The Hindu Business Line : Germany: Growing abroad, shrinking at home

Finance Minister, Mr P. Chidambaram, welcoming German Minister for Economics and Labour, Mr Wolfgang Clement, at the opening of the 15th Session of the Indo-German Joint Commission on Industrial and Economic Cooperation in the capital on April 4. — Kamal Narang

FORTY-four German CEOs, led by the Economics and Labour Minister, Mr Wolfgang Clement, participated in the 15th session of the Indo-German Joint Commission on Industrial and Economic Co-operation that was held in New Delhi, on April 4 and 5.

Globalisation has come to threaten Germany's industrial core. More and more of its companies are moving factories and production abroad. The number of Germans working in industry is set to drop to a record low of below 10 million.

Indeed, an economy famous for its engineers, carmakers and white coat-wearing lab assistants seems to be losing its industrial base. Germany is still one of the world's top exporters, but lately it has earned the rather dubious distinction of being the top exporter of jobs.

Here are some unsettling facts. For six years now, Siemens has employed more people abroad than at home. The trend seems to be to grow abroad and shrink at home. When companies like the engineering firm Hochtief or pharmaceuticals and chemicals giant Bayer invest, it is usually on the other side of the border. If a company like ThyssenKrupp opens a new steel mill, it's more likely to be in Brazil than the Ruhr region. If BASF opens a new factory, chances are it will be in India.

A recent survey by German business consultant Roland Berger and the University of Aachen found that 90 per cent of heavy machinery and construction firms want to relocate parts of their business by 2009. A study by Ernst & Young found that 50 per cent of car-parts manufacturers are moving abroad.

"The manufacturing sector is on the verge of recession," confirmed Friedolin Strack, Head of the Asia Committee of the powerful Federation of German Industries (BDI). Exactly five years ago, Tarun Das, then Director-General of the Confederation of Indian Industries had met Dr Ludolf von Wartenberg, his counterpart in BDI. To Mr Das's invitation to send an out-sourcing mission, Dr Wartenberg had exclaimed, "India is not anywhere in our radar".

Today, however, many German companies are considering outsourcing. The worst is yet to come. The Boston Consulting Group offered a bleak prognosis for German workers in a study released recently. The situation is especially dangerous because no one knows whether alternative jobs can be created.

Some argue that jobs can be created in the service sector. But even there, jobs are being outsourced. Lufthansa recently moved much of its accounting services to Krakow, Poland. Deutsche Bank processes much of its electronic payments in Bangalore. And a good deal of book-keeping of chipmaker Infineon has been moved to Portugal.

So what will happen if Germany loses its industrial base? And how much industry does a country need? These are questions that are giving economists, labour officials and entrepreneurs sleepless nights.

These questions are especially tough given that industry is intrinsic to Germany's national identity. Even before the First World War, Germany was Europe's biggest industrial power. That was the time when many well-known companies such as Krupp, Thyssen, Bosch, Siemens and Daimler-Benz were set up and became leading international firms. There haven't been many new industrial giants since and the digital revolution seems to have passed Germany by. With the exception of SAP, Germany has no pure IT company of global significance.

Consider the service sector. The growing wage competition from Eastern Europe has given rise to a new argument within the government. While Mr Clement is inclined to opening up the European service market further, the German Chancellor, Mr Gerhard Schröder, has joined the growing chorus of critics of the European Union's Bolkestein directive which aims to de-regulate the service sector in the 25 member-states.

According to the directive, companies offering services in all the member-states will be allowed to operate under the rules and regulations of their home country.

In other words, services — from butchers to hairdressers to construction firms — from countries with lower taxes and fewer social regulations, notably in Eastern Europe, will be able to operate in higher-cost economies without being forced to pay their workers at the local rates.

Mr Clement and supporters of the directive argue that such reforms are necessary if Europe is to have a truly free market and wants to achieve its long-time dream of becoming as dynamic an economy as the United States.

With unemployment at a record post-War high of 5.2 million or 12.6 per cent of the workforce, opponents of the directive argue that allowing Eastern European companies to undercut their western European rivals with cheap labour will inevitably lead to even longer dole queues at home.

Does India stand to gain from the German windfall? According to a statement from the Finance Ministry to coincide with the arrival of the German delegation: "The Indo-German Joint Commission assumes special importance for the Indian government in view of the falling German investment in India in recent years." The Indian delegation was led by the Finance Minister, Mr P. Chidambaram. "These investments have averaged $125 million annually the last 10 years, which is relatively insignificant compared to the investments made by Germany in other countries and taking into account India's potential."

A perspective on India

Delhi has changed little in the last three years. Taxis, buses, Mercedes, and Toyotas continue to mingle with donkey carts on crowded streets. Then, of course, there are the usual suspects — mountains of refuse, haphazard building constructions, collapsed buildings, children hawking water in bottles, cola and fruit, and beggars. Delhi has come be a city of burgeoning slums. The growing population is exerting tremendous pressure on the city's infrastructure and urban utilities such as electricity, roads, sanitation, and water. Public transport is hopelessly inadequate, both in terms of quantity and quality. There is chaos on the street. Sanitation is almost non-existent in the slums. Drains are choked with garbage.

Mr Chidambaram and Mr Clement addressed the Plenary Session. German delegates expressed concern over India's slow decision-making process. Mr Chidambaram assured them of complete transparency in foreign investment policies and the Government's commitment to clear proposals fast.

Among the many challenges facing Delhi are the power-cuts every summer that residents have been suffering for decades now. . Two years after the privatisation of the Delhi Vidyut Board (DVB) nothing seems to have changed. Power theft and non-declaration f load enhancements are challenges the DVB is facing in this ever-expanding city.

A study by the The Energy Research Institute (TERI) reveals that the capital is headed for a severe water crisis. The groundwater level in many parts having fallen drastically, increasing its salinity and making water unfit for drinking and bathing.

The government has to get its act together fast, if it wants to retain the interest of heavyweights who plan to restructure and modernise the Delhi and Mumbai airports.

Nearly all the large international airport developers and operators are queuing up for the Rs 10,000 crore-plus plan for the two largest airports in India. Even as plans for privatising the Mumbai and Delhi airports are gathering steam, the airport employees unions are opposing what they describe as an "indiscriminate sell-off of airports".

The quality of infrastructure in India is abysmal. This is true of roads, ports, and telecommunications. India is ranked at 69 among 75 countries for telephone lines per 100 inhabitants; 73 on road quality outside of major cities; 57 on port facilities and inland waterways; and 47 on the quality of air transport infrastructure.

This is in contrast to India's achievements in science and engineering. Labour market is ineffective, perhaps the most ineffective in the world.

Put briefly, India shows the advantages of a vast labour force with a skilled engineering and scientific community. It is, however, deficient in infrastructure such as roads, ports and power, as well as in public administration, labour market practices and depth of its financial market.

It is necessary to move swiftly to complete the reform process, which are now under way. To sustain higher rates of economic growth, Indians must act now.

(The author is former Europe Director, CII, and lives in Cologne, Germany. Feedback may be sent to mohan.murti@t-online.de)

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