BAYRY Bayer Aktiengesellschaft (PK)

By William Boston and Eric Morath 

BERLIN--As corporate America debates whether companies should consider other constituencies than just their shareholders, Germany offers an example of what a new approach might look like for labor.

In Germany, where workers enjoy high labor protections and a say in management decisions, companies such as Volkswagen AG and Bayer AG have announced plans this year to cut tens of thousands of jobs.

But rather than resorting to mass layoffs or plant closures, they will often reach for instruments created by government and unions that allow executives, often with considerable state support, to weather economic storms, or reduce their workforces through voluntary methods.

Yet for influential U.S. CEOs like JPMorgan Chase & Co.'s James Dimon, who recently vowed to become more stakeholder and less shareholder focused, Germany isn't just a model. It is also a cautionary tale. Sparing staff in a short downturn can allow companies to ramp up activity quickly when demand rebounds without having to hire and train new workers. But it can also slow necessary adaptations when companies are faced with structural changes, resulting in some businesses sticking to outdated business models for too long, economists and management experts say.

Among the German companies who said this year they will slash tens of thousands of jobs are auto giant Volkswagen, car parts suppliers Continental AG and Robert Bosch GmbH, pharmaceutical company Bayer, electronics group Siemens AG, chemicals maker BASF AG, and business software maker SAP SE.

However, most of them will use short-time work, early retirement, and other instruments to reduce their workforce or even keep staff on with government support rather than axing jobs as U.S. auto giant General Motors Co. did recently when it decided to shut five plants in the U.S. and Canada.

"There is a social and cultural view in Germany that is different than the U.S. but also a system of governance where the interests of the employee is more in the foreground," said Craig Smith, chair in ethics and social responsibility at Paris-based business school Insead.

Volkswagen took action early. In 2016, the company said it would shed 23,000 administrative and factory jobs in Germany by 2025. Hit by slower demand in China and Europe, Volkswagen slashed production in its German factories by 15% in the first half of this year and announced another 4,000 job cuts. When the restructuring is completed, Volkswagen will have shed 25% of its German workforce from its 2017 level.

But it won't resort to forced layoffs. Instead of shutting factories, Volkswagen is retooling three plants to make electric cars. And it is shrinking the workforce long term by not replacing the large numbers of baby boomers who are approaching retirement age.

Bosch employs 50,000 people world-wide just in diesel components businesses, 15,000 of them in Germany. Management is negotiating with the IG Metall trade union to reach an agreement on cutting staff.

Bosch CEO Volkmar Denner said recently that the company is "doing everything to do this in a way that is socially responsible," saying the company would use work time accounts, severance programs, early retirement, and reducing the ranks of temporary workers.

Notwithstanding the cultural differences, German managers have little leeway in how they treat staff. Since the 1970s, by law the supervisory board of any company with more than 2,000 employees must be made up of equal numbers of shareholder and labor representatives, which has given trade unions enormous decision-making influence.

Many of Germany's biggest corporations have brokered deals with trade unions to allow them to reduce staff through various instruments in exchange for agreements to ban forced layoffs. Bayer, for example, is cutting 12,000 jobs by the end of 2021, but resorting mainly to voluntary methods such as early retirement and buyouts that in some cases offer up to five years of severance pay.

"Such voluntary offers are always expensive because they have to be attractive, otherwise no one would take them," said Georg Müller, Bayer's Germany human resources chief.

The upside for Bayer, he said, that it gives the company more control over managing the staff reductions and reduces the confrontation between management and workforce, preventing costly and disruptive strikes.

Alternatives to redundancies and plant closures--which are all possible under German law but can be slow and costly--have at times helped companies be more rather than less nimble in reacting to rapid fluctuations in demand.

In 2009, as Germany's gross domestic product collapsed in the wake of the Lehman Brothers closure, many companies resorted to short-time work--sending employees home but keeping them on the payroll thanks to wage subsidies.

Hours worked per employee declined 3.8%, but when demand rebounded a year later, they could skip a lengthy hiring and training process. Despite a 5-point drop in GDP, unemployment rose less than a percentage point, while in the U.S., it rose to a postrecession peak of 10% in October 2009 from a prerecession low of 4.4% in the spring of 2007.

Another tool that has become popular in Germany to manage capacity is working-time accounts, which are typically negotiated as part of labor contracts. With these accounts, workers can bank overtime pay during good economic times and then tap those accounts when their hours are cut during economic downturns.

But the German way also bears risks.

"If you have a structural change--a business model change--then short-time work could prolong a crisis by avoiding making the necessary adjustments," said Enzo Weber, an economist at the Institute for Employment Research in Nuremberg, Germany.

Another limitation is that socially considerate alternatives to payroll cuts work best in deep and short downturns but can prove excessively costly--to companies or to the state--in shallow, protracted slumps when capacity needs to be durably reduced.

"The institutions are set up to create even more flexibility" to retain workers during slowdowns, said Gunther Friedl, dean of the Technische Universität München School of Management in Munich. "The risk is if you keep too many people, and the losses pile up to the point of no return, that could result in bankruptcies."

Germany's finance minister hinted last month that it had a war chest of EUR55 billion ($61 billion) to inject into the economy to buffer the effects of a downturn.

German GDP shrunk in the second quarter and the country's central bank warned in its most recent monthly report that the country may already be in a recession. How long it could last is anyone's guess. There is no sign or a resolution to the global trade disputes and the slowdown in China that are weighing on global demand--a particular concern for an economy that is highly dependent on exports.

"Businesses should be preparing for a recession the next one to two years," Mr. Friedl said. "Depending on trade fights, it could be more or less severe."

Ruth Bender

in Berlin contributed to this article.

Write to William Boston at william.boston@wsj.com and Eric Morath at eric.morath@wsj.com

(END) Dow Jones Newswires

September 09, 2019 05:44 ET (09:44 GMT)

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