German Auto Industry at Risk

It's an open secret that German carmakers are frustrated with high wages, employee benefits and inflexible working conditions, and that many are considering a move as a way out of the dilemma. Many in the sector have already set up manufacturing facilities abroad where wages and production costs are considerably lower than back home. Nearly every third German car supplier is already producing in Eastern Europe, and every sixth one has already set up sites in China.

But that's only the beginning: Every second automobile parts manufacturer is planning to move its production facilities outside of Germany, according to a study published by the business consultancy firm Ernst & Young on Monday.

Looking to the East and Far East

The Stuttgart-based business consultancy surveyed 200 German car suppliers with an annual turnover of between €5 million ($6.12 million) and €500 million.

Nearly every second company had already established at least one production site abroad, and almost 40 percent of those questioned said they had concrete plans for shifting parts of their production to Eastern Europe. Some 23 percent, or close to one-fourth of all suppliers, said they planned to invest in China.

Peter Fuss, one of the authors of the Ernst & Young study said that various factors played a role in a company's decision to move production outside Germany. Whereas Eastern Europe attracts car companies primarily because of the low wages, he said China is particularly interesting because of its proximity to the growing Asian market.

"Logistical costs can be kept low because companies produce for the local market and parts don't have to be shipped from Western Europe to China," he said.

Expanding exodus

In a worldwide comparison of production sites, China and the Czech Republic topped the list, followed by Hungary and Poland. Both regions, China and Eastern Europe received top marks for car suppliers for low wage costs (15 to 20 percent less than the hourly wage in Germany) and in terms of flexibility and motivation of employees. Tax breaks and benefits for investing in industrially weak regions -- aspects frequently criticized as unfair advantages by Western European politicians -- hardly played a role at all in the decision to move production outside of Germany.

According to Ernst & Young, fewer and fewer new manufacturing sites will be opened in Western Europe in the future. While more factories close in Germany and its neighboring western countries, the move East will not be limited to just the production of parts.

"Over time things will develop," Fuss said. "The companies interviewed in the survey clearly indicated that they are planning to move final assembly stages to Eastern Europe and China in the near future."

That would mean that more complicated manufacturing processes -- up to now largely based in Germany would be affected by the outsourcing.

Is Germany's auto industry at risk?

The Ernst & Young study concluded that Germany's long tradition as a center of auto manufacturing is indeed in danger as more and more companies pack up and leave in search of better conditions abroad. At the same time, the move abroad represents "the last chance the companies have to reduce costs and remain competitive in the international market."

But the study also said that although manufacturing will move, Germany will continue to hold on to its claim as a nation of carmakers in the fields of branding -- the label "Made in Germany" will still hold sway over car buyers -- and in the critical area of research and development. However, in order to capitalize on these strengths in the future, it will be crucial to identify innovative companies in these fields and promote them internationally, Fuss said.

The threat of moving east is not necessarily connected to the loss of jobs, the study reported, with a view to the country's rising unemployment rate.

"Within the last few years there has been a considerable increase in the number of companies moving production to Eastern Europe and China," Fuss said. "But during that same time there has also been an increase in jobs in the car sector in Germany."

The key to guaranteeing that those jobs remain in Germany in the future, is to focus more on innovation, design, research and development, he added.