$Unique_ID{COW04073} $Pretitle{373} $Title{Federal Republic of Germany (West Germany) Chapter 6A. Industry} $Subtitle{} $Author{Warrick E. Elrod, Jr.} $Affiliation{HQ, Department of the Army} $Subject{industry production steel percent west german coal million germany states} $Date{1982} $Log{Frankfurt Skyline*0407301.scf Figure 12.*0407302.scf } Country: Federal Republic of Germany (West Germany) Book: Federal Republic of Germany, A Country Study Author: Warrick E. Elrod, Jr. Affiliation: HQ, Department of the Army Date: 1982 Chapter 6A. Industry [See Frankfurt Skyline: Frankfurt Skyline] Industry in Early 1982 faced a somewhat uncomfortable future, at least for the near term. The economy had reached a cyclical turning point in mid-1980. At that time it turned sharply downward after a little more than two years of robust, almost boom, expansion. The economic decline in the Federal Republic of Germany (West Germany or Federal Republic) was part of a world economic decline, especially in Western industrial nations, which was caused to a marked degree by the 1979-80 increases in petroleum prices. The major impact of the petroleum price spiral on industry was twofold: production costs rose significantly as petroleum products became ever more expensive because the United States dollar, in which oil was priced, appreciated rapidly against the deutsche mark; and export markets, a vital aspect of industry, weakened for West German goods as the increased petroleum prices forced trading partners to shift from other imports in order to meet the higher petroleum prices. Industrial investment activity was mixed, but there were some favorable expectations that investment spending would blunt the economic decline. The construction industry was hard hit, in part because of rising interest rates as the German central bank (Deutsche Bundesbank) reluctantly used a higher interest rate policy to stem the flow of capital to American markets where significantly higher interest rates prevailed. With stimulative policy desirable in the face of over 1 million unemployed, the Bundesbank action was forcing restrictive actions. The depressed iron and steel industry faced severe problems of oversupply and competition as suppliers faced weakening worldwide demand for steel. As the only steel-producing member of the European Economic Community (Common Market) not granting export subsidies to its industry (practically all privately owned), West Germany considered the competition basically unfair and had given notice of intention to try to change the community's pricing system for steel. It was the only member country to oppose a Common Market quota system, which it considered protective of inefficient producers. In August 1981, however, the government made a major change in its position and approved the equivalent of US $560 million as an aid package for its domestic steel industry and announced that it had prepared plans for levies on imports of subsidized steel from other Common Market countries and had taken administrative measures to impose the levies quickly should it become necessary. Although the European Coal and Steel Community was still trying to eliminate by 1985 all state aid to the steel industries of member states, West Germany felt it had to take steps to counteract "massive distortions of competition" abroad that had begun to threaten domestic jobs and the survival of its steel industry. The aid package, to run from 1982 to 1985, had four major components: grants of up to 10 percent of investment costs to support major restructuring and modernization without expansion of capacity; a federal research program for modernization; investment grants to those federal states with areas heavily dependent on steel that were undertaking job-creation programs; and fostering parallel, independent investment planning among steel companies to avoid creation of new production capacity. Consumption goods industries were expected to show low levels of investment; but fast-growth industries, including data processing, office machines and equipment, aircraft, and chemicals, were expected to show offsetting increases. Surprisingly the automotive industry, suffering as were manufacturers in other major automobile-producing countries from a worldwide slump in sales as severe as in 1974-75, expected investment to remain strong. Channeling of funds into technical improvements was motivated by the need to meet Japanese competition. Energy conservation was also a strong motive for investment in the automotive as well as in other industries. Overall, investment remained strong in fast-growth industries, in industries seeking to apply new technology and expand research and development, and in industries where conservation of energy had become paramount. In 1981 West Germany remained the largest exporter of manufactured goods in the world. During the 1970s exports averaged about 25 percent of gross national product and foreign trade (exports and imports) almost 50 percent. The industrial sector was especially vulnerable to conditions of worldwide demand and needed at all times to keep pace with international competition. A worldwide slowdown can therefore be damaging to West German export growth to the extent that world incomes stagnate or rise at a significantly slower rate. From mid-1979 to mid-1981 the deutsche mark had declined by almost 25 percent against the United States dollar, thereby making West German goods cheaper for American buyers. But the full effect of this favorable turn in lowering prices of West German exports could be months in coming, given the lag in international trade adjustments in response to changes in foreign exchange rates. Industrial recovery in 1982 and later will depend very much upon wage negotiations. Average wage increases on the order of 5 percent were the rule in settlements in 1981. Continuation of such agreements would represent a moderation of the settlements in most preceding years. With productivity likely to grow at a much lower rate during a period of slow industrial growth, the 1981-82 pattern of settlements would aid in maintaining some degree of price stability as cost pressures on prices would ease. Management and labor seemed readier to discuss macroeconomic issues that affected both than at any time since the 1977 unraveling of the concerted economic action program, or social partnership (Sozialpartnerschaft), after many years in existence. Major Industrial Sectors Coal and Lignite Coal has been the country's most important natural resource, in large part making possible the industrial leadership attained in the late nineteenth century. Earlier of great value in the chemical industry, in powering the steam engine, as fuel for the superb rail transport system, as coke for smelting and refining iron, and as a raw material for numerous other industries, coal in the early 1980s remained vital to the metallurgical and electric industries. The chief locations of hard coal production are the Ruhr district-the largest coalfield in Europe-and the Saar (see fig. 12.). Reserves are estimated at about 70 billion tons, an amount sufficient for about 800 years at the 1980 rate of production of 87 million tons, slightly above the levels of 1977-79, but below production levels of 1976 and earlier. The post-World War II peak was reached in 1956 (102.5 million tons); the decline in annual production since that date has been due to competition from petroleum-in 1981 being slightly reversed-and the lower cost of imported coal. West Germany produces approximately 5 percent of coal mined the world over but is projected to produce only a little over 2 percent by the year 2000. Its own production is expected to rise by only 25 percent, while coal production in such countries as Australia, Canada, China, India, United States, and the Soviet Union will rise by 100 to 400 percent. The metallurgical (63 percent) and electric industries (22 percent) accounted for about 85 percent of all coal used in 1981; the same percentages were projected for the year 2000. Increased amounts will be used to produce synthetic fuels (from 1 percent in 1981 to 14 percent in 2000), with diminishing amounts (from 12 percent to 5 percent) used in the residential and commercial sectors. Of all Organisation for Economic Co-operation and Development (OECD) countries, West German expenditures on energy research and development are second only to those of the United States-being more than double the expenditures of the governments of Britain and Italy and approaching one-third those of the United States. In large part the West German expenditures were directed toward the ultimate production of synfuels from coal. The coal industry developed late, following Britain and France, but gained as a result by organizing firms that operated efficiently on a large scale. The coal producers of the Ruhr Valley developed the most remarkable of all European cartel syndicates. The cartel was an outstanding example of a successful attempt by German industry to establish a monopoly in order to avoid price fluctuations and other insecurities that are often found in freely competitive markets, especially those operating under conditions of largescale production. Such cartel arrangements were anathema to authorities of the occupying powers after World War II, but the federal government nevertheless took steps to aid the coal industry. Through premiums for mine-closing and tax incentives, the coal mines of the Ruhr were concentrated and rationalized and reorganized into a single corporation. Labor productivity rose, in large part because of superior technological equipment. Import duties on coal; limitation of imports from outside the Common Market (see Glossary); subsidies, including one on the transport of coal and another for coal exports; and a fuel oil tax were other measures designed to support the industry. Miners were given protection against unusual hardship arising from structural change. Federal funds covered two-thirds of all costs; the coal-mining states contributed the other third. [See Figure 12.: Basic Resources and Processing] Lignite, or brown coal production, was 120 million tons in 1980. West Germany produces annually about one-half as much lignite as the German Democratic Republic (East Germany). Brown coal, a low-grade fuel, intermediate between bituminous coal and peat, is found in vast quarries and generally is used near the mining sites to fuel thermoelectric power plants and as a raw material for chemical plants producing synthetic nitrates and oils. Little labor is needed in the mining of lignite, as it is obtained from the vast open pits with huge excavators. Rid of water and waste, the material either is used for the production of briquettes, which are fed directly as fuel into furnaces for the generation of electricity and the manufacture of chemicals, or is distilled by carbonization processes for the production of tar, oil, and chemicals. Production centers are sufficiently near to the Ruhr to have developed a close economic association with it. Iron and Steel Iron has been the basis of all modern industry, but in West Germany iron and nonferrous minerals are found in small quantities in scattered areas. The iron ore is generally of low quality with a metal content averaging 32 percent. Mines are small, most are distant from the Ruhr metallurgical industry, and costs of extraction and transportation are high. Domestic production declined continuously throughout the 1970s, down from 6.1 million tons in 1972 to a little less than 2 million tons in 1980. The country, therefore, must import iron ore, principally from Sweden, Brazil, and the Lorraine area of France. The iron and steel industries are located in the Ruhr and the surrounding Rhine area. As in the case of the coal industry, the steel industry developed after the industries in Britain and France. It was efficiently organized, used the newest and most advanced methods of production, developed a cartel, the German Steelwork Union (Stahlwerksverband), second only to the Ruhr coal cartel, and formed for the same purpose-to stabilize prices by allocating production of standardized products where destructive competition presented threats to an industry requiring enormously expensive plants and facing heavy fixed costs. Ties to the great German banks were strong and indispensable, given the need to raise large amounts of money capital to finance the great steel plants (see Industry and Banks, this ch.). Mixed coal and steel companies developed as steel companies sought to gain an advantage by owning coal mines where the cost of coal production would be well below prices on the open market. Steel firms were rationalized and modernized in the 1920s. In the 1930s firms successfully participated in the European steel cartel and enjoyed an increased average efficiency of production when incorporated into the European Coal and Steel Community (ECSC-see Glossary; see The European Communities, ch. 8). Surrendering some of its control by being part of the ECSC was viewed by the steel industry as being far preferable to the internationalization of the Ruhr or to similar proposals made in the early postwar period. By the mid-1960s steel cartels had returned in Europe as a result of overcapacity. Thirty-one West German steel producers formed four marketing cartels, thus eliminating competition among cartel members. The French and Italian steel industries had earlier sought similar organization as protection against declining sales, falling prices, and the reduced profits that come with overcapacity. West German steelmakers were late in cartel-like rationalization, because they had been able for more than ten years to invest in greater capacity and had no difficulty in finding ready markets for their exports; but a decline in the rate of return on investment prompted action to joint planning. The problems of the mid-1960s in the steel industry were again present in 1982. In 1980 production of pig iron and ferroalloys reached 34 million tons, the highest production since 1974 (40.5 million tons) except for 1979 when production was 35.4 million tons. Crude steel production in 1980 was 43.8 million tons, the highest level reached since the record high level of 1974 (53.2 million tons) except for 1979 when production was 46 million tons. Rolled steel products naturally followed the same general trend of the raw metals; the production of sheet steel, steel rods, wire, hot-rolled band steel, and seamless steel tubes declined in 1980 to 31.1 million tons, down slightly from the 32.7 million tons produced in 1979. In 1981 the steel firms faced the problems associated with declining steel demand worldwide, some obsolescence of producing plants, competition from companies subsidized or owned by governments, and resulting declines in returns on investment. Ostensibly to combat subsidized competitors, West Germany in August 1981 announced a change in its policy in order to aid its steel industry. Motor Vehicles In mid-May 1981 in Puebla, Mexico, Volkswagen produced its 20 millionth car, thereby surpassing the 15 million "Tin Lizzies" produced by Ford. A basically good Volkswagen car design had been improved over the years to meet new tasks, new conditions, and new challenges. Although certainly a symbol of success for West Germany-in 1981 the third largest automobile-producing nation in the world after Japan and the United States-it reflected past sales, not future prospects. From 1973 through 1980 domestic automobile production averaged 3.4 million cars annually, while production of commercial vehicles (light and heavy trucks, buses, delivery vans, and special vehicles) had an annual average level of 305,000. The peak year for motor cars was 1979, when production was just under 4 million vehicles, and for commercial vehicles 1980, when production reached slightly over 390,000. Car production increased in every year from 1973 through 1979, dropping slightly in 1980 when a total of a little over 3.5 million passenger cars and 380,000 commercial vehicles were produced. The 1973-79 increases matched the performance of the Japanese car industry, which increased production in every year over the same period and achieved a 6.7 million passenger car production in 1980. Meanwhile American production fell in every year from 1977 through 1980 when 6.4 million passenger cars were produced. In 1981, however, the West German automobile industry, except for its luxury car production, was beset by problems similar to those faced by the American motor industry: Japanese competition, inflated wage costs, stagnant productivity, diminishing markets, and especially, continuing losses in export markets. Japanese exports to the Federal Republic tripled from 1978 to 1980, reaching 251,990 in 1980, or 10.4 percent of the total West German market. Nevertheless in 1981 manufacturers continued to refrain from declaring themselves officially in favor of protectionist measures. The executives of Daimler-Benz and the Bavarian-based BMW were strongly antiprotectionist. Daimler-Benz sales in the United States and Canada increased in 1980 by 2 percent over 1979 to 56,000, reflecting, in Daimler's opinion, a North American trend to diesel cars. BMW became the first West German firm with its own Japanese importing subsidiary in order to expand its sales in Japan from the 1980 level of 3,200. In late 1981 Volkswagen was still exploring a possible production and technological arrangement with Nissan, which could lead to production in Japan of a medium-class Volkswagen or Audi. Volkswagen, only marginally profitable in 1980, was going ahead with an ambitious investment program at home and abroad that would cost some US $5.5 billion for 1981-83. The automobile industry obviously has depended heavily on export markets to maintain employment in the industry. In 1980 Volkswagen exported slightly over half of the 1.6 million cars it produced domestically. The Japanese not only have increased their share of the West German market, but in 1980 also increased their share of the Latin American market by 81 percent, of the Middle East market by 44 percent, of the Southeast Asian market by 41 percent, and of the African market by 32 percent. Much of the Japanese increase in the overseas market was at the expense of the West German car exports, as well as of American exports. In the United States, German cars faced increasing competition from the smaller American cars that had price advantages. The need to cut costs in the automobile industry has been paramount as wages in the industry have spiraled. The annual per capita income of the Volkswagen worker has exceeded the equivalent of US $15,000. As in the United States, automobile workers in West Germany have consistently earned the highest industrial wage (see Working Conditions, Wages, and Benefits, this ch.). West German car producers have bought Japanese components to cut the cost of such components by 10 to 20 percent below costs of domestic production. Location of plants abroad has been motivated not only by such location being an aid to holding or increasing market shares, but also as a means of cutting production costs. In 1980-81 Daimler-Benz opened a truck production plant in Hampton, Virginia; Daimler acquired facilities in San Francisco to produce above-fifteen-ton freightliners; and Maschinenfabrik Augsburg-Nurnberg (MAN) established a bus assembly plant in Cleveland, North Carolina. MAN had under consideration acquisition of plants in the Philippines and India in addition to plants it already operated in South Africa, Turkey, and Australia. Although many reasons have gone into the decision of West German car producers to locate plants abroad, cutting production costs has been a major factor. Higher costs have also resulted from the decline of productivity in the car industry. In 1981 each West German worker in the automobile industry produced 16.5 cars a year, compared to twenty-six by an American worker and thirty-three by a Japanese worker. Although production of luxury cars has accounted in part for fewer cars a year being produced by the West German worker, the decline in average yearly output per worker since the mid-1970s has been evidence of a general decline in productivity in the industry. Chemicals Europe was the original home of the chemical industry. Such industries flourished especially in Germany, which achieved world leadership in applying the science of chemistry to industrial technology. Before World War I Germany produced large amounts of inorganic chemicals and held a virtual monopoly on valuable synthetic dyestuffs and on most pharmaceutical chemicals. Although these monopolies were broken after the war, Germany recovered strongly and retained leadership in chemical technology. Under the domination of a giant combination, I.G. Farben Industrie, German chemical industries were streamlined into highly efficient operations. Obsolete plants were closed, products were standardized, production was specialized by plants, research was concentrated, and patents and markets were pooled. In 1981 the Federal Republic had the world's three largest chemical firms: Hoechst, Bayer, and BASF. The country's chemical industry enjoyed the reputation of being the largest exporter and importer of chemicals in the world. In 1980 total turnover reached US $55 billion, a nominal rise of 5 percent, although overall production declined 4 percent from the record level of 1979. The 1980 figure included exports of US $23 billion and imports of US $13 billion. Included in imports were purchases from the United States of US $1.3 billion, an increase of 20 percent from the year before. The "Big Three" companies were nearly even in terms of world turnover. Bayer, however, registered a good gain in earnings while Hoechst and BASF experienced declines in profits as American subsidiaries of the latter two firms suffered losses. As of 1981 West Germany produced more sulfuric acid than any country except the United States, the Soviet Union, and Japan. It produced more caustic soda than any country except the United States and about the same amount as Japan. In the production of plastics and resins, West Germany was a close second to the United States and achieved about the same production as Japan. The chemical companies in 1981 faced generally depressed markets for their products. Although different companies faced different problems, they shared some problems not limited to West Germany. All firms faced rising costs. They had to pay more for energy and for petroleum and other chemical raw materials. With depreciation of the deutsche mark (for value of the deutsche mark-see Glossary) during 1980 and 1981, purchases abroad inflated costs by more than the basic quoted price increases. Moreover the chemical industry was incurring the expense of meeting the government's increasingly tough environmental regulations. A larger and stable home market would aid chemical firms by reducing dependence on foreign markets where cyclical economic trends have had a destabilizing effect on the industry. The chemical industry continued its investment abroad, however, and sought to increase overseas market opportunities. Bayer's 1981 worldwide capital investment exceeded US $1 billion even though investment had been greater in 1980 (US $1.06 billion), an increase of almost 19 percent over 1979. Hoechst's capital investment worldwide in 1981 was US $760 million, the same as in 1980. Almost all West German chemical firms, including some smaller ones, increased spending on research and development, considering such expenditures to be essential to maintain competitive shares of markets. Electrical Industry No German industry, other than the chemical industry, has given greater evidence of "science in the service of industry" than the electrical industry. The economics of physics found its greatest opportunity in the electrical industry, which, second only to the chemical industry, has offered the most challenging outlet for the society's scientific and organizational talents. German progress in the science of electricity was the foundation of the industry. The basic discoveries of physicists were applied to industry. It is not too much to say that the electrical industry was born and nourished in the research and development laboratories of the universities. Two great firms concentrated power in the electrical manufacturing industry through their control of inventions and patent rights. The manufacturing industry is distinguished from the generation and sale of electric power on which most other industry depends. The first firm is Siemens AG, the largest industrial firm in Germany, which was founded by Werner Siemens (1816-92). Among his numerous innovations were the invention of the dynamo and the development of the first electric railway system. The second major firm in the industry is the German General Electric Company (Allgemeine Elektrizitats-Gesellschaft-AEG), which was designed by the organizational genius of Emil Rathenau. The company was formed in the 1880s to exploit Edison's incandescent lamp. The electrical manufacturing industry displayed unusual talent for organizing large-scale business and applying scientific genius; the talent remained evident in 1982. Electrical manufacturing has maintained rapid and steady growth for over a century. The industry made applications to transportation (tramways), illumination (lamp bulbs), metallurgy (steel production), communications (telephone and telegraph), electrochemical processes (nitrogen fixation from the atmosphere), and countless machines and appliances utilizing electric motors. By 1913 Germany had achieved world leadership in the production of electrical products and equipment, surpassing the United States by a narrow margin, and was preeminently the leading exporter of these products, having no close rival. The renowned British economic historian, John Clapham, wrote of the German electrical manufacturing industry: "Beyond question, the creation of this industry was the greatest single industrial achievement of modern Germany." The industry shared in, indeed led, the industrial progress of Germany after World War I. Productivity in industrial production rose 25 percent between 1925 and 1929, and real wages and profits also rose. As should be expected of the fourth largest manufacturing country of the world in 1981, Germany produced more electric power (in kilowatt-hours) than any country except the United States, the Soviet Union, and Japan. It was third in the production of manufactured gas, which was used to produce electricity-not far behind the Soviet Union and the United States. In the modern electrotechnology industry of the early 1980s West Germany stood among the world leaders. The industry depended heavily upon export markets, accounting in 1980 for almost 10 percent of all exports, i.e., DM30 billion out of DM344 billion. Siemens alone accounted for over DM10 billion. Foreign orders for Siemens' products in the first half of 1981 were up 24 percent over the same period in 1980. Foreign markets were also of importance to AEG, if not to the same degree as to Siemens. Of its total 1980 production of DM15.1 billion, 42 percent or DM6.4 billion was exported. In the first quarter of 1981 new foreign orders were increasing at double the rate of increase in domestic orders. The country's electrical manufacturing industry has been in the forefront of international cooperation in the rapidly changing world of electronics and electrotechnology. Again, Siemens has been the outstanding example of organizational adaptation to changing needs. In 1980 the company's investments in the United States reached DM269 million, more than double its investments in 1979, making available DM203 million for the acquisition of shares in subsidiaries and associated companies. Siemens' main activity remained medical engineering, but it was increasing its production of power engineering products through Siemens-Allis, a joint venture with Allis-Chalmers, based in Atlanta, Georgia. Siemens also increased its investments in Africa, Asia, and Australia, pointing out that of its total international business sales, 45 percent were generated in the countries where Siemens operated production units. A new switch gear plant in India and a plant to produce communications systems in Australia were among plants going into production in 1981. A joint venture with Fuji Electric that has existed since 1923 has led to the establishment of cooperation between Siemens and Fuji Electric for production of computers. AEG has begun production of color television in China. AEG-Telefunken was entering a joint venture agreement with Japan Victor Company to produce video recorders in Japan. As manufacturing operations have become increasingly multinational, the industry has sought to preserve the country's electrical manufacturing leadership in world production.