Study: Moving Production Abroad Can Have Positive Effect

What do Samsung in Berlin, AEG in Nuremberg and Conti in Hanover have in common? They are all companies where management centers, group bosses and even profitable production plants have pulled up stakes and moved out of Germany.

The rates of pay commanded by cheaper labor in Eastern Europe and South East Asia have got a lot of executives asking themselves why they should still produce in Germany. Could it be that Germany will soon become, not only the export world champion when it comes to goods but also the global leader when it comes to exporting workforces?

There was a time when fathers would scare their children by saying the monsters under the bed would get them if they didn't eat their greens. These days, it could be the story of how other countries could threaten Germany by turning it into a "bazaar" economy where trade is everything because it produces nothing.

These stories have been circulating for some time, aided and abetted by trade federations' releasing doom-mongering statements like the one which said that 150,000 jobs would be shifted abroad by 2007. But on closer inspection, these stories appear to be nothing more than propaganda. A report by the German Chamber of Commerce (DIHK) in September stated that foreign investment by German companies was actually boosting employment in Germany.

DIHK President Ludwig Georg Braun has admitted that the balance is a positive one, a belief shared by Wolfgang Rohde, a member of the management board at trade union IG Metall. "The thesis is that the German economy and German employment have profited from the trend towards globalization," Rohde said, adding that only a quarter of production companies in Germany saw any movement of activities outside Germany between 2001 and 2003.

However, Rohde believes the lure of cheaper labor and lower costs abroad remains strong. "There remains a wider spectrum of economic opportunities for production in other industrial countries."

Larger firms tend to go abroad

The Fraunhofer Institute of System and Innovation Research conducted a two-year survey of 1,500 German businesses in an attempt to gauge the feeling towards foreign investment. The survey showed that it was predominantly large groups which were considering shifting production abroad and less the mid-sized companies.

While there are positive conclusions to be made from the institute's findings, that small to middle-sized enterprises were staying in Germany and that a mass exodus was far from inevitable, the institute did see some problematic results.

"The small and middle-class companies may look to the foreign investment strategies of the larger concerns and feel that they may be missing out on something," Steffen Kinkel from the Fraunhofer Institute said. "But the picture that everybody is running away from Germany and producing abroad is a false one."

Not always a happy ending

For those companies considering jumping ship, there are some lessons to be learned, Kinkel warns. Firms that shift production to countries only because the wages are lower there can come away with a bloody nose.

"From qualitative studies we know that two years is the test phase for any serious foreign investments. If after two years things aren't working out then one should seriously think about getting out. Every fourth or fifth company shifting production abroad has moved it back after two years"

Sometimes, however, it's too late. "We looked at some business plans where companies have banked on successful foreign production and then we compared their forecasts with what really happened," Kinkel said. The usual result is that the businesses invested two-and-a-half times more time and money into the foreign production than they intended in a bid to make a success of the shift abroad.

Pumping more investment into a project which extends the company past its intended target can often be dangerous, Kinkel warns. The decision to move production abroad should be well thought out and on not made on the attraction of low wages alone, he added.

The plus side

But not all foreign adventures fail. German investments abroad, specifically by the automotive and chemical industries, have flourished through moving production out of the country. Both cars and chemicals have seen continuous growth abroad since 1994 and the profits have boosted the bottom lines of German-based companies as a result.

"I would say that foreign investments, on the whole, are a potentially positive step for German industry," said Professor Christoph Scherrer of the University of Kassel. "They can be positive for Germany as well as for the host country."