A Homecoming for Lost Jobs: Burned by Offshoring, Mid-Sized Firms Return Production to Germany
The trend towards offshoring production from Germany to other countries is slowly being reversed, with medium-sized businesses leading the way. In fact, Germany is itself becoming an attractive location for foreign investment.
When the metal sheets came back from Romania "as if they had been gnawed at by rats," Rutger Dautel knew that his company's adventure in offshoring production had come to an end. He slammed on the brakes.
Dautel is a classic German medium-sized company based in the southern state of Baden-Württemberg that manufactures tail-lifts and tipper structures for trucks. Workers at the company's plant in Leingarten separate the metal used with highly modern gas cutting machines. Workers in Romania used straightforward metal shears for the same work.
"We couldn't present that to any customer," says one Dautel welder. "There were major qualitative flaws in the processing. We had to constantly touch things up in Germany. The Romania deal was a total fiasco." Of course, when company management embarked on the endeavor three years ago, they had a different outcome in mind.
Back then, things weren't going well for the business, which employs about 250 people, and layoffs ensued. Cost pressure was high and the company's profitability was at risk. Then, in 2004, one part of the assembly process was relocated to Romania.
Like many other managers, company head Dautel had dreamed of massive savings. At the end of the day, though, it turned out to be a zero-sum game -- one that cost him a lot of nerves.
Dautel's decision to backtrack now puts him in good company. Many thousands of German companies joined the march to Eastern Europe and China during the past 15 years, hoping to reduce production costs there. But recently many have been returning, disillusioned. Smaller companies in particular are finding they overestimated the apparent advantages of low labor costs or more advantageous tax laws.
So far, it has not been the largest and most well known companies that have begun reconsidering Germany as a production location. And the return home usually involves considerably less ballyhoo than the earlier offshoring of production. Nevertheless, the trend is significant because medium-sized companies are both the heart and the driving force behind the German economy.
It is companies like Siteco, which produces lighting technology, Optotec, the producer of technical devices for opticians, or Gröditzer Kurbelwelle, one of the world's leading producers of crank shafts, who are now coming back -- along with the jobs they provide. They all hoped to make their fortune in the east -- whether in Maribor, Slovenia, Panagyurishte in Bulgaria or Katowice in Poland. But now they are coming back home to Germany's cities and states -- to Traunreut in Bavaria, Rathenow in Brandenburg and Gröditz in Saxony.
Jungheinrich, a company that produces fork lift trucks, even shut down its plants in Spain, Britain and France, redistributing production to its three German locations in Norderstedt, Lüneburg and Moosburg. Offshoring production is largely yesterday's news for all of these companies. Instead, production capacities are being massively relocated to Germany, researchers at the Fraunhofer Institute for Systems and Innovation Research (ISI), who regularly study the phenomenon, have found.
According to their findings, more than 6,500 companies in the metal, electronics, chemistry and plastics industries relocated their production process abroad, either in whole or in part, during a period of two years. Two years later, about 1,200 of them are giving up production abroad again.
A total of more than 3,500 companies from the metal and chemical industries -- two major sectors of the economy -- have returned home since 2000. Service or consumer goods companies, which have also been eager to relocate production, are not even included in these statistics.
"The relocations to Germany are not isolated cases," says ISI's Steffen Kinkel. His conclusion: "We are dealing here with a quantifiable and genuinely relevant phenomenon." The Federation of German Industry (BDI) itself also admits that "fewer investments are being made abroad and more are being made in Germany."
The Joseph Vögele corporation, for example, wants to set up an entirely new company headquarters and is looking for suitable real estate in Mannheim. The company's present headquarters are too small now that the decision has been made to integrate assembly currently being done in Slovenia into the German production location.
The Mannheim-based company is the world's market leader in the production of road-paving equipment, and its executives believed the high-volume business would be best pursued abroad, where costs are lower. "That was an illusion though," Bernhard Düser, a member of Vögele's board of directors, says today.
"The more production that takes place here at the Mannheim production location, the cheaper it gets," the manager says. Thanks to stricter cost controls, the management of Vögele even succeeded in making its workers in the German state of Baden-Württemberg produce at the same costs as their counterparts in Slovenia.
One decisive argument for making that decision was surely the southern European country's admission into the European Union (EU). Since then, wages have been rising rapidly in Slovenia -- just as they have in other countries that joined the EU, such as the Czech Republic, Hungary and Poland. In Poland alone, average incomes rose by 40 percent during the past four years. But when it comes to productivity, almost all of the new EU member countries are lagging far behind.
- Part 1: Burned by Offshoring, Mid-Sized Firms Return Production to Germany
- Part 2: 'There Is No Longer a Trend Towards Offshoring'
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