German Automakers and Suppliers Still in the Driver's Seat

Only a few years ago, the death knell was sounded for automotive suppliers and manufacturers in Germany, with reports of downsizing and production being shifted abroad to emerging eastern European countries and China, where labor costs are considerably lower than in the West. But now those forecasts of doom appear to be premature and unjustified.

"The strong pressure to cut costs then led to a narrow minded focus on high labor costs here, but that view has widened considerably," said Jan Miller, a spokesman for Ernst & Young business consultants, who conducted a recent industry survey. "Other factors, such as our highly qualified workforce and innovative edge, are equally important. What has changed is the image of Germany as a production site. The hourly cost of hiring an industrial worker in the western part of Germany is the third highest in the world at 28 euros ($36), compared to 19 euros in the US and only 4 euros in Slovakia and Poland, according to the Cologne Institute for Economic Research.

High labor costs, but unrivalled German infrastructure

"Such high costs to the employer are a major drawback in Germany, but the tightly woven net of suppliers, services and high tech research, which supports the industrial core is unrivalled here," said Martin Leutz, spokesman for Gesamtmetall, an employer's association in the metal and electrical sector which represents the big players such as Siemens, Daimler-Chrysler and BMW, as well as mid-sized and small companies. "This kind of cluster structure, which allows for depth, diversity, streamlined efficiency and quick decision making, is hard to duplicate in other countries."

Outsourcing of low-skilled, labor intensive work to countries such as Poland, Slovakia and the Czech Republic actually allows German companies to concentrate on maintaining a leading technological edge in world markets and producing premium products, Leutz added.

Only one major assembly plant outside Germany

"The manufacturing base in Germany has always been incredibly strong. Our main industrial imprint is home-based," said Florian Martens, spokesman for the flagship Mercedes division of Daimler-Chrysler, who added that the assembly plant in Alabama is the only major one outside of Germany. "All our engines for example are made in Germany, even those for SUVs in the US market. In the US though, it made sense to set up production facilities as a hedge against currency fluctuations, and to be close to our primary customers."

Although eastern Europe and China are ranked high among auto suppliers as production sites, Germany comes close behind with 72 percent of those surveyed finding the home market attractive, according to the Ernst & Young survey.

"The gospel that we have been preaching for years is to remain home-based," said Christoph Stürmer, an auto analyst at Global Insight, a forecasting institute in Frankfurt. "Even an equally qualified automotive engineer in China for example does not necessarily cost less than a German one."

Production problems in remote, developing countries

Stürmer added that plenty of western automobile manufacturers have discovered that the cost of quality control in countries such as India and China is too high, which has wound up wrecking their business model.

"In developing countries, it is much harder to find highly qualified engineers who can perform complex tasks or plan strategically," he said. "Transport and logistic costs also makes it risky to go to extreme locations, which is why eastern Europe, which is geographically and culturally closer, is looked on more favorably.

"Although it is evident that automotive investments streams are increasingly headed eastwards, automakers still remain committed to their western European manufacturing base," he said, adding that production in eastern Europe is focused on the lower segment of mass-market vehicles, and is likely to stabilize at a level of 25 percent of total European output in the foreseeable future. And production in the premium market would remain primarily German.