs. But this also means a decline in exports from Germany. Respondents expect employment growth, especially in India, China and North America. Within Europe, the eastern part of the continent is becoming more attractive: 52 percent of executives expect job growth there.
HUNGARY, THE NEW CENTER OF THE GERMAN AUTOMOTIVE INDUSTRY
For years, Hungary has become a major destination for the German automotive industry. BMW, Audi and Mercedes-Benz have invested billions of euros and built large factories. German suppliers are also moving to Eastern Europe. Mercedes-Benz’s largest factory is no longer in Germany, but in the Hungarian city of Kecskemét. The fully electric C-Class is expected to be produced there in the future, as well as other models. Chinese competitors are also investing heavily in Hungary. The world’s largest battery manufacturer, CATL, will soon open a giant factory in Debrecen, while the Chinese company BYD is building a large plant in southern Hungary. Chinese vehicles “Made in Europe” are expected to roll off the production lines next year.
ADVANTAGE IN SALARIES AND WORKING HOURS
Mercedes CEO Ola Källenius highly values Hungary: “The production costs here set the standard for the whole of Europe.” According to the company’s calculations, production in Hungary costs up to 70 percent less than in a factory in Germany. On average, the hourly labor cost in the manufacturing industry in Hungary is 15.60 euros, while in Germany it is 49.50 euros, more than three times higher. Also, the regular working week in Hungary is 40 hours, while in the sectors covered by the IG Metall collective agreement in Germany it is 35 hours. Mercedes also emphasizes another advantage: the rate of absenteeism due to illness is significantly lower in Hungary. In German factories, this rate is more than twice as high.
A REMOVAL WITH MIXED FEELINGS
The KACO factory in Hungary is now almost completely full. The last space will be replaced by the end of the year, and then there will be no more room for machines from Germany. For director Feiel, this is a situation with mixed feelings. “On the one hand, I am happy that our machines are still producing. But when I think of the German employees who can no longer work on these machines, my heart aches.” No one wants to lose products or jobs, he says. In recent years, the company has cut 174 jobs, mainly in production, at the German factory.
IS COLLECTIVE AGREEMENT A COMPETITIVE DISADVANTAGE?
This makes Feiel think seriously about the future of Germany as an industrial country. At the beginning of August, KACO executives decided to leave the Südwestmetall employers’ association. In future, the company will no longer apply the collective agreement of the IG Metall union. According to him, this, together with the relocation of production to Hungary, is the only way to remain competitive. “The wage costs under collective agreements have become too high. Although the social partners have contributed a lot to Germany’s well-being, this is becoming increasingly problematic in international competition.”
GERMANY’S INNOVATION AND HOPE
Despite job losses, production relocations and falling revenues in the automotive industry, experts also see positive opportunities. According to Anita Wölfl from the ifo Institute, Germany should focus on areas where it is most competitive. “The biggest effects on economic growth and productivity in the future will come from research, development and innovation,” she says. She emphasizes that German companies should also be more strongly supported by politics. KACO is also pursuing this strategy. According to Feiel, the development department is the heart of the company and cannot be moved abroad. “Germany is very strong in creativity and innovation. In international comparison, we are among the best. We must not lose this advantage,” he says . (DW)