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German Businesses Head for Lower-Cost Shores
BusinessWeek ^ | 12/23/02 | Jack Ewing

Posted on 12/23/2002 6:35:22 AM PST by Incorrigible

German Businesses Head for Lower-Cost Shores

As it becomes easier to operate in Poland, Hungary, and Czech Republic, even smaller companies are starting to relocate

 

Several times a day, a barge slowly makes its way across the Oder River from Poland to Germany, carrying a cargo upon which much of Berlin's economy rests. Literally. Aboard the vessel are freshly washed and pressed bedsheets bound for Berlin's finest business hotels.

Not that German workers aren't capable of doing laundry. In fact, Fliegel Textilservice, an overnight-linen service for Berlin hotels such as the five-star Adlon, is German-owned, and it is equipped with German-made industrial-washing equipment. But Fliegel President Hubert Emming believes that northwest Poland is a better place than Germany to do business, even if the laundered pillowcases often have to travel partly by ship to avoid traffic jams at the border. Polish workers typically earn less than one-fifth the wages of their German counterparts. Moreover, Fliegel's 250 workers in Nowe Czarnowo rarely call in sick, and turnover is low. "The desire to work is a lot stronger than in Germany, that's for sure," says Emming.

If things keep going the way they are, Germany will be sending out more than just laundry. Managers are deeply discouraged by what they consider to be unfair new tax laws planned by the government of Chancellor Gerhard Schroder. That only adds to the current disadvantages of doing business in Germany, such as high wages, rigid labor rules, and a smothering bureaucracy. As a result, according to a November poll by the Berlin-based Working Group of Independent Entrepreneurs, 7% of companies surveyed, ranging from small businesses to major corporations, have already decided to leave Germany out of dismay over Schroder's policies. An additional 32% are thinking about it.

No doubt some managers are simply in shock at the Schroder government's unexpected tax hikes. Still, there's a real danger that German businesses will conclude that their home market is just not a good place for their capital. Domestic investment is on track to decline in 2002 for the third year in a row, and foreign investors are finding more attractive places for their money. "I'd be very surprised to hear of any company coming to Germany to build a new production facility," says Rainer Mück, tax director for General Electric Co.'s ( ) German unit.

Multinationals such as Siemens ( ) and DaimlerChrysler ( ) have been building up their overseas operations for years, sometimes because costs are lower but also as a way to open up new markets. It's clear, though, that Germany is losing industrial jobs simply because it is so expensive to do business there. In the 1980s and '90s, Germany lost much of its textile and consumer-electronics industry to Eastern Europe and Asia. Now, in a year when Germany has a 9.7% jobless rate and more than 4 million unemployed people, the country is bracing for a new exodus that could damage whole industries as well as the vaunted small-business sector, the backbone of the economy. "This has been the trend since 1990, but it accelerated in the last couple of months," says Diether Klingelnberg, president of the German Machinery & Plant Manufacturers Assn.

This time, signature industries such as machinery and banking could be affected. In a December survey conducted by Klingelnberg's group, 54% of German machinery makers said they plan to shift some production abroad in the next two years, compared with 24% who have done so in the last two years. Already, Deutsche Bank's ( ) investment banking operations are based in London, where employees pay lower income taxes.

The mighty German auto companies won't abandon the country soon, but their suppliers already are: In November, Stuttgart-based Bosch announced it will move starter production to Miskolc, Hungary, where a worker costs an average of less than $4 an hour, compared with $26 in Germany. Service industries such as transportation and distribution are also vulnerable as it becomes ever-easier to operate just over the border in Poland, Hungary, and the Czech Republic.

Even smaller companies are starting to bolt. Earlier this year, Grieshaber Transportation & Logistics, which provides trucking, packing, and other services for corporations, planned at first to hire 26 workers near headquarters in Bad Säckingen, Germany. But, discouraged by German red tape, the company instead expanded just across the border in Hombourg, France, where it invested $6.5 million.

Co-owner Heinrich Grieshaber says the outfit was able to acquire a piece of land in Hombourg, get building permits, and erect a new building within six months. German officials would have taken months longer, says Grieshaber. "We've always seen Germany as our home, but not anymore. There's too much bureaucracy," he adds. His company already is scouting real estate in the Czech Republic. Grieshaber sees little hope that conditions in Germany will improve and faults the chaotic policymaking of Schröder's government, which, since winning national elections in September, has scrambled to plug a budget gap with dozens of ever-changing tax proposals. "Policy has to be predictable," he says.

Germany is exporting white-collar jobs, too. Early this year, Berlin-based drugmaker Schering ( ) moved research and development for its Special Therapies business, which focuses on cancer, multiple sclerosis, and heart disease, to Montville, N.J. Schering wanted to be closer to the universities that produce leading-edge research--a backhanded slap at German academe. Schering also feared that Germany's 48.5% top tax rate would make it hard to attract and retain the best scientists. Taxes spook other German businesses, too. Schering CEO Hubertus Erlen doesn't predict a panicked rush for the exits by German companies: "You won't hear a big bang," he says. But he warns of a slow and steady loss of investment unless conditions improve.

In principle, there is nothing wrong with exporting jobs to developing countries. Living standards in those places rise, which in turn creates new markets for wealthy nations. In fact, the Polish hotel-laundry business created a new customer for Herbert Kannegiesser, a maker of industrial-washing equipment in the north German city of Vlotho. But company President Martin Kannegiesser, who also is president of the machinery and auto-industry association known as Gesamtmetall, frets that jobs lost in Germany aren't being replaced by new ones. "That's the big danger," says Kannegiesser.

Kannegiesser continues to produce almost exclusively in Germany: No other country in the world offers such a concentration of engineering expertise. Kannegiesser says it is unlikely he'll relocate, but he won't vouch for other businesses. "At some point," he says, "the weaknesses may start to outweigh the strengths." More and more German managers think that point has already been reached.


By Jack Ewing in Frankfurt
 

Not for commercial use.  For educational and discussion purposes only.


TOPICS: Business/Economy; Foreign Affairs; Germany
KEYWORDS: czechrepublic; daimlerchrysler; gerhardschroder; gesamtmetall; hungary; poland; siemens
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Now that Poland and the rest of Eastern Europe is part of the EU, Germans can expect to hear a "giant sucking sound" south and east.
1 posted on 12/23/2002 6:35:22 AM PST by Incorrigible
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To: Incorrigible
Sounds like California.
2 posted on 12/23/2002 6:37:42 AM PST by AD from SpringBay
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To: Incorrigible

German Tax Rates

Personal Income tax rates in Germany are calculated on the basis of a mathematical formula. For 2002, the following tax schedules are applicable:

Single Taxpayers:

" a zero tax rate on taxable income up to € 7,235
" a marginal tax rate rising form 19.9% to 23% on taxable income between € 7,236 and € 9,251
" a marginal tax rate rising from 23% to 48.5% on taxable income between € 9,252 and € 55,007
" a marginal tax rate of 48.5% on taxable income over € 55.007

Married Taxpayers:

" a zero tax rate on taxable income up to € 14,470
" a marginal tax rate rising from 19.9% to 23% on taxable income between € 14,472 and € 18,502
" a marginal tax rate rising from 23% to 48.5% on taxable income between € 18,504 and 110,014
" a marginal tax rate of 48.5% on taxable income over € 110,014

As of the year 2001, Germany has a new system for the taxation of business income. The corporate tax rate is 25%. In the case of individuals and partnerships, the general income tax rates are lowered in accordance with the above rates. In addition to this tax reduction, the German trade tax is taken into consideration in determining the income tax.



Up to the the end of the year 2000 German corporate income was taxed at 40% if the income was retained and at 30% if the income was distributed. Foreign corporations with income from German operations were subject to a tax of 40% whether or not the income was distributed.

3 posted on 12/23/2002 6:43:57 AM PST by Oldeconomybuyer
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To: Incorrigible
One of Germany's main exports now is talented, ambitious young people. Go to New York, L.A., London or even Syracuse where I live and you'll find many of them. Germany is in serious trouble.
4 posted on 12/23/2002 6:45:41 AM PST by jalisco555
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To: jalisco555
The rest of Euro countries are soon to follow on their same footsteps.

This is the result of the cradle to grave welfare.

Yes they earn big bucks so that they can pay for all these wefare items.

You only get what you pay for and those you elect.

Stop your whining, it's your choice.

5 posted on 12/23/2002 6:56:36 AM PST by chiefqc
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To: AD from SpringBay
Relative to the US, the the top tax rate of 48.5 percent is not that high. I wonder if there are other local taxes or social security taxes that are not included in this figure.

Consider: Our top federal rate is 36%. The Feds start phasing out deductions at around $160,000 per individual return. Therefore, the top rate rate really becomes around 40%. If you are unlucky enough to live in California or some other hight tax state, your marginal rate then becomes around 48-50 percent, plus all the other taxes you pay. The Germans also have a reasonably efficient health care system as a benefit of their taxes. Who are the bigger socialist? The Germans or us?

6 posted on 12/23/2002 6:58:46 AM PST by eeman
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bump
7 posted on 12/23/2002 7:35:25 AM PST by Prodigal Son
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To: chiefqc
The rest of Euro countries are soon to follow on their same footsteps.

Yep. I've met several young French people here for the same reason.

8 posted on 12/23/2002 7:37:33 AM PST by jalisco555
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To: eeman
The real issue in Germany is the total lack of new private sector job creation. It isn't just taxes but the whole socialist structure which prevents new business formation, old business destruction and the kind of economic flexibility that we take for granted here.
9 posted on 12/23/2002 7:40:03 AM PST by jalisco555
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To: eeman
well, you are wrong. That is only the tax rate, add to thata healthinsurance rate (mandatory) of 15.2 %, Social security of 19.5 %, Vat of 16% on all purchases, Ecology tax of 8 % on all purchases, 80 cents fuel tax per liter, a new tax on electricity, natural gas ,etc.,etc. After all that you get to the tax rate. By the way, this is only what the worker pay,the employer is taxed as well. Would you like to explain the "free health insurance" again please? Noithing is free Hillary.
10 posted on 12/23/2002 7:51:10 AM PST by americanbychoice
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To: eeman
"Our top federal rate is 36%. The Feds start phasing out deductions at around $160,000 per individual return. Therefore, the top rate rate really becomes around 40%."

No, that's not how it works. Your top possible tax rate doesn't go UP when you phase out deductions. Deductions only LOWER your tax rate.

Also, your numbers are out of date.

Old pre-2001 U.S. Tax Code

Bush Plan

Single

Single

$0

$27,050

15%

$0

$6,000

10%

$27,050

$65,550

28%

$6,000

$27,050

15%

$65,550

$136,750

31%

$27,050

$136,750

25%

$136,750

$297,350

36%

$136,750

--

33%

$297,350

--

39.6%


11 posted on 12/23/2002 8:11:28 AM PST by Southack
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To: Southack
I appreciate your explanation about the additonal taxes. If you read my post more closely, I was wondering if there were additional taxes that were not mentioned in the original post. Your post is very informative about those additonal taxes.

What I do not appreciate is your obnoxious insult. There is nothing implying that I think that we should have government run/financed healthcare healthcare or that healthcare should be "free."

12 posted on 12/23/2002 10:28:11 AM PST by eeman
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To: Southack
Thank you for supplying the tax table. I respectfully diagree with your assertions about deductions, however. In the current tax scheme, itemized dections start phasing out incrementally as your income rises above 129,000. Similarly, personal exepmtions start phasing out. If you cannot use the deductions, they cannot lower your taxes. Thus you end up paying more taxes. This is equivalent to being bumped into a higher marginal rate but without telling you.
13 posted on 12/23/2002 10:44:32 AM PST by eeman
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To: americanbychoice
Please see post number 12. It was meant for you, not Southack
14 posted on 12/23/2002 11:08:45 AM PST by eeman
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To: eeman
The Germans also have a reasonably efficient health care system as a benefit of their taxes. Who are the bigger socialist? The Germans or us?

Healthcare is NOT a benefit of their taxes. They pay for it seperately (also their employer pays part). Then you questioned who the bigger socialists are. Just pointing you straight, no insult intented, just responding to your post. :)
15 posted on 12/23/2002 11:32:25 AM PST by americanbychoice
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To: eeman
"I respectfully diagree with your assertions about deductions, however. In the current tax scheme, itemized dections start phasing out incrementally as your income rises above 129,000. Similarly, personal exepmtions start phasing out. If you cannot use the deductions, they cannot lower your taxes. Thus you end up paying more taxes. This is equivalent to being bumped into a higher marginal rate but without telling you."

If Joe Above-Average makes $150,000 and gets taxed on every penny of it, then he pays no more than 33% of that $150,000 to the federal government.

If he has $2,000 worth of deductions, then he pays no more than 33% of $148,000 in taxes (i.e. 32.56%), a rate that is LOWER than the top bracket of 33%.

So if ALL deductions are phased out or banned, you still don't pay MORE than the top 33% (for income tax). Deductions can only LOWER your percentage below that of your official tax bracket, they do NOT raise that official percentage if they are banned.

16 posted on 12/23/2002 1:17:18 PM PST by Southack
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To: eeman
"Relative to the US, the the top tax rate of 48.5 percent is not that high."

I disagree. Compare people in the U.S. earning between $55,000 and $137,000 to those in Germany. The tax rate for that bracket in the U.S. is no more than 25%. In Germany, the tax for that bracket is 48.5%.

In other words, their income tax alone is roughly DOUBLE the taxes that Americans pay.

17 posted on 12/23/2002 1:55:01 PM PST by Southack
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To: Incorrigible
. . . Germans can expect to hear a "giant sucking sound" south and east.

Somebody call Ross Perot! We've found his "giant sucking sound!"

18 posted on 12/23/2002 2:08:35 PM PST by 1rudeboy
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To: Southack
Yeah, there's no argument there. Looking at that table in this discussion, those German upper-middle-to-high income earners, who are by no means "rich," are truly getting screwed.

I also must admit your point (cough, cough) about phasing out deductions. For what it's worth, not related to current disucssion, the income limitations on deductions either phases out or will start phasing out by 2006 under the Bush Tax plan

19 posted on 12/23/2002 2:52:46 PM PST by eeman
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To: eeman
No sweat. I'll spot you this one if you forgive my next misunderstanding.

In the spirit of Christmas, of course!

20 posted on 12/23/2002 2:56:59 PM PST by Southack
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