German companies do not relocate their operations to regions outside Germany as frequently any more. Between 15 and 25% even return to Germany, because gains due to lower wage costs are set off by lower quality and flexibility. A new software by the ISI Fraunhofer-Institute provides support in making the right decisions prior to relocation.
Germany seems to regain its attractiveness as an industrial location: just 15% of the German processing industry relocated parts of their production abroad in the period between the middle of 2004 and the middle of 2006. This finding is part of a study carried out on behalf of the union friendly Otto-Brenner-Stiftung. To this end, the Fraunhofer ISI in Karlsruhe evaluated the data collected in the course of its survey called “Modernization of Production” in which 1663 companies of the processing industry took part.
As was revealed by several analyses carried out in the metal producing and electronic industry, relocations abroad have lost importance while relocations back to Germany have remained at approximately the same level. Between fourth and sixth companies which relocated abroad relocated back to Germany after four to five years.
The preferred countries for relocation were the new EU member states, in particular the Czech Republic and Poland. China, which comes third in this respect, is by far the most important target for relocation outside the EU. Slower personnel costs are still the most important reason for relocation, in particular to the new EU member states. This discovery is underlined by the fact that companies in East Germany, where labour costs are lower than in the west, do more rarely relocate parts of their production abroad. Tax rates and subsidies, on the other hand, have lost in importance as reasons for relocation.
The study also showed how quickly relocations may sometimes fail: 85% of those coming back to Germany had carried out relocations four or five years prior to their return. “Those who returned had most of the time relatively quickly failed”, said Mr. Steffen Kinkel from the Fraunhofer ISI. In this context long-term negative developments in the countries to which German companies relocate are not playing a major role as far as failure is concerned. It seems that it is rather the fact that relocations are not adequately planned and too much concentrated on short-term cost saving which leads to failure.
As reasons for their return the companies themselves state less flexibility and supplying capabilities as well as quality problems with the production abroad. Thus, the decision to relocate must not solely be based on labour cost considerations, but should also take into account the costs for assuring quality and flexibility.
In order for companies to be able to compare different locations more profoundly in future, the ISI developed a software that can be licensed or purchased in combination with an introductory seminar from the ISI. The software is based on data which was collected among suppliers to the car manufacturing industry, but can in general also be applied to other lines of industry. Further information is available online. 