Survival of the Fittest German Firms and the Wild West of Globalization
They shed tears the first time around: On a weekend in September 1999, workers dismantled the huge Hoechst logo that had topped the company's headquarters in Frankfurt. The removal of the sign marked the end of a legend - and the beginning of a new era.
The workforce had fought valiantly, and the ultimate surrender was all the more crushing: The 136-year-old company would be history after its merger with the French chemical company Rhône-Poulenc. When the shift began the following Monday and employees scurried past the new "Aventis" logo, many were overcome by emotion.
That was then. For several months now, a new sign has adorned the same spot: "Sanofi-Aventis." The German-French venture has been swallowed by a smaller French competitor, Sanofi. This time, however, there were no tears. There was no anger. At most, people shrugged their shoulders and went about their business.
Some 180,000 employees once performed the research, development and production at Hoechst. Within the space of a few years, they have experienced a phenomenon up close and personal that the Austrian economist Joseph Schumpeter has called "creative destruction." Jürgen Dormann, the former head of Hoechst, partitioned the company and then listed the individual parts on the stock exchange or sold them off. The pharmaceutical division was initially combined with Rhône-Poulenc, and the venture was later divested to Sanofi.
Hoechst as a whole is dead. But its parts have been transplanted and found a second lease on life: pharmaceuticals at Sanofi, pesticides at Bayer, enamels (Herberts) at DuPont, industrial plants (Uhde) at ThyssenKrupp, and chemicals (Celanese) and textile dyes under the management of private equity firms, to name only the largest units.
Dormann called the process a form of "self-selected and self-managed cell division."
Hoechst managers who tried to halt the process say today that an historic organization "was blown to smithereens with 1,000 tons of dynamite." By any definition, however, Dormann was a radical trailblazer among Germany's top executives.
Adapt or die
Modern management is less tetchy about luxuries like corporate legacies. If a company is to survive, its executives must obey the dictates of the global economy. Change management is the key: ongoing adaptation sometimes so radical that a company can become a ghost of its former self.
Today the rules of this new global game of Monopoly are laid down largely by investors, analysts and fund managers. They demand profits, profits, profits. Their new benchmarks - for local operations too - are the new production sites that have been springing up in Eastern Europe and China since the end of the Cold War. Just about everything marches to a tune played by American-style shareholder capitalism, now the dominant force in the world's financial markets.
CEOs are under pressure from investors hungry for dividends and closely monitored by private equity funds on the lookout for takeover targets. They are offshoring production and even developmental research to low-wage countries. Factories and complete workforces have become chess pieces to be maneuvered at will.
Cases in point: Adidas announced last spring that it planned to divest itself of its winter sports subsidiary, Salomon. Siemens intends to transfer parts of its automotive technology production from Würzburg to the Czech Republic and sell off its money-bleeding cellphone business. The employees who want to keep their jobs in Germany have to work longer and more flexible hours for the same pay and sometimes even less: in peak periods, weekend work is the norm. When business is slow, they are assigned to another plant in another city.
Even "Alliance for Jobs" programs such as those recently set up at Opel, Mercedes- Benz and VW can do no more than buy time. Germany will never win a competition for the lowest pay.
The job-security agreements being reached today all contain exit clauses. If the economy dips, the dollar dives, the price of oil or steel rises, or the competition leaps ahead, employees who have just accepted cuts will be catapulted back to square one.
The days are long over when a job at a major corporation like Daimler-Benz, Siemens, Bayer or Hoechst meant guaranteed employment and a good income - all the way to early retirement - and often even low-priced company housing.
Global business has ostensibly long been subject to the same principles that the naturalist Charles Darwin once postulated for the world of flora and fauna: Only those who adapt quickly to their environment will survive.
Survival strategies
For a long time, German companies were scarcely the chameleons of globalization. Of the country's 68 radio and television manufacturers, only two remain as independent companies: Fürth-based Metz is still standing firm. But Loewe is reeling in Kronach. All the rest have disappeared or exist as brand names only - a label that foreign, i.e. Chinese, manufacturers attach to the products because it still conjures up images of solid German engineering.
The garment industry and home-appliance manufacturers have been floored by the same wave of structural change. The manufacturers were too slow to react when the German economy first felt the pressure of Asian competitors at the start of the 1970s.
Unlike the executives of erstwhile giants Grundig, Saba, Rollei and all the other defunct brands, today's managers know full well how quickly competitors can storm bastions of business once thought impregnable. Having seen the consequences, workers' councils and unions are much more willing to reach compromises than before. For this reason, German companies may well yet succeed in the new global marketplace - notwithstanding radically different survival strategies:
Daimler-Benz experimented with expansion. By merging with Chrysler, it became one of the world's most powerful automakers - but also one of the most vulnerable.
Hoechst was dismantled. Under other corporate umbrellas its divisions live on, albeit in constant jeopardy.
Mid-sized competitors such as Trumpf, a mechanical engineering firm, and ZF, a German automotive supplier, are world leaders in their niche markets thanks to excellent quality and consistent innovation.
Adidas underwent radical restructuring, metamorphosing into a globally-networked operation that remains based in the southern German town of Herzogenaurach.
Only two small buildings at the Scheinfeld site bear witness to the sportswear provider's humble beginnings two decades ago. In one of them, seamstresses clad in colorful smocks are producing custom-made soccer shoes for the likes of David Beckham, Zinedine Zidane and the company's other advertising partners. In the second, footwear is still being produced for the mass market - nearly 2,000 shoes daily in a global total of 330,000. "Made in Germany" is emblazoned on the tongue of each.
These are the last shoes that Adidas still makes in its southern German home - motivated more by sentimentality than business sense. Only 40 people still work in production here; 20 years ago, there were 3,000. Adidas is listed in Germany's blue-chip index, the DAX, and is arguably the enterprise that has undergone the most sweeping changes in its gambit to survive globalization.
Today Adidas is a virtual organization with departments in every corner of the world. Marketing is based in Amsterdam. Product development is centered in the U.S. city of Portland, Oregon. The designers work in Tokyo, New York and elsewhere. Worldwide procurement is managed in Hong Kong, and production is performed mostly in Asia, particularly China.
Adidas frequently engages third-party contractors. Some 850 factories with nearly 500,000 employees work for Adidas. The primary suppliers deal directly with Adidas. But the company also has so-called second-stage suppliers ranging from major fabric producers with hundreds of employees to backstreet printers where five people make brightly-colored T-shirts.
The brain work is left to southern Germany: to product managers, controllers and designers, most no older than thirtysomething. People from some 40 nations work at the new corporate headquarters north of Herzogenaurach, where a former military base has been transformed into the "World of Sports."
"Our workforce is completely different now," says Michel Perraudin, a longtime member of the board. He came to Adidas in 1987 as a McKinsey consultant. His assignment: develop a strategy to restore the company's competitiveness. Two years later, he was putting his ideas into action as a board member.
Perraudin still vividly recalls announcing the plan to close the Herzogenaurach plant at an employee meeting on April 3, 1989.
It was his second day on the job - and for hundreds of shoemakers and sewing staff, almost their last. Yet today, the company's employment figures are presentable: 2,580 in Germany, nearly as many as prior to restructuring.
Had the company not made such a clean break back then, it might no longer exist today, Perraudin believes. Or it would have been sold: "I'm very happy that Adidas has already finished what many others have yet to start."
A failed marriage
The strategy chosen by Daimler-Benz CEO Jürgen Schrempp to securely anchor the southern German automaker in the global world was seen by many as no less bold, indeed as downright audacious: the merger with Chrysler. Getting accustomed to the new name "DaimlerChrysler" was the least of the problems. From "day one," -- i.e. November 17, 1998 -- every caller was to be greeted with "Guten Tag, DaimlerChrysler."
These instructions were spelled out in an interoffice memo entitled "Handling Incoming Phone Calls." A few short weeks later, the new name had caught on. It was as if the company had never been called Daimler-Benz for over seven decades.
Not much else turned out as Schrempp had promised shareholders and employees after he consummated his "marriage made in heaven": "We want to set new standards in earning power, profitable growth and social responsibility."
But the U.S. partner turned out to be critically ill. More than 30,000 jobs had to be slashed, and six plants closed or sold off. The stock value plunged more than 50 percent from its initial listing price in 1998. Now even the Mercedes Car Group, the cash cow that used to pump out billions in company-sustaining profits, has slipped into the red.
Today business consultants use DaimlerChrysler as a model case study to illustrate everything that can go wrong when companies from two different continents with completely different corporate cultures merge. They clash. As it turned out, even the assumptions up front proved false.
Schrempp had proclaimed that Chrysler and Mercedes-Benz would mesh perfectly because their strengths lay in different vehicle classes. Chrysler made all-purpose vehicles, vans and light trucks; Mercedes-Benz made premium sedans. Another selling point of the transatlantic match was the complementary nature of the two automakers. Chrysler sold most of its vehicles in North America and Daimler-Benz its cars in Europe.
In fact, though, two fundamentally different companies can hardly do much for each other. Chrysler has little use for Mercedes- Benz' expensive technology because U.S. customers aren't willing to pay for it. Conversely, Mercedes-Benz can't use Chrysler's cheap plastic parts; its clientele is more demanding.
Chrysler didn't promote sales of Mercedes- Benz vehicles in the U.S. because the German company has its own chain of dealers there. And in Europe Mercedes- Benz dealers would never dream of placing a Chrysler Neon anywhere near an S Class car in their showrooms. When the Stuttgart headquarters dispatched hundreds of engineers to help bail out the American company, Mercedes began to hit the quality skids.
No matter how you look at it: Chrysler and Mercedes-Benz don't gel.
When Schrempp picked up a third hitchhiker on his journey around the world - Mitsubishi Motors - DaimlerChrysler was forced to acknowledge that globalization too has its limits. Scores of top executives ended up spending more time jetting back and forth between continents - coordinating the plans of the German, American and Japanese partners - than they did developing and building the new cars. And while English was the lead language at all their meetings, the interpretation of their conclusions often fueled major disagreements - with the disparate cultures colliding head-on.
The World, Inc. was born in 1998 and died in infancy in 2004: a short, but eventful life. Once DaimlerChrysler pulled the financial plug on Mitsubishi last year, the company reverted back to a German-American venture. But that too could still change.
Why? Such is the financial clout of private equity and hedge funds that top executives are starting to demand a volte-face. Or are even toying with the idea of buying their companies and carving them up into profitable cuts. The billions needed are available.
Daimler's experiences illustrate that size alone is no guarantee of corporate survival. As Porsche CEO Wendelin Wiedeking has persistently mocked: "If volume were everything, dinosaurs would still be roaming the earth today."
Wiedeking has good reason to feel superior: All of Porsche's common stock is family-owned. Its numbers are good; its success in the luxury niche is astonishing. Small, adaptable companies are often the true stars - even if their names aren't known outside their own industry.
Such German companies include Weinmann, Baader, Webasto, Wirtgen, Rittal and Sachtler: suppliers of medical technology, fish-processing machines, car sunroofs and asphalt-recycling equipment. Or mainframe cabinets and camera tripods. Most importantly, in their specialist markets, they are global leaders.
"The hidden champions" is analyst Hermann Simon's term for such companies. They are concentrated in the engineering sector, which contributes some 13 percent of German exports. In the global marketplace, this German segment holds an almost 20 percent share and leads patent statistics worldwide. The companies in the southern German state of Baden-Württemberg alone produce more machine tools than the entire U.S.
There is a specific reason why so many midsized German companies cope with globalization more effectively than large corporations: Often family- owned, the smaller firms are not listed on the stock exchange and, as a result, not beholden to it. Instead of paying out profits in the form of dividends, they are free to invest. And they can survive a dry spell without turning their business strategy upside down. In short: They have the courage to pursue their own long-term goals - rather than chase short-winded investors.
ZF automotive supply in Friedrichshafen is such a case. A market leader, the company now also produces automotive technology in 12 plants outside Germany. When major automakers set up operations in Asia or Eastern Europe, their suppliers need to produce on-site. Nonetheless, 65 percent of ZF's 54,500 total employees are based in Germany.
"Our products are extremely complex. We can't simply relocate to Timbuktu," says Siegfried Goll, chairman of the board at ZF. "When the train heads off to Eastern Europe, we can't stop it," Goll says. "We just have to make sure we uncouple as many cars as possible."
At ZF, these cars include five R&D centers in Germany employing more than 3,800 people. The latest plant was built four years ago in Friedrichshafen: an airy, well-lit facility that is decorated with relics from the company's past.
"This is where the world's first six-speed automatic transmission was developed, and the first hydraulic steering system. Controlled damping systems for axles got their success story rolling here," Goll says.
There is hardly an automaker on the planet who doesn't install some ZF product in its vehicles, says Goll, himself a mechanical engineer.
The reason: The innovative company from Friedrichshafen has been able to pull away from its competition.
Certain parts are available only from ZF. Over the past decade, the Ger man workforce has swelled from 24,482 to 34,481.
To stay ahead of the pack, ZF invests 5 to 6 percent of its sales in R&D - a quarter more than five years ago. Capital expenditure for equipment and production processes has nearly doubled in the same period.
Made in the Black Forest
Trumpf, located in the German state of Baden- Württemberg, has cemented its base in much the same way. Trumpf began manufacturing motor-driven hand shears for cutting sheet metal in 1934 and introduced the first stationary nibbler in 1948. And since 1985, it has also been producing the lasers used in its own sheet metal processing equipment.
"Innovations determine our direction," says Berthold Leibinger, who has been at the company's helm since 1978. The southern German producer plans to secure its future with other new developments as well.
The company is based in Ditzingen (population: 24,000). Modern art embellishes the factory walls, and the floors are made of black basalt. If the occasional small electronic train wasn't delivering parts to the assembly area, employees might think they were in the lobby of a modern hotel. The dust-free facility has already produced more than 10,000 laser units.
Trumpf has boosted sales to €1.2 billion. And director Leibinger has nothing but praise for Germany; in his eyes, the high density of high-tech companies makes it the perfect place to do business. If the engineering firm needs optical lenses for its laser equipment, it turns to Zeiss in nearby Oberkochen; if it needs compressed- air valves, Festo is close by in Esslingen.
And for precision diamond milling equipment, it can call on Kugler in nearby Salem. "We don't find our first-class suppliers in China. They're in the Black Forest," Leibinger says.
The company also has its own innovative approach to cutting labor costs. Nine years ago it worked out an agreement with its employees based on flexible working hours: The workers are paid for 35 hours, just as the collective- bargaining contract requires. But the time worked each day was increased by nearly 20 minutes, which translates into a maximum of 70 hours a year without pay. The agreement was extended for another five years at the beginning of 2001. The result: Trumpf's German workforce has grown from 2,028 to 3,711 in the past decade.
Companies such as Trumpf and ZF have fueled Germany's emergence as the world's leading exporter. Last year, domestically produced goods valued at $915 billion were sold abroad, contrasting with imports worth $718 billion. The $197 billion surplus set a new record.
Among the industrial giants of the G7 countries, Germany alone has boosted its share of world exports in the past five years. In the same period, the U.S. share dropped from more than 12 to 9 percent.
But critics who challenge Germany's feasibility as a place to do business dismiss such figures as misleading. Export volumes are increasingly including preproduction services from low-wage countries. There, and not here, is where the real value creation is occurring, says Hans-Werner Sinn, head of Munich's Ifo Institute. In his view Germany is a "bazaar economy."
In fact, the share of imports in exports has risen by a quarter to 39 percent within a six-year period. While sales abroad have increased annually by an average 8 percent, the associated volumes purchased abroad have nearly doubled. In other words, German products are becoming less and less German.
But this development is anything but negative, experts from the German Statistics Office point out: Purchasing inexpensive components from abroad often allows cars or machinery to be sold at competitive prices.
These exports have more impact on the domestic economy than critics like Sinn would like to believe. Their contribution to the gross domestic product has risen from 16 to 21 percent within the space of seven years.
German companies are world leaders in many sectors, including the chemical industry, automaking and mechanical engineering - segments other developed nations have all but abandoned. Germany still boasts three independent automakers. The United Kingdom has just laid its last - Rover - to rest.
Adapting to the new realities
The question remains: How many jobs can be saved in Germany, and at what cost? Thus far, DaimlerChrysler has made most of its large-scale redundancies in the U.S. In Germany 8,500 jobs are slated to be cut.
At Adidas, human resources have nearly returned to pre-restructuring levels. Trumpf and ZF have hired more people. Globalized companies don't have to be job killers.
Fatalities are only inevitable if companies don't adapt to globalization's new realities. If they insist on producing massmarket goods at home, although better tires, alarm clocks and umbrellas can be made abroad at a fraction of the cost. If management and labor representatives ignore the tectonic shift in the international distribution of labor.
American business writer Daniel Pink compares the division of labor with the organization of the human brain. The upand- coming countries of China and India, he contends, perform the function of the left half of the brain, which is responsible for rational and mechanical work like numbers and math - i.e. routine processes such as those required to mass-produce goods and deliver services. According to Pink's analogy, western countries bank on "right-brain" qualities such as creativity and inventiveness.
It follows that the more complex, conceptual work is less vulnerable to relocation. For now at least: But the emerging companies from the eastern hemisphere are penetrating ever deeper into former German domains.
Engineering firms are registering this encroachment with Chinese competitors challenging them in standard equipment markets. The makers of cellphones and microchips are faring no differently. Today's high tech is tomorrow's mainstream - which can be produced by China or India.
As a result, German companies are being forced to maintain their knowledge lead and simultaneously cut costs. Many have reached compromises with their workers: longer hours for the same pay. Within the VW group, employees at Auto 5000 GmbH even earn less than the regular VW workforce - although they work more.
Inside the space of six years, German unit labor costs have fallen 10 percent compared with the average euro zone rate. This too is a concession to the forces of globalization.
The future is taking shape at the former Hoechst site, where 25,000 men and women once worked. Today it houses an industrial park, and provides jobs for 23,000 people. That doesn't sound bad at all. But for the employees, much more has changed than the name above the door.
At Hoechst, all these people were part of a generous corporate family. They were paid 30 percent to 40 percent above collectively bargained wages and their representatives occupied half of the seats on the supervisory board. Roughly the same workforce is now spread out among 80 companies. Some of these - such as Sanofi-Aventis - have several thousand employees; others have fewer than 20.
The German concept of co-determination also suffered a terminal blow when Hoechst was dismembered. Employees are still allowed to send the prescribed five delegates to Sanofi-Aventis' supervisory board - but as observers, with no voting rights. Very few of the companies at the former Hoechst site pay more than union rates. Many have petitioned for exemptions to pay less. And some have been hit hard by the cuts. About 800 tradespeople, spun off to form an independent entity, have to work 2.5 additional hours each week. They earn the same wages as at Hoechst. But they have lost an overtime bonus that could mean up to €400 a month.
The cuts hurt, one of them says. And he couldn't care less which name is embroidered on his overalls.
By Dietmar Hawranek, Alexander Jung, Janko Tietz