German Firms' Success Isn't Trickling Down
Job Fears Hurt Consumer Spending

By Peter S. Goodman
Washington Post Foreign Service
Wednesday, December 28, 2005

HAMBURG -- The view across the bustling port of this northern German city suggests that Europe's largest economy must be growing more prosperous. Cranes load and unload shipping containers, part of a flow of commerce that has made Germany the world's leading exporter, amassing a $200 billion trade surplus. Large German companies are counting strong profits.

But national unemployment sits above 10 percent, and the economy will have grown by only 1 percent this year, according to German research institutes. Consumer spending still accounts for nearly two-thirds of the economy, but Germans are feeling too anxious about the future to spend. Private consumption is expected to slide this year by 0.2 percent, according to the Organization for Economic Cooperation and Development.

"We're really afraid," said Simone Geue, whose family has opted to increase its pension savings instead of going out to eat and renovating a bathroom, even though her husband earns the U.S. equivalent of more than $110,000 per year as an executive at one of Germany's fastest-growing companies. They are hanging on to their 10-year-old Volvo. "You see so many people who have lost their jobs, who are not able to afford so many things, and you think about that. It makes you insecure. You never know what is coming."

The increasing German reluctance to spend affects the rest of the global economy, as well. Historically, Germany buys as much as one-fifth of French and Italian exports, so tight-fisted shoppers in Germany hurt profits and job growth in those countries, in turn diminishing the European appetite for the wares of the world, including those from the United States.

"Germany has become a problem for all of Europe," said Alfred Steinherr, head of macroeconomic analysis at the German Institute for Economic Research in Berlin.

The disconnect between the strong performance of German companies and the weakness of the domestic economy is particularly pronounced in Hamburg, a lakefront city of about 2 million people that has long been a monument to opulence.

Income per capita here is 10 percent higher than the national average. Brick mansions dominate the banks of the Elbe River in the city that has one of the largest collections of billionaires in Europe. Downtown boulevards are lined with luxury shops such as Prada and Hugo Boss, and cafes are full of fur-hatted people nibbling chocolate pastries. An old block of warehouses is being redeveloped into airy, glass-fronted apartments. A new philharmonic concert hall is under construction, funded in part by private largesse. Mercedes-Benz sedans make up the taxi fleet.

The city has carefully positioned itself to exploit a changing world economy. With exports the engine of the German economy, Hamburg's port is handling more container-shipping traffic bound for China than any other European city. Trade volume is growing by better than 10 percent annually at the port, with more than 6,000 jobs added over the past four years. Airbus, the pan-European aircraft manufacturer, is using its Hamburg factory to build key pieces of its new long-haul, ultra-wide-body jet, the A380. The city hopes next year to secure direct air links with Shanghai, its sister city.

"Hamburg is the winner from globalization," boasted the city's mayor, Ole von Beust, as he sat in his office at City Hall, a fairy-tale building of soaring spires and elaborate statuary.

But if Hamburg's status as a portal to global trade is a source of pride for the mayor, the basic force of capital flowing eastward in search of lower-cost labor is deepening unease among local workers.

"Here, all the developments are seen as negative things to be frightened of, not new opportunities," said Thomas Straubhaar, director of the Hamburg Institute of International Economics. "People are very hesitant, afraid about whether they can manage the future."

In many respects, their anxiety is rational. Hamburg's most successful companies illustrate how well many German firms are doing but also how much of this success is happening overseas, producing more profits for shareholders than jobs at home.

Hamburg is home to the cosmetics giant Beiersdorf AG -- owner of Nivea, the world's largest skin-care brand -- whose global sales should reach nearly $6 billion this year. More than 10 percent of its sales are now in Asia, with the China market growing by more than 50 percent annually. But Beiersdorf supplies foreign markets from a network of four dozen factories around the world, including operations in Poland, Thailand, Mexico and China. Its Hamburg plant employs about 1,500 people, roughly the same number as five years ago.

Out at the airport, Lufthansa Technik AG is something like the maintenance garage for commercial aircraft worldwide, overhauling engines and hydraulic systems. Global sales have grown about 8 percent every year for the past three, reaching nearly $5 billion this year.

About 12,000 people work for the company inside Germany, the same number as a decade ago, while almost 4,000 have been added at maintenance facilities in Beijing and Manila. The company's chairman, August W. Henningsen, said he envisions shifting more work to those lower-cost operations, declining to offer any reassurance to his Hamburg workforce.

"There's no safety guarantee," he said. "Only the professional and big companies that take a global approach will win this business in the future."

Airbus is a prime counter-example to the trend. In the past decade, the local workforce has nearly tripled, to 11,000, making the company the area's largest industrial employer. Another 500 jobs are expected to be added next year, propelled in part by a $10 billion order for 150 single-aisle aircraft from China, said Gerhard Puttfarcken, chief executive of Airbus Germany GMBH.

But as Puttfarcken acknowledged in an interview, more than half the value of what the local factory produces is from imported components and raw materials. Meanwhile, automation is limiting the demand for workers.

"The more you look to the future, the less you need," Puttfarcken said.

All of which has translated into anxiety among retailers, both in Germany and across Europe, whose livelihoods depend on German spending.

Where Americans are inclined to pull out a credit card and keep spending when hard times come, Germans have a cultural predisposition against debt. They are more inclined to make a deposit at the bank than visit the shopping mall, with the average family now saving 11 percent of its income.

With so many people feeling insecure about their incomes, local merchants are struggling, having lost many of their middle-class customers.

At AST Automobile, a dealership in the suburbs, partner Uwe Hamman recalled the lucrative days of the 1980s, when he dealt only in Mercedes-Benz, BMW and Porsche and sold about 100 cars a month, netting average profit of nearly $5,000 per vehicle. Today, he is lucky to sell 20 cars in a month, mostly economy brands, such as Toyota and Opel. His profit has dropped to as little as $750 per car. His sales staff has shrunk to three from 10.

"The business gets worse every year," he said.

Downtown, Dietmar Kirsch, owner of a chain of menswear stores, explained how he recently shut down one shop in a middle-class neighborhood to focus instead on his lakeside outlet catering to the ultra-rich, with tailored English tweed sports coats and Italian cashmere sweaters selling for $1,000.

"Nobody has any money to spend except the rich," he said. "The barons and the earls, these people are still buying. We are the tailor for the executives, for the upper class, who have the necessity of being well-dressed. When the papers every day talking of everyone in Germany becoming poor, nobody feels like spending money."