German Firms Seek Better Prospects Abroad

Germany, once the home of a robust industrial sector, could soon be seeing vacancy signs at some of its best-known business addresses.

Close to one out of four German company is planning to move its manufacturing operations abroad in the coming three years, according to a survey of 10,000 companies by the German Federation of Chambers of Commerce (DIHK) released Monday. The DIHK estimates the moves could lose Germany up to 150,000 jobs between 2003 and 2005.

Infineon CEO plans to move headquarters

One of the most recent high-profile examples is Munich-based Infineon Technologies, Europe’s second-biggest chipmaker. Last month Infineon Chief Executive Ulrich Schumacher announced he was moving the headquarters of his automotive chips unit to Austria to avoid high taxes and Germany’s restrictive labor laws.

"In terms of economic policy we are going the wrong way," Schumacher told Reuters in an interview.

"German companies will be moving more work places abroad. I don’t know anyone who isn’t worried about the situation," he said.

A survey conducted among leading German companies by the Frankfurter Allgemeine Zeitung newspaper last year found that most were disgruntled by the government's taxation plans and believed they would stifle economic innovation and growth. While heads of companies such as Allianz, BASF and Commerzbank predicted that an increasing number of firms would move production abroad, rumors circulated that electronics giant Siemens was planning to relocate its headquarters from Munich to Salzburg.

Smaller firms joining the exodus

But it isn’t only large companies that are increasingly getting their products manufactured abroad. DIHK Chief Executive Martin Wansleben told a reporters on Monday that every sixth medium-sized firm surveyed is planning such a move.

The survey declared that, to an extent, small and medium-sized concerns are forced to invest abroad to remain competitive and secure production. "But Germany as a business location then misses chances to invest and innovate," Wansleben said.

"Particularly alarming," said Wansleben, is the fact that the exodus isn't just limited to labor-intensive manufacturing. Other sectors, like research and development as well as the core headquarters of some companies are being transferred to other countries.

High taxes and labor costs

About 45 percent of the companies surveyed cited high labor costs as the main reason for moving their manufacturing facilities abroad. Another 38 percent explicitly referred to massive tax burdens, spiraling non-wage labor costs, rigid hiring laws, a complex taxation system and seemingly endless bureaucracy.

Wansleben said German companies were coming under increasing cost pressures as they attempted to keep up with international competition.

"When we need to relocate in order to remain competitive on the price front, then Germany has a problem on the international competition level," he said.

EU still prime destination

The survey showed that the German textile industry is most prone to moving manufacturing overseas, with every second company in the sector planning to relocate. Further, the study pinpoints that every four out of ten electronic goods manufacturers, over a third of automobile makers and more than every fourth manufacturer of machinery will in the future -- at least partly -- move production lines overseas.

The most important destinations remain within Europe, in particular in central- and eastern Europe, though Asia is becoming an increasingly viable option. The DIHK estimates that German companies abroad employ about 2.4 million people and that the present drive to relocate could see a further 50,000 jobs created abroad yearly.

Can companies still be lured to stay?

But despite the gloomy scenario painted by the survey, Wansleben said that the industrial exodus could still be stemmed if the government followed more business-friendly policies which could make Germany an appealing location for investment and business again.

He said Chancellor Schröder’s social and economic reform package, Agenda 2010, which envisages loosening rigid labor practices and capping generous unemployment benefits was "a beginning," but more had to be done. Wansleben also urged breaking the silence on topics in Germany such as discussing extending working hours, which still remains taboo under pressure from unions.

"Germany in Europe has a chance like no other country in the world," he said. "We have no chance to keep up with the cheapest salaries at the international level. But we don’t want that, we want to have wealth, that’s why it’s all the more important that we encourage innovation."