$Unique_ID{COW04074} $Pretitle{373} $Title{Federal Republic of Germany (West Germany) Chapter 6B. Engineering} $Subtitle{} $Author{Warrick E. Elrod, Jr.} $Affiliation{HQ, Department of the Army} $Subject{industry industrial percent board oil west company supervisory associations billion} $Date{1982} $Log{Oil Consumption*0407401.scf Energy Consumption*0407402.scf Figure 14.*0407405.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 6B. Engineering The mechanical engineering industry (machine-building) may well be the most important pillar overall of the industrial economy, accounting in 1980 for 20 percent of manufacturing gross domestic product (GDP). In 1980 the industry recorded a turnover of almost DM122 billion, about 11 percent of total industrial production. The industry was of particular importance in the export sector, accounting in 1980 for almost 20 percent of total exports. The industry was a significant contributor to the overall foreign trade surplus. In 1980 sales abroad increased by 7 percent over the previous year to a total of DM63.1 billion. Although imports went up by 12 percent, the total was only DM22.4 billion, which meant that the industry had an overall export surplus of more than DM40 billion. The contribution was all the more remarkable because the overall surplus in foreign trade was about DM9 billion. The decline in demand in the domestic market, where orders fell 10 percent in the first quarter of 1981, has made the machine builders all the more attentive to markets abroad, even though they were already exporting more than 60 percent of their production. The industry confronted challenges beginning to be posed by manufacturers in Japan and the United States. Although the industry had an export advantage as a result of declines in the exchange value of the deutsche mark, the industry continued to emphasize the need to keep production costs down in order to remain internationally competitive, especially with Japanese manufacturers who were taking increasing shares of foreign markets, particularly in the Far East. As of 1981 Japanese advances had been achieved mainly at the expense of American, British, and French manufacturers, but West German manufacturers had not been unaffected, even though market share losses had been minimal. An area where West German firms continued to register growth was in turnkey industrial plants. Successful operations of the late 1970s-early 1980s included the completion of a polyester fibers plant in Indonesia by Lurgi, a subsidiary of Metallgesellschaft; a steel mill in the Soviet Union by Schloemann-Siemag; and a power plant in Algeria by Siemens and its subsidiary. Total orders in 1980 for this category of production were almost DM14 billion. Orders from Saudi Arabia reached DM1.5 billion. Other countries placing orders for large-scale plant equipment included China (DM904 million), the Soviet Union (DM822 million), Libya (DM659 million), South Africa (DM654 million), and Indonesia (DM612 million). The mechanical engineering industry, like the steel industry, has expressed concern over advantages that some foreign competitors hold as a result of being able to offer state-subsidized financing. West German firms seeking contracts abroad for major industrial turnkey projects have reported foreign competitors offering concessional financing. In early 1982 industry, banks, and the government continued to voice their objections to such policies in international forums. Energy [See Oil Consumption: Courtesy Embassy of Germany, Washington DC.] [See Energy Consumption: Courtesy Embassy of Germany, Washington DC.] In 1981 primary energy production was the equivalent of about 2.4 million barrels per day (bpd) of oil. Production had been within a narrow range of this level for the preceding eight years. Of the 2.4 million bpd oil equivalent, 1.7 million bpd were accounted for by coal, 0.3 million bpd by natural gas, 0.3 million bpd by hydroelectric and nuclear power, and only 0.1 million bpd by crude oil. Production of crude oil, excluding natural gas liquids, declined continuously after 1977 when production was 108,000 bpd. In terms of proved reserves, the country had negligible amounts of oil, 6 trillion cubic feet of natural gas, and almost 35 billion tons of coal; the coal reserve, however, was estimated at 70 billion tons. In the early 1980s the country had a crude oil refining capacity of 3 million bpd, a little above its average daily consumption of 2.7 million bpd in 1979, which was slightly above the average of the preceding three years. Consumption fell significantly in 1980, declining to a daily average of 2.4 million bpd. Reports covering the first six months of 1981 indicated a further decline over 1980. Given the negligible domestic crude oil production, imports of crude oil supplied most of the oil for refining. West Germany is a major importer of oil-importing more oil than any industrial noncommunist nation other than the United States and Japan. Import dependence for energy production is a little under 50 percent, well below the dependence of France (70 percent) and Italy (82 percent). The Federal Republic had well-distributed sources of oil; Saudi Arabia supplied 25 percent and Libya, Nigeria, and Britain each accounted for about 10 percent of total imports. Other significant suppliers were Algeria, the United Arab Emirates, and until early 1980, Iran. As of the end of 1980 the country had oil stocks exceeding 310 million barrels. Natural gas production has increased rapidly from only 98 billion cubic feet in 1965 to 670 billion cubic feet in 1980. To supplement domestic production and meet domestic requirements, natural gas has been imported from the Netherlands and from the Soviet Union. In late November 1981 officials of Ruhrgas AG agreed to buy about US $45 billion of natural gas from the Soviet Union over a twenty-five year period. The transaction represented the largest East-West business agreement of all time. Although no single price for the gas was announced, it was expected to be "tied to the overall trend of heating oil prices" rather than to the price of higher quality crude oil. The Federal Republic will receive 370 billion cubic feet annually, in addition to current deliveries, but Soviet deliveries also to be made to France, the Netherlands, Belgium, Italy, Austria, and Switzerland will bring the annual total of deliveries to Western Europe to 1.4 trillion cubic feet, an energy equivalent of about 700,000 bpd. The gas will be delivered through a 5,760-kilometer pipeline to be built between the Soviet gas fields around Urengoy, in northwestern Siberia, and delivery points along the borders between Czechoslovakia and Austria and the Federal Republic (see fig. 13). The agreement provides for deliveries to begin in 1984. As of mid-1981 the Soviets were delivering about 425 billion cubic feet of gas annually to West Germany, accounting for about 17 percent of the country's gas supplies and about 3 percent of its primary energy needs. The 17 percent figure will rise to 30 percent and the 3 percent figure to 5 percent when the Siberian pipeline begins delivery. The transaction reflected the underlying philosophy in West Germany, and indeed throughout Western Europe, that East-West trade was business and was not to be politicized. Concern over increased dependency on the Soviet Union as a source of supply was secondary to the economic benefits to be gained. The pipeline, by various estimates costing between US $10 and US $15 billion, will mean jobs and profits for West German workers and industry, as well as benefits for the other West European countries involved. Orders for the components of the pipeline have been placed with major contractors and subcontractors throughout Europe. The Mannesmann AG steel group had won contracts worth over US $500 million to supply twenty-two compressor stations for the pipeline. In turn, the Soviets stand to earn more than US $7.5 billion annually in convertible currency once the gas starts flowing. West Germans and other West Europeans minimized the risk of the Soviets cutting off the gas by asserting that such action would damage the pipeline and result in loss of hard currency to the Soviet Union. Moreover the West Europeans believed that their precautions-including alternate systems for switching fuels and for a surge capacity of Dutch gas-would greatly lessen the impact of any cutoff. It was also argued that the Soviets possessed a fine reputation for fulfilling business contracts, an argument that experience has from time to time contradicted. The Soviets, for example, have violated contracts in the past by cutting off petroleum shipments to Yugoslavia (1948), Israel (1956), Finland (1958), and China (1964). The increased crude oil prices of 1973 did minimal damage to the economy. Remarkably the Bundesbank noted in its July 1974 report that, in a balance of payments sense, the 1973 price increase had been offset by virtue of appreciation of the deutsche mark. (With oil priced in United States dollars, and the deutsche mark appreciating against the dollar and most other currencies, the price increase had been dampened and then offset because in terms of the deutsche mark, industrial and other imports had declined in price.) The increases in oil prices in 1979 and 1980 were damaging, however, in large part because of the depreciation of the deutsche mark and because price rises in the countries that supply industrial imports were greater than those in West Germany. Production of electricity in 1980 was almost 400 billion kilowatt-hours, or 20 percent more than output in 1974. Of this total almost 44 billion kilowatt-hours were produced by nuclear electricity generation. The electric power industry consumed about 10 percent of the total supplied. Industry consumed about 60 percent and residences 22 percent; the balance was consumed by small trade establishments, transport, and agriculture. West Germany remained a major producer of manufactured gas-gas produced by gasworks and cokeries-producing more than any other country within OECD except the United States and Australia. The reduction of some 4 percent of total energy consumption in 1980 was attributable to many causes-weather was mild, and the rate of economic growth decreased. There was also an implied increase in energy efficiency and a reduction in the energy coefficient (the incremental amount of energy required to produce an incremental unit of the gross national product [GNP]). Particularly remarkable was a reduction of 10.5 percent in the consumption of petroleum products, especially of light heating oil. As a result oil imports were reduced by about 9 percent as compared to 1979. Before the 1980-82 glut in the world oil market and the concomitant disarray in the Organization of Petroleum Exporting Countries (OPEC), the government announced details of its energy strategy for the 1980s. The plan had five major elements: phasing out subsidies on oil consumption; more extensive use of domestic coal resources; curtailing the use of natural gas and eliminating oil completely in the generation of electric power; giving priority to finding solutions to the problems of storage and disposal of nuclear waste; and raising the nuclear power share of primary energy generation from 3.4 percent in 1979 to over 10 percent in 1985 and over 16 percent by 1990. Meanwhile the government and industry made significant progress in obtaining nonnuclear sources of energy. Contracts with Saudi Arabia that were due to expire were renewed, and Saudi Arabia agreed to provide 25 percent of the country's oil imports, up from 17 percent in 1979. Construction was begun on a liquefied petroleum gas terminal at Wilhelmshaven, with completion scheduled for the mid-1980s. Plans were prepared for a nuclear power station at Brockdorf, near Hamburg; political and public reluctance to increase nuclear power generation in the area created continuing difficulties, however. Antinuclear protesters joined in the opposition, and at times clashes with authorities were violent. Transportation In the early 1980s the transportation system of West Germany was among the finest in the world. An efficient inland waterway system carried grain, oil, timber, coal, heavy iron and steel products, and countless other goods. The industrial areas remained centers of attraction for both export and import of materials and goods through North Sea ports, especially Hamburg, a center of shipbuilding and marine engineering. The German Federal Railway system, state owned and operated, provided over 29,000 kilometers of rail line carrying fuel and ores, principally coal, stone, and lignite in various forms, as well as other cargo items. Highspeed passenger trains connected all major cities. Railway density (length of rail per square kilometer and per capita) was, along with Denmark's, the greatest in Europe. Approximately 4,400 additional kilometers of railways were not federally owned (see fig. 14). A superior road and highway network served the highest number of road vehicles in any European country. The autobahns, great transcountry motor roads that were developed during the Nazi period, provide limited access express connections of almost 7,000 kilometers, joining all major cities and carrying heavy passenger and cargo traffic. [See Figure 14.: Transportation] Industry and the Free Market Philosophy Following World War II, official policy deliberately set out to reduce the power of the state in the management of the economy-particularly in the management of industry. The effort was personified in Minister for Economic Affairs Ludwig Erhard during the era that took the society through reconstruction to the prosperity and full employment of the late 1950s and early 1960s. Erhard, who later served as chancellor (1963-66), fervently defended private enterprise against governmental power and saw economic liberalism as a way of reducing public power. He believed that free trade was the answer to arbitrary authority. The concept appealed to the new generation ready to cast away the Hitler years of overwhelming state interference (despite which German industry in the Nazi period was never thoroughly and efficiently organized for the war effort). Erhard neatly summarized the point in his book, Germany's Comeback in the World Market: "More perhaps than any other economy the German one has had to experience the economic and supraeconomic consequences of an economic and trading policy subjected to the extremes of nationalism, autarchy and government control. We have learned the lesson; and if the basic principles of a liberal economic policy are championed...the reason must be sought in the special circumstances of our recent history." Although the government's postwar fiscal measures enabled industry to finance its reconstruction and expansion, it did not accept in full Erhard's doctrine of economic liberalism if that doctrine was taken to imply that business and industry would be kept relatively small, divided, and overly competitive. This had been the goal of the postwar occupying powers, particularly the United States. This goal was abandoned, however, when West German industrial power became an obvious asset to the West in the developing cold war. West German industry cooperated to a degree with the Erhard ministry, but it built upon a familiar structural foundation of concentration, and it manifested a strong inclination to centralize industrial decisions. The problem for industry was how to mobilize economic resources and power on the scale required if the job of reconstruction was to be finished in a minimal period of time. Industry saw a need for large enterprises capable of undertaking ambitious investment projects and for large concentrations of venture capital in the hands of powerful financial institutions willing to take risks and able to acquire the necessary financing. Concentration of economic power among the large firms steadily increased, and by the mid-1960s one of every three workers in industry was employed by the 100 largest industrial firms, which produced over 40 percent of total industrial output and accounted for 50 percent of industrial exports. In the early 1980s industry continued to be highly concentrated, the result of constant efforts to bring together various sources of economic power. Although it is extraordinarily difficult to compare the degree of industrial concentration in different countries, Common Market surveys over the years have suggested that the concentration of industry in the Federal Republic was probably not out of line with that in other member countries. Tax concessions speeded the postwar recovery of industry. These concessions were used not merely to accelerate overall industrial recovery, but to discriminate purposely between one industry and another. Favored basic industries-steel, coal and iron ore mines, and electric power plants - received special tax benefits throughout the 1950s. Firms in these industries received exceptionally large depreciation allowances for any new investment that they set against the profits, thus sharply reducing taxable profits. A condition of receiving such benefits was that an amount equal to the reduction in taxable profit was to be reinvested in the business, not distributed to shareholders. Thus retained earnings financed industrial expansion through increased research and development, application of technologically advanced methods of production, and reduced cost of capital. Because taxes were purposely set high, the incentive for tax-reducing investment was all the greater. Additionally there was an export tax rebate proportional to the amount exported that was applicable to all industries. It proved to be such an export incentive that by the end of the 1950s West Germany had the strongest balance of payments in the trading world. Domestic consumer demand might, and did, fluctuate, but the continuing boom in world trade kept the export order books filled and the trade balance positive throughout the 1970s despite the worldwide recession of 1974-75. Only in 1980 did imports exceed exports in value-then by only a narrow margin and principally because of the spiraling cost of dollar-priced petroleum, reinforced by depreciation of the deutsche mark against the dollar (see Balance of Payments, ch. 4). Nevertheless demand for exports helped keep industrial employment throughout the 1970s and into 1981 at levels averaging 97 percent of the work force. Tax incentives also favored the shipbuilding and construction industries. A vast increase in housing contributed to mobility of labor. Availability of housing in the great industrial centers was responsible in part for the low level of unemployment because workers could move from areas of relative unemployment to areas of labor scarcity. By the time the various special incentives were terminated, their intended effect had been achieved with industry reaching higher levels of productivity. There are many other examples of government support of industry, such as subsidies, low-cost loans provided by the state, and discriminatory tax allowances favoring selected sectors of industrial activity. A free market philosophy does pervade industry, but it is understood as a philosophy restraining state intervention, not as a policy favoring business and industry. And since the early postwar years, moreover, government policy has never been conceived as limiting the concentration in and central direction of industry by industry. Industrial cooperation was achieved by consultation, especially consultative planning within respective industries for future investment. Organizational Structure West German civil and commercial laws give legal recognition to a variety of incorporated and unincorporated business forms. The most common forms are the public corporation. Aktiengesellschaft (AG), and the limited liability company, Gesellschaft mit beschrankter Haftung (GmbH). In addition there are general partnerships, limited partnerships, sole or joint proprietorships, joint ventures, and branches of foreign corporations. Industrial organization is almost always in the form of a public corporation or a limited liability company. The public corporation is an incorporated business entity. Shareholder liability is limited to the unpaid portion of the nominal value of the shares. Because these shares can, upon application of the corporation, be traded on a stock exchange, the public corporation is the form overwhelmingly favored by large enterprises that have high capital stock requirements. The promoters of the corporation may be citizens or foreign nationals, resident or nonresident. They appoint the supervisory board, Aufsichtsrat, which in turn appoints the board of management, Vorstand (see Industry and Banks, this ch.). The share capital (capital stock) of a public corporation must be expressed in deutsche marks with a minimum capital of DM100,000. Shares may be common or preferred (preference shares) and, as in the United States, one share of common stock entitles the holder to one vote; preference shares may be issued without voting rights. Preference shares entitle holders to a preferential dividend or preferential distribution of assets in the event of liquidation. Shareholder approval is required to establish a legal reserve for the protection of shareholders and creditors. An important difference between a public corporation and a limited liability company is that shares of the latter cannot be traded on a stock exchange. The rules for shareholder representation and for increases and reductions of capital are in principle the same as for the corporation. Registered managers direct the affairs of the limited liability company; a management board oversees the affairs of the corporation. Minimal capital structure for a limited liability company is DM20,000, one-fifth the minimal requirement for a corporation. The members of the management board are the main corporate officers. Legislation enacted in 1978 requires that a labor director be a member of the management board. This director represents the employer in wage negotiations and is mainly responsible for labor relations, working conditions, personnel, and welfare. Depending upon the size of a public corporation, or limited liability company, and the number of employees, the supervisory board must consist of from three to twenty-one members-the total number to be divisible by three. Except in the case of a family-owned corporation with fewer than 500 employees, one-third of the members are elected by the employees of the corporation. The supervisory board of a firm with more than 2,000 employees must equally comprise representatives of labor and capital. Shareholders elect representatives of capital, employees elect the labor representatives who may come from the relevant trade union, company-employed wage earners, nonmanagerial salaried employees, and employees with managerial functions. A limited liability company is legally represented by and managed by one or more registered managers. In addition the company may have a supervisory board or a similar body, but such a body is mandatory only if the company has more than 500 regular employees. Like the workers of a public corporation, employees elect one-third of the board members. Company Supervisory Boards Unlike the single-board Anglo-American system, West German companies have two boards: a supervisory board and an executive or management board. The supervisory board generally meets four or five times a year, or more often if conditions necessitate. It analyzes the annual accounts of the company and is responsible for such major policy decisions as overall manpower planning, investment in new plants, closing old facilities, mergers and takeovers, and changes in production methods. The members of the management board are responsible for conducting the day-to-day business of the company and, therefore, work full time. They may not sit on the supervisory board, and members of that board may not sit on the management board. Since July 1, 1978, one-half of the members of the supervisory board have been representatives of labor. This parity of control with management on supervisory boards was achieved by labor in the iron and steel and coal-mining industries by laws passed in 1956. Although the supervisory boards appear to have considerable influence, and in fact often do, a management board, so long as it is successful (which means profitable), will exercise dominant control of the firm and will probably have the ultimate word in deciding on the membership of the supervisory board. This is possible because management will have seen that members of the supervisory board represent a mixture of the principal outside interests on whose cooperation the company is normally dependent, i.e., the customers for the firm's products, the providers of finance, or suppliers of materials. This results in a company being represented as a supplier on the supervisory board of another company and having on its own board a representative of the other company as a valued customer. Firms allied in vertical or horizontal structures thus establish long-standing relations by associating the various companies with each other in major decisions, especially on investment. This network is reinforced by the association of banks and companies through interrepresentation on each other's boards (see Industry and Banks, this ch.). Supervisory boards of major industrial firms thus tend to be highly supportive of management. The members of such boards usually stand in close alliance with each other, and the function of the boards is clearly seen as a device for systematic consultation between firms whose interests are intertwined. A company reform law of 1965 made it illegal for two companies to exchange supervisors and management positions directly, but it is not illegal for a company to have one of its executives sitting on its own supervisory board and on that of another company. The executive must not, of course, be a member of the management board. Interlocking at the supervisory board level is legal, and this is the way that firms of mutual interest-and their banks-do in fact interlock. It seems, as a matter of practice, that decisions usually considered to be managerial are mainly influenced by management representatives on the supervisory boards. This occurs because trade union members of supervisory boards do not generally intervene adversely in the ordinary conduct of business in the areas of investment and in so-called technical matters. Although informed in these areas, trade union members tend to concentrate their influence on matters that affect employment, wages, and working conditions, the traditional areas of trade union interest. Industrial Associations The pervasive industrial associations, and more particularly the central body of associations, the Federation of German Industries (Bundesverband der Deutschen Industrie-BDI), constituted a major force for the organized economic effort and post-World War II reassertion of power by industry. The BDI was established in 1949 with an organizational structure based upon thirty-nine national industrial federations (Verbande-also translated as associations). The system is hierarchical to the point that the smaller industrial associations rely heavily upon the support of the so-called top associations (Spitzenverbande) to represent their views at the center of consultation. In 1982 this hierarchical structure still seemed to be reinforced by the Basic Law (constitution), which gives the associations an unusual consultative status in the processes of government, even spelling out the general practice in ministries: "Do not bring in for consultation associations which do not exercise a nationwide authority." This collaboration between the state and powerful industrial associations was not new. It was a feature of the Weimar Republic, under which a 1926 law instructed the big associations to provide forums for the views of smaller associations and to take note of such views. The hierarchical principle was not held simply for administrative convenience; it was the basis of the system. Under the Nazi regime the hierarchical system was greatly reinforced. Lines of authority were not to be questioned. Responsibility was concentrated in a small group at the apex of the structure. The Nazi word for their method of organizing industry was Wirtschaftslenkung (guided private enterprise). The contemporary practice of developing planned investment programs covering a whole industry and seeking to achieve more collaboration in research to accelerate technical development has its roots in practices of a similar type during the Weimar and Nazi periods. This is not to assert that industry is rigidly organized. Industry in general recoils from arbitrary procedures, rejects cartelmongering and compulsory price agreement, and tries to avoid unfair dominance of small industry by large industry. Moreover since 1958 the Federal Cartel Office has prohibited abuse by market-dominating firms, controlled mergers and acquisitions, and applied regulations against unfair competition and unfair trade practices. The industrial associations were responsible for a marked improvement in the standard of industrial statistics, making them more precise and comprehensive. The steel industry, for example, regularly makes three-to-five-year forecasts of productive capacity on the basis of industry investment plans, including an estimate of future demand for various steel products. Individual steel producers pay particular attention to these industry forecasts, seeking to coordinate long-term supply arrangements for particular products in a conscious effort to avoid creating surplus capacity in the industry as a whole. The Verbande see themselves as exercising a traditional and public role as guardians of national industries. Problems of policy are resolved not by authoritarian decree but by consultation. The associations continue to wield considerable power and influence, but they do so more subtly than in earlier eras. Individual associations vary widely in quality and in importance. As might be expected they are a significant force in the steel, chemical, machine tool, and electrical industries, and supply excellent leadership to these industries, also providing technical assistance and information. The methods used by associations to secure a consensus of industrial decisions in any given direction are distinctly of a high order of sophistication. Technical directors employed by the associations see it as their task to take systematic long-term views of the interests of their industries. As experts in investment and technological development, they are regularly consulted by the government well in advance of presentation of legislation for parliamentary discussion. Erhard and the ideologues of economic liberalism did not convert West German industrialists from being disciplined members of their particular industrial communities to being passionate adherents of free competitive markets. This does not mean that West German businesspeople are not competitive; in practice they are often extremely responsive to the market and often compete powerfully with each other. There is more competition within West German industry than is sometimes realized. The BDI has tremendous influence throughout the industrial sector, powerful enough to mobilize industry when deemed desirable. In the 1960s, for example, the BDI persuaded industrial firms to subscribe large amounts of money for government use, thus permitting Bonn greatly to increase its foreign aid to underdeveloped countries. Under leadership of the associations, industry often does voluntarily for the public good what might otherwise require legislation. The methods of industrial associations rest upon the preference of industry leaders for organized and deliberate action, not blind and brutal confrontation (see Traditional Interest Groups, ch. 7).