Germany's quiet flexibility drive

Richard Milne and Hugh Williamson have a long feature article in Friday's Financial Times explaining how German companies achieve greater labour flexibility. The 1990s flexibility drive by distressed companies has broadened into widespread moves to boost competitiveness.

It amounts to a hidden revolution. While executives in German companies publicly lament the government’s failure to push through labour market reforms, at plants across the country companies are quietly striking ultra-flexible deals with workers over wages and working conditions.

...Ignoring the 80-year tradition in Germany of trade unions and employers’ associations taking the lead role in collective bargaining, companies are pioneering modernising agreements on wages and working conditions. Employee works councils (a consultative group required by law for nearly all companies), and increasingly trade unions themselves, are becoming willing – albeit publicity-shy – partners.

Heinrich von Pierer, one of the country’s leading businessmen and chairman of Siemens, the engineering and technology group, says: “There is far greater labour flexibility at German companies than people think. It is just nobody has any interest in talking about it.”

The change has been driven by the often family-owned small- and medium-sized companies known as the Mittelstand, which have negotiated thousands of opt-out clauses and similar devices to supplement Germany’s standard industry-wide labour agreements. Concessions made by unions willing to trade flexibility for increased job security, as well as breaches in the terms of industry-wide agreements that some of the deals involve, mean many of the deals stay secret, as neither the company nor the workers have anything to gain by publicising them.

Yet this desire for labour reform now faces several very public tests. Sector-wide wage negotiations start this month for engineering companies, where union-business differences over the value of these workplace deals will play a big role. At the same time, a labour dispute at Continental, the car parts supplier, could undermine support for flexibility agreements.

In addition, German unions, rocked by huge membership losses in the last decade, are finally acknowledging the significance of the changes – and are gearing for action. “This is really a paradigm change. Traditionally, collective bargaining was focused at the industry level. Now companies and the workplace level are much more important,” says Detlef Wetzel, head of IG Metall in the industrial region of North Rhine-Westphalia, the union’s largest district. “We have been slow to recognise this trend, but now we are trying to control the process,” he adds, pointing to a new IG Metall campaign to involve ordinary members in wage bargaining.

Mr Burkhard, his colleague at national headquarters, concedes that IG Metall used to be embarrassed about many of the flexibility deals it supported, saying: “In the past it was a bad [union] official who publicised such deals. The motto was, ‘Do them quick and dirty – not in public’.” His union went on to sign a landmark industry-wide flexibility pact two years ago that has led to more than 500 such agreements being signed.

The flexibility drive started in the 1990s as a means of helping distressed companies but now encompasses efforts by managers to improve competitiveness. The German trend has parallels with the rapid spread in the US from the 1980s onwards of “concession bargaining”, where local workforces made concessions in exchange for what they hoped were job guarantees. According to Hagen Lesch, an expert in labour at the business-funded IW research institute in Cologne, concession bargaining in Germany has been slower to take hold. Yet the same pressures – towards globalisation, cost-cutting and greater variation within sectors – have driven the process forward in both countries.

“Businesses in Germany have benefited as the collective bargaining system needed to be opened up, to reflect the much greater differentiation now existing between companies in any one industrial sector,” Mr Lesch says.

Even proposals on wage bargaining by chancellor Angela Merkel – such as to remove the current trade union veto on companies signing labour deals with their employees – are seen as largely superfluous by many executives. “We should not expect politicians to lower our costs for us. We have to work our problems out ourselves,” says Hakan Samuelsson, chief executive of MAN, another engineering group.

Outside attention on labour flexibility has centred on a few large companies – Siemens and the return to a 40- hour week in some of its factories 18 months ago, from the previous 35 hours, and agreements struck by other prominent companies such as Porsche and Volkswagen. But speak to the Mittelstand and a fuller picture emerges.

The family-controlled SMS, the world’s largest producer of steel production machines, has had the 40-hour working week for a decade. Heinrich Weiss, chief executive and a former head of the BDI, the main German industry federation, says: “We do it in silence. Our workers say, ‘We are willing to give concessions but not when it is made public’.”

Jürgen Thumann, current head of the BDI, estimates that 70 per cent of family-owned businesses have flexible workforce agreements, often negotiated outside normal collective bargaining and benefiting from close management-worker relationships at such companies. VDMA, the engineering association representing 3,000 groups with combined annual revenues of €136bn, says more than half its members have similar deals. The figures chime with a survey last year of works council members showing that flexibility agreements exist in three-quarters of German workplaces. The findings point to a slew of methods used to improve flexibility, including variations in working hours, cuts in bonuses and lower pay for new employees (see chart).

Companies such as SEW-Eurodrive and Bosch Rexroth, both producers of transmissions and gears, have “time accounts” and “time corridors” allowing them to ramp up or scale back production as necessary without paying any extra money. “We are used to doing things silently,” says Rainer Blickle, co-chief executive of SEW-Eurodrive. “A new sort of thinking is starting now even with the unions. They know they will not survive this situation without change.”

The length of the working week is a trickier subject. In engineering, 35 hours remains the official norm, but variations are widespread. A senior Siemens director – backed up by executives from companies such as Continental and Linde – highlights some of the many ways to disguise a 40-hour week to avoid ruffling union sensibilities. “You can start the week with a theoretical figure of minus three hours on your time sheet and then, when you work 40 hours, it will say you did only 37 hours. Or you can have an hour a day of ‘training’, which is really work, bringing you up to 40 hours.”

Many executives say success lies in building a relationship with the company works council – and avoiding interference from union headquarters, seen as being more ideological. Wendelin Wiedeking, chief executive of Porsche, says: “Productivity must be permanently improved – and you hear that from the works council people. They are much further ahead than people at headquarters.”

Increased flexibility has done little to stem the decline in Germans employed in industry, however. Companies involved in commodity products – such as Ina-Schaeffler, a bearings manufacturer, or Continental in tyres – argue that no matter what level of flexibility is achieved, it is difficult to fight against lower-cost countries. “It is considerably easier when you have a niche, innovative, capital-intensive product to remain in Germany,” says a Continental director.

Business experts such as Mr Lesch believe nonetheless that long-term structural benefits in competitiveness could be reaped from concession bargaining, as long as Germany’s consensus-based approach to labour relations remains intact. Dietmar Hexel, board member of the DGB trade union confederation, agrees. “These agreements can help companies, and remain compatible with our basic industry-wide approach, but only if both sides – the unions and the companies – stick to their sides of the bargain.”

It could be time for Germany’s hidden revolution to emerge fully from the shadows.

Note: This FT story online also has two companion pieces below the main article: one on engineering unions' role and attitudes, and the other a case study of the labour dispute at Continental.

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