Europe’s cost frontier

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These are difficult times for Germany. The country may have reunited its old capitalist and communist halves but at the same time the country’s once allconquering manufacturing industry has hadto learn the lessons of globalisation – and quick. The low-cost world starts on Germany’s eastern border.

Accenture supply chain management partner Mark Pearson says: ‘A lot of the traditional middle-sized companies, often family run, have had to bite the bullet and there has been a trend toward companies moving east to the Czech Republic, to Ukraine, and Russia.’ It is a highly sensitive issue for Germany, to a much greater extent than the Anglo-Saxon world. German company management tend to be highly patriarchal and outsourcing has been a difficult and often emotional issue. But the  stark choice for many has been to outsource or go out of business.

The eastward drift of manufacturing has been reflected among logistics service providers, where there has been an upsurge in acquisitions. Germany-based operators like Kuhne + Nagel and the Deutsche Post have been leading exponents of the industry trend toward globalisation.

Moving east
But the growth of the eastern economies could also wrest the centre of gravity of European logistics eastwards as these countries emerge as significant markets. However, Martin Raab, head of transport and logistics for Central Europe at Cap Gemini says that while Benelux has for long been considered attractive as a site for pan- Europe distribution hubs, the dismantling of the Iron Curtain and the eastward enlargement of the European Union has made more people think of Germany. ‘Benelux is still an attractive location for sure, but the attraction of Germany as a location has increased compared with other European countries,’ he says.

The region centred on Kassel is reckoned by many to be the transport centre of the country, on the intersection of the main north-south and east-west autobahns and with a maximum distance of 500km to every other German location. And it is this area that has been most attractive to logistics operators. But unlike its equivalents in some other European countries, the labour and land markets have not become unduly overheated.

Another area of emerging interest is centred on Leipzig where a new airport and DHL hub are currently under construction. It may be around two hours further east than Kassel but it gives good access to the Czech Republic, Poland and the rest of Eastern Europe.

So if Eastern Europe is such a draw, why not locate there rather than in a relatively high-cost country like Germany? The answer, says Raab, is that Germany is still a good location despite its significantly higher labour costs, mainly on account of the quality of its infrastructure.

It’s also worth remembering that Germany is still effectively two countries in one. The concrete and watchtowers may have gone but there is still an invisible border dissecting the old East Germany from the West, with labour costs around 20-30 per cent lower to the east than to the west. But infrastructure in the old East has come on in leaps and bounds since reunification, with the eastern autobahn network as good as that in the West – arguably better because it has less traffic on it.

Pearson says the old East Germany occupies a middle ground between the highcost West Germany and the emerging economies of the East. ‘But reunification will inevitably result in the same cost drivers, inflexible labour market and taxes as in the West,’ he says.

Labour costs in Germany have been moving decisively in the right direction over the past five years, Pearson says, but it has still been difficult to restructure German  companies to take costs out. The German government tends to take a keen interest in company lay offs, even in the private sector. (It’s interesting to note how many large German firms pushed through unpopular large-scale redundancies and increases in the working week during the few weeks that Germany found itself effectively without a government following the stalemate in the recent elections.) The new government can be expected to take a much more laissezfaire approach to labour market restructuring.

Restructuring in progress
But it is possible to overstate the extent to which Germany is deindustrialising, says Pearson. It’s unlikely the country will see the same wholesale loss of manufacturing jobs as the UK though there will have to be a lot of restructuring and movement of labour intensive activities offshore.

Unemployment may be high but Germany does have its labour hotspots, though these tend to be centred on the high tech and industrial centres of Munich and Stuttgart in the south and on Frankfurt, Germany’s financial centre, where wage costs can be 30 per cent higher than in the Kassel region.

Finding labour is not a problem in a country that has recently experienced some relatively high unemployment levels. As well as East Germany, other places with a labour glut include the Rhine-Ruhr and North Rhine Westphalia, where the decline of heavy industry and shipbuilding have created unemployment levels of 20 per cent. But in Frankfurt and the south the rate drops away to around five per cent.

Land prices follow labour costs to some degree, says Raab, for industrial and warehousing land the differences are not so pronounced as for housing or office land. ‘There are only serious problems in locations like airports – and that’s pretty common everywhere in Europe,’ says Raab. ‘Standard warehouse operations are not usually a problem and there is generally plenty of space available. Maybe in the Kassel region you have to look a little harder, but bear in mind it’s a big region and it’s usually possible to find something.’

Germany has a comprehensive network of motorways and railways, unlike France and the UK, and development is much more regional, with industry and population less concentrated on single regions or cities. Whereas the UK rail system is essentially a means of getting to and from London and the French railway is for getting to and from Paris, the German system consists of a grid of main lines of more or less equal importance whose function is to link regional centres and towns.

Economic powers
The German motorway network follows this grid pattern too, and it is also reflected in the country’s politics, with regional and länder governments wielding considerable economic and executive powers compared with France or the UK.

Contrary to the general perception it is possible to lay labour off in Germany provided criteria such as lost contracts are fulfilled, though it is necessary to pay severance in most cases.

Raab says: ‘Things are changing. People were right to focus on Benelux when the Iron Curtain was still in place but Germany has become more attractive and more pan- European.’

While Benelux will still score for companies seeking to serve the whole of Europe from a single distribution centre – the Ile de France and UK would be hard to serve next-day from most parts of Germany – Germany is an attractive regional centre for firms adopting a three or four-centre approach to pan- European distribution.

Another plus for Germany is that the biggest single transport operator, Deutsche Post, is German owned while many of the multinationals, like UPS, have also made the country the base for their operations in Europe. In fact, UPS, which has been in Germany for three decades, says that almost half its 14,000 European employees are in Germany.

The heart of UPS’ German (and European) operation is in Cologne. It has the sort of airport that suits the operator, says director of communications in Europe John Wheeler. ‘It’s a very enviable place to be. Not only is 30 per cent of Europe’s GDP within 400km radius but it also has the advantage of being in a reasonably large city, though not a congested mega-hub like Frankfurt.’

Relations with the local government are good and, even though the ten new entrants to the EU will probably shift the centre of gravity eastwards, UPS is in no way tempted to up sticks and move to somewhere like Leipzig.

It’s easy to land at Cologne and a recent extension to its hub was built on the other side of the road with bridges carrying the sorting belts across the highway. To the best of Wheeler’s knowledge, there have never been any development problems.

Schenker is another heavyweight of the European freight scene and again is based in central Germany. This alone can cut several hours off European transit times.

Raab adds also that more rural areas away from the major conurbations can also often be particularly attractive.

Big investments
NYK logistics, which has invested heavily in distribution centres in the Benelux countries also has a number of sites in Germany, says business development director, automotive, Michael Storey.

Most of these though tend to serve the German market or German exporting manufacturers while some locations opened in East Germany to serve places like the Czech Republic have since been replaced by facilities in Eastern Europe itself, says Storey. ‘A lot depends on the product and where the market is,’ he explains. But because Germany is such a major manufacturing nation, NYK is looking at doing more consolidation of products in Germany itself for exporting to common destinations in the wider world.

Getting hold of suitable land is generally straightforward though there can occasionally be problems. It’s important to remember that Germany is a federal country and a lot depends on the attitude of the local government to development plans. Some put more obstacles in the way of development than others. But on the whole, there are few problems in getting hold of the relatively simple distribution sheds NYK requires.

Labour availability
‘But the German economy has changed considerably. There’s a lot more unemployment, and hence a much greater availability of labour,’ says Storey. To some extent, the country has been unable to capitalise on lower labour costs in the east because of the rapid expansion eastwards to countries like Hungary and Poland, which has tended to undercut even East German labour rates, Storey adds – although the economy may also have benefited from the opening of new markets in those countries. Migration from the east has also kept the supply of labour topped up.

Another plus is the availability of good local trucking firms. Germany abandoned quantity licensing some time ago and there is now a relatively free market. One negative has been the imposition of the motorway tax on trucks (the ‘maut’) which can increase the cost of trucking long distances quite significantly.

‘It’s something you need to be aware of and it is something we’ve considered in network planning, but it hasn’t made us move operations out of the country,’ says Storey.

‘There is this view in the media that Germany is somehow on the way out but in fact it is very important and there’s a lot of economic activity. It’s just unfortunate that it’s been outshone by growth in the rest of the EU.’

Pearson believes that if German manufacturing can hang on for a little while longer, the tide could start to turn in its favour again as some of the low-cost countries become more expensive. One factor that Germany has in its favour is its welleducated, high quality labour force – something that is difficult to match in the east, especially as the large numbers of incoming multinationals has put pressure on the limited supply of high quality labour.

Meanwhile, even East Germany is developing hotspots of its own. Leipzig, only a few years ago buried away behind the Iron Curtain, is fast emerging as a destination of choice for developers and logisticians. Specialist pan-European developer Eurinpro has just signed a deal with Amazon for a warehouse there as part of the online retailer’s diversification into new products – just one of a long list of major firms that have recently moved there including BMW, Porsche and DHL.

It’s an ideal place from which to serve Poland, the Czech Republic and most of the rest of Germany, says Eurinpro country manager Christian Bischoff.

Not only does it benefit from its location only 150km from Germany’s eastern border, ‘but it also has a professional economic development agency, and there are also state incentives that pay up to 28 per cent of investment excluding land costs’. The exact percentage payable depends on the employment potential but it is generally available throughout the old East Germany.

Eurinpro is active throughout Germany (as well as Benelux, France, Spain, Italy, Poland, Japan and the US) and Bischoff says that the main distribution centers are Hamburg/Bremen near the main northern seaports, the Ruhr, Frankfurt, Stuttgart/Munich, the Kassel central region and, now, Leipzig.

Land costs are another big attraction in Leipzig. What could cost e200 per square metre in Frankfurt can be had for only e25 in Leipzig and away from main roads and motorways the cost dips to as little as e10. Land costs in Germany tend to dip sharply away from autobahns and main roads, although Bischoff does not believe that the ‘maut’ has had a big effect on location decisions. ‘In fact, while there was talk ofmore regional hubs when it was introduced, if anything there’s been a move back towards centralised hubs.’

There has also been a move back out of low cost eastern countries like Czech Republic partly because of transport costs, lack of infrastructure and the need to offer fast response times.

Fast decisions
‘You wouldn’t get anything lower cost even in Eastern Europe,’ says Bischoff. Leipzig also offers one of the fastest decision times on granting building permits – 17 days – though in truth this process doesn’t normally take more than four weeks in even the tardiest German regions. This is because under the German system, land is zoned in principle for industrial or distribution development in advance and any arguments with residents, environmentalists and the like take place at this stage. Once zoned, building permits are usually granted quickly.

A lot of the land once occupied by smokestack industry in the old East has now been cleaned up with help from city and regional governments. The new Amazon site, for example, used to be a Russian army base.

Labour costs are another attraction of Leipzig and the former East Germany. According to 2004 figures, says Bischoff, hourly rates including social security are e15.50 compared with e27.60 in the west, although the differential is narrowing.

The presence of low-cost economies on the eastern fringe has concentrated minds in Germany and the country is not only more competitive compared with these places but could even start to compete with the Benelux region for pan-European distribution work.

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