Regional Outlook : Germany Looks East for Labor : Low wages in Hungary, Poland and the Czech Republic are luring businesses. But while capital is not yet pouring over the border, the trend is provoking edginess at home.

By MARJORIE MILLER

June 28, 1994 12 AM PT

TIMES STAFF WRITER

TRUTNOV, Czech Republic —

On a Monday morning, Lutz Kahlbau leaves his family in Berlin to drive four hours east past the old Iron Curtain and on to the former state-run factory that he manages for its new owners, the German company Siemens.

Kahlbau oversees 700 Czech employees turning out electromechanical relays, switches and circuit boards for Siemens’ European market at about one-twentieth the cost of producing these components in Berlin, where Kahlbau often returns for the weekend.

“We are in a happy situation. Because of the growth of our market shares, we don’t have to kill jobs in Germany,” Kahlbau said. “But of course, labor-intensive work has a better chance in countries with low labor costs. None of our competition is starting new products on the Champs-Elysees. They are starting in Thailand and Shanghai.”

Others, like Siemens and thousands of other small and large German firms, are investing in post-Communist Eastern Europe, primarily Hungary, Poland and the Czech Republic, and provoking an edginess back home familiar to Americans.

“Korea at Our Front Door,” cries a headline in Germany’s Stern magazine. “More and More Businessmen Migrate,” reads another in the daily Frankfurter Rundschau. “Our Mexico,” business people call neighboring countries.

Nearly one in three German companies intends to transfer part of its production outside the country in the next three years, according to a recent poll by the Assn. of German Chambers of Industry and Commerce. In the survey of more than 10,000 companies in western Germany, the favorite destination was Eastern Europe, where Deutsche Bank estimates that 5 million jobs--equivalent to more than 15% of the German work force--could move in the next five years.

Like American firms that argued in favor of the North American Free Trade Agreement linking the United States with Canada and Mexico, German companies cite high domestic labor costs as the main reason for their plans to move production across the border. Manufacturers say they must cut costs to remain competitive or lose even more German jobs; Eastern Europe is their opportunity.

But so far there is no giant sucking sound of German capital whooshing across the border, as might have been expected.

German investment in Eastern Europe has been tempered by a recession at home and the need to develop the former East Germany, where western German firms invest about $40 billion a year. And direct investment by German companies still totals less than $3 billion and is second to the Americans’. In 1993, for instance, Germany invested about $1.10 billion in the East, compared to U.S investment of about $1.12 billion, according to Deutsche Bank and the U.S. Department of Commerce.

The German investment is significant, however, given that there was almost nothing before 1989, and the upward trend clearly will continue. Germans were first off the mark to invest in the former East Bloc after the fall of communism in 1989 and 1990.

Production at the Trutnov plant, one of about a dozen that Siemens has in Eastern Europe and the former Soviet Union, has grown 15% annually since the plant opened under Siemens in 1992. But the company still employs more than three times as many people in Berlin as in Trutnov to make electromechanical components.

This may explain why, despite the headlines, German unions do not see as much of a threat from cheap foreign labor as did American unions that fought tooth and nail against NAFTA. Rather, union leaders agree with manufacturers that it is in Germany’s interest to strengthen the economies of its eastern neighbors. They say estimates of lost jobs do not take into account those created by East European countries purchasing German machinery and consumer goods.

Hans-Georg Wehner of the German Union Federation contends that Deutsche Bank’s prediction of job losses is part of a scare campaign to push down the high wages and benefits that western German workers enjoy--in some industries, the highest in the world.

“Jobs are lost here and there, but you have to see that the volume of investment taking place over there is not that big. Overall, it doesn’t shake us,” Wehner said.

Meanwhile, the relatively modest investment has had the positive effect of quieting fears in the East and West that Germany would thoroughly dominate Eastern Europe. Germany was the logical economic partner for its neighbors in the East. Many Poles, Hungarians and Czechs already spoke German. They provided cheap labor and potential markets right on Germany’s border. And Germans had experience there.

“Germans know the market--(auto maker Ferdinand) Porsche started his career here,” said Jan A. Havelka, general manager of the semiautonomous CzechInvest, which is charged with attracting foreign investment to the Czech Republic. “At the beginning there was reasonable concern about such a powerful economy showing such enthusiasm. . . .

“But Germans are not dominating the situation in a way that could be politically sensitive,” he added. “They are looking east. They know the emerging markets from the post-Communist countries could be the big chance of the 21st Century. But they have certain disadvantages, like World War II.”

Many Eastern Europeans continue to fear domination by Germans, who occupied their countries during the Third Reich. For that reason, German investors in the Czech Republic say it suits them just fine that Germans and Americans are on an equal footing in that nation, each with about 30% of foreign investment.

Like other Eastern Europeans, Czechs generally view German capital guardedly. They need it but are wary of becoming too dependent on it--and on the Germans.

Down the road from Siemens’ Trutnov plant, about 90 miles northeast of Prague, is the Ekvita textile machine manufacturer, a Czech-German joint venture in which the German firm Georg Sahm has about 25% of the shares.

“When we privatized the firm (in September, 1992), I was standing in the yard with empty hands,” said Jaromir Jelecek, one of the Czech owners. “The bottom fell out of the industry, and we had to find a way out of the situation. We decided to find a partner. We would have preferred it to be Czech capital, but we have to accept it’s German. Who came here first when this was empty?”

Jelecek said Czech owners and managers get along with their German business associates well, although “occasionally we find they insist on their way of solving a problem even though the Czech way would be better.”

His was a diplomatic assessment of what other Czech business people consider to be out-and-out German arrogance. At the nearby Grund-Textil factory, owner Grazyne Grundova explained that she and her husband opted to tough out hard times rather than take German investors into their bathroom-rug company.

They rejected offers from large German manufacturers to buy them out or form a joint venture with their company, which now boasts 40 employees in the Czech Republic and another plant in Poland.

“We wanted to be a 100% Czech firm. We don’t need them or their money,” Grundova said. “To drag in the Germans so they will order you about, no, no, no.”

In Prague, the Timo producer of ladies’ lingerie chose a middle ground. About 10% of its production is piecework for the German Felina line, but the Czech company turned down a contract from a second large German firm in favor of an Italian one.

“This way we have help with know-how and fashion,” said Vladimir Mracek, one of the owners. “The problem with the Italians is that for them time is not money. There’s no organization, no payment. During the summer, no one works. But their fashion is really very nice.

“With the Germans, the business side is very strong. Pure contract. What they promised is done. But there are no new ideas there,” he said.

Nonetheless, thousands of small, medium-sized and large German firms have found partners and investment opportunities in the East. The lion’s share of German investment has gone to Hungary, the Czech Republic and Poland, where in each case at least half the economy is now in private hands. Deutsche Bank predicts growth in all three countries this year.

The Czech Republic is considered one of the most stable and hospitable environments for foreign investors in Eastern Europe. With a highly educated work force and long experience in a broad range of finished industrial products, the country has been able to move quickly into export markets.

Foreign companies are drawn primarily by the low cost of labor--an average of about $250 a month for a full-time industrial worker, compared with $1,562 in eastern Germany and $2,500 in western Germany.

And yet, Juergen Moellering, of the German-Czech Chamber of Industry and Commerce, warns potential investors that labor is only a part of the cost of production. Czechs work more hours and take fewer vacations than Germans, but their productivity is lower, Moellering says.

Bureaucracy abounds. An investor starting a business from scratch in the Czech Republic may need up to 17 permits, Moellering said, and faces infrastructure problems and a shortage of Western-style management.

“I know of two companies that left because they didn’t get a telephone,” Moellering said.

But companies like Siemens with long overseas experience view all of this as natural. They see the Czech Republic at the center of a vast new market in Eastern Europe.

“This is just a growing phase” in East European industries, said Trutnov plant manager Lutz Kahlbau. “If you want to grow with them, you can do it.”

Cutting Down on Labor Costs

Wages in the former East Bloc are one-tenth those in Germany.

Wages:

Average monthly wage for a full-time industrial worker (estimates in U.S. dollars)

Germany: $2,500

Poland: $225

Czech Republic: $250

Hungary: $275

1994 German Investment

Through April (in millions of U.S. dollars)

In Hungary: 476.8