Boss’ New Deal Jolts Germany’s Unions

With his jovial manner and many contributions to life in this village of 5,000, Martin Viessmann just doesn’t seem to cut it as Class Enemy No. 1.

His industrialist father and grandfather built and developed the furnace factory that employs about 3,500 people here and provided the heaters that warm most of their homes. Scion Martin has brought both bread and roses to town too, adorning Allendorf with the works of contemporary painters and sculptors and--probably more to the liking of the locals--offering his work force guaranteed jobs and a promise not to cut pay.

Viessmann even created about 170 jobs last year, at a time when the nation’s unemployment rate was--as it still is--pushing 12% and job creation had moved to where it remains, at the top of everyone’s political agenda.

All that sounds good, particularly in an age when other German industrialists are fleeing their high-cost homeland and taking their manufacturing jobs with them.

So why do German unions and social critics paint Martin Viessmann as an unreconstructed capitalist pig? Why do they rail that he is destroying the vaunted labor-relations system that ensured labor peace and prosperity for decades?

Because Viessmann had the audacity to strike a deal directly with his own, mostly nonunion work force instead of accepting the terms negotiated at the regional level by the metalworkers union. And his approach is attracting imitators in corporate Germany.

This might not sound like much of a departure in America, where just 14.5% of employees are unionized and managers can pay pretty much what the labor market will bear.

But it ranks as an act of savage daring--and perhaps illegality--in the German context. Here, 30% of employees are unionized, and even those who aren’t expect to be paid union scale or better.

IG Metall, Germany’s powerful metalworkers union, has taken Viessmann to court. Industries across the country are watching for the final outcome, expected this month.

“Our company’s labor model is unique in Germany,” Viessmann says in an interview at his art-studded headquarters here in rural central Germany, an hour’s drive from the nearest rail junction. “You won’t find anybody else doing exactly the same thing we are, and that’s why the union took us to court.”

In Germany, unions have the statutory power to negotiate contracts for entire regions, setting pay, work hours and benefits for their sectors of the economy. The contracts have the force of law, and managements have willingly gone along, understanding that the extra cost buys them labor peace.

“Our social system puts the stress on ‘social,’ ” says Wolfgang Boeckly, director of human resources for Bayer, the German pharmaceutical giant. “Maybe it costs a bit more, but that’s the price we pay for social harmony.”

In Germany, it should be noted, the street-fighting days of the 1930s and the fascist disaster they engendered are living memories, and there is near-zero tolerance for social conflict.

Factory Committees

Unions here don’t have much direct contact with individual factories. That job is left to another layer of organized labor: the factory committees. These are small, elected bodies in every plant, made up of specially trained blue-collar men and women who have full access to company financial data. They can’t negotiate basic benefits or call strikes, but they enjoy an ample share of power in company decision-making, on everything from marketing plans to corporate spinoffs.

This two-tiered system, distributing the clout of organized labor between the big unions and the small factory committees, is key to the much-envied German economic model and is often credited with giving the nation one of the lowest strike rates in Europe.

“Many conflicts which in other countries lead to strikes are resolved here by co-determination,” says Ulrich Zachert, a professor of comparative labor law at Hamburg University. “There is a culture here of day-to-day dialogue at the plant level.”

But however fond Germans may be of their “consensus” model, it’s hard to find anyone who thinks it works well anymore. Unemployment here, already at its highest rate since the 1930s, is expected to rise further this year. New business investment is vital--it would create jobs--but executives say they won’t pump more money into plants and equipment because labor costs are the world’s highest.

And at 35 hours, they add, the German workweek is already the shortest in the industrialized world.

For several years, management has been arguing that the nation’s economic problems would be solved if only there was greater labor flexibility--if key workplace decisions weren’t rigidly fixed by the unions at the regional level and if, instead, bosses could hire and fire, set wages and design the workweek according to the circumstances of their own plants.

Just look at the United States, say these heretical executives, sizable numbers of whom were educated in America: U.S. managers enjoy these freedoms, and America has created 8.5 million jobs since 1993. Germany, by contrast, has lost 2.4 million jobs since 1991.

A strong argument, perhaps, but Germany’s huge and all-powerful unions aren’t buying it. On the contrary, they argue that the magic bullet for unemployment is an even shorter workweek. If the current generation of workers cut its hours, the reasoning goes, managers would have to hire many more workers to take up the slack.

Accordingly, last year, the metalworkers union--a contentious cadre that gets most of the credit for the current workweek--started calling for a 32-hour version.

Labor and management have been baring their fangs over these issues for several years--and yet the German economy, the world’s third largest, keeps bubbling along. Exports soared by nearly 12% last year and are expected to increase by a comparable amount in 1998. Growth is forecast at a respectable 3%. And unions continue to negotiate some of the most indulgent pay-and-benefits packages in the world.

How to explain German buoyancy, in the face of the country’s seemingly unsustainable labor costs and the soaring joblessness that has resulted?

“If you look at Germany in a strictly formal way, you think this economy should have collapsed a long time ago,” says Josef Joffe, a senior foreign policy specialist at the Munich daily Sueddeutsche Zeitung. “You have to look deeper.”

And indeed, if you look under the surface you find an increasing number of executives like Viessmann, quietly finding ways to break free of the two-tiered labor structures and give workers less.

The chain of events that pushed Viessmann to make his big move started in 1995. His company’s core product is big, free-standing furnaces, but that year he decided to produce smaller gas heaters to be mounted on apartment walls. To add such a product, he’d need to build a new factory. His financial people calculated that if he built it in Allendorf, it would cost $12 million more than if he built it in the Czech Republic.

Viessmann bought a tract of land outside the Czech capital, Prague; got a building permit; hired some Czech staff; and announced that he was building a new plant there.

Workers’ Initiative

No jobs were on the line in Allendorf--yet. Business would continue as usual, with workers cranking out Viessmann’s big, traditional furnaces.

Still, the local work force was shaken. What if the wall-mounted heaters caught on? What if their popularity outstripped that of furnaces? Great news for the Czechs, but what about Allendorf? Might the factory here just shrivel and die?

Factory committee member Helmut Japes asked Viessmann whether there was anything the locals could do to derail the Czech plant. Viessmann told him that if they could find another way to save the $12 million, he’d gladly bring the expansion home.

The factory committee came up with a package that fit the bill: Each staffer would work three extra hours per week, for no extra pay. That brought the workweek to 38 hours, not the 35 decreed by IG Metall for this region.

Viessmann, in exchange, said that not only would he build the plant in Allendorf, he would guarantee all signatories’ jobs for three years. A full 97% of the work force signed up.

The heater assembly line came to Allendorf, and today there are 170 more residents on the payroll.

The deal, reminiscent of blue-collar concessions made in the United States during the 1980s, made Viessmann and Allendorf the talk of many a German golf course and airport business-class lounge. Plenty of his fellow executives have consulted with their factory committees on ways to cut labor costs, but rarely in the provocative way Viessmann did.

Such giant concerns as Daimler-Benz, Volkswagen, Hoechst and Bayer have all negotiated in-house concessions directly with factory committees. But they didn’t trample union sentiment in the process, because they reached deals their unions could approve.

This was possible because, in the past, these companies had been paying wages and bonuses well above the legal union scale. There was built-in wiggle room. Factory committee members say it was hard, but not impossible, to take away some of the bonus mustard but leave all the salary wurst.

“The key is, we didn’t touch incomes,” says Karl-Otto Czikowsky, a factory committee member at Bayer, whose in-house deal requires workers to give up more than $170 million of stock options, bonuses and seniority premiums in exchange for three-year job guarantees, apprenticeships and investments in Germany.

“From the first minute we were negotiating with the factory committee, we invited the union as well,” adds human resources director Boeckly. “They were involved with the whole negotiation, and therefore they couldn’t fight the result.”

Viessmann’s End Run

In Allendorf, however, Viessmann was unwilling just to trim extras above union scale--he bugged out of a major clause of the contract.

And the union reacted with fury. Because Viessmann makes metal products, IG Metall argues, he is legally bound to honor its regional contract, which calls for the 35-hour workweek. And the Viessmann factory committee, supposedly part of that second great pillar of German organized labor? Seen from union headquarters in Frankfurt, it was little better than scabs.

The union sued not only Viessmann but Japes and his fellow committee members, seeking to have the committee dissolved.

And not just because of those three extra hours. The huge union, already bleeding members to the unemployment rolls, senses mortal danger in the trend that Viessmann and Japes have set in motion. For if managers such as Viessmann are allowed to do end runs around the unions and negotiate in-house deals with their factory committees--which tend to be more willing than unions to make concessions--what will Germany need unions for, anyway?

At the trial level, the judge gave a mixed decision, ruling that Viessmann may have acted improperly but refusing to dissolve the factory committee.

Viessmann argues that he is within his legal rights, and the union has appealed. The appellate judge has given the two sides until Feb. 19 to reach an out-of-court agreement. If settlement talks fail, the judge will rule conclusively.

Businesses across the country are eagerly waiting to see whether the court confirms the legality of Viessmann’s arrangement. An appellate ruling in Viessmann’s favor could set off a wave of in-house, nonunion labor deals, undoing hallowed union achievements and ultimately recasting the labor-management power dispensation in this country.

In the meantime, some companies are venturing down Viessmann’s path.

Valve manufacturer Buerkert has made a deal in which each employee puts $60 into a pot and gives up 5% of his or her Christmas and vacation bonuses. In exchange, Buerkert is hiring 55 new engineers, technicians and apprentices.

And at children’s toy manufacturer Ravensburg, factory committee member Erika Ullmann persuaded the work force to put in an extra two hours per week--37 hours total--for no extra pay in exchange for a three-year job guarantee and a profit-sharing agreement with the company.

“Of course, one doesn’t like to do such a thing, but I can see what’s happening in the toy sector,” Ullmann says. “Our last German competitor went out of business because its labor costs were too high, and our biggest foreign competitors are moving their production from cheap England to cheaper Portugal. We had to react before we went under.”

There are no reliable statistics on how many companies have negotiated such in-house concessions. Companies aren’t broadcasting their deals because it’s not clear yet whether they’ll hold up in court. But analysts say the trend is flourishing in secret, particularly in the former East Germany, where unemployment is much higher than in the west and where factory committees are hungrier.

“We are in a transition period,” says labor professor Zachert. “Nobody knows whether both pillars of organized labor”--the unions and the factory committees--”are strong enough to survive. I hope the system will continue, but it must find a new form of balance.”

Viessmann insists that he never intended to set a national example.

“We really didn’t want all this publicity,” he says. “We’ve always said we just want a solution for our own company, not a model for all Germany.”