Comeback in the West
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In New Delhi last week, Indian government officials pored over plans for a $150 million steel mill. Both Britons and Americans had wanted to build it, but lost out in the bidding. The winner: a group headed by Germany's famed old munitions maker, Krupp. In the busy Brazilian cities of Rio and Sao Paulo, bars were crowded with German businessmen speaking painfully correct Portuguese, while not far away another huge steel plant was being built by Germans. In Mexico, University City bustled with preparations for Germany's first big Latin American trade exposition since the war, to be opened next month by leading Ruhr industrialists. Around the world, wherever there was a sale to be made, similar events reflected the postwar world's No. 1 economic phenomenon: though pulverized by the armies of East and West a short nine years ago, West Germany today is out to conquer the conquerors in the field of trade.
Some of the conquerors themselves are alarmed at the trend. U.S. businessmen, who have found themselves undersold in foreign markets by 40% or more on such items as X-ray equipment and cement-making machinery, are getting out their storm warnings. Some British firms are so worried that they are already bluntly reminding their customers that the Germans who today are winning export business away from the British are the" same ones who yesterday made the V-25 that bombed London. Headlined Lord Beaverbrook's London Daily Express: THEY'LL BEAT YOU YET, THESE GERMANS.
Vital Ingredient. West Germany throbs with its fabulous recovery while the East Germans under Soviet rule are on the brink of starvation. In Duesseldorf, Munich and other cities, where only a few years ago the ragged populace scrabbled through the rubble in desperate search for a single potato, rebuilt hotels teem with prosperous travelers, and the air is filled with shop talk and cigar smoke. In the Ruhr, bomb-shattered steel mills glow once more through the long winter nights. Germans who were once glad to sell their prized possessions for a few packs of cigarettes now have one of Europe's strongest currencies in their pockets. Shops are loaded with consumer goods and crowded with substantial-looking buyers. In the port of Bremerhaven, once severely damaged by bombers, the luxury liner Gripsholm, recently leased from Sweden, set sail last week for the U.S. on the first transatlantic voyage of a German-flag passenger ship since the war.
Germany's rebirth is the kind of economic miracle Americans can understand. At a time when other European nations were leaning towards socialism, Germany plumped for free enterprise. Its chief ingredient: hard work. "Other people," says an old German saw, "work to live. The German lives to work." It was Germany's cigar-smoking Economics Minister Ludwig Erhard who gave that national characteristic a free hand. A massive 57-year-old economics professor from the University of Munich, Erhard had for years preached the theme: "Turn the people and the money loose, and they will make the country strong." As a result, the free world is now blessed, on the one hand, by its strongest European bulwark against Communism--and confronted, on the other, with a new trade competitor who has come up so fast that nobody knows quite what to do about it.
The People's Car. Nowhere is the resurgence of German men and machines more evident than in Germany's No. 1 auto company, Volkswagenwerk GMBH, and its boss, Heinz Nordhoff, 55, a compact (5 ft. 10 1/2 in., 165 Ibs.) man with the steady eyes of a production whiz and the courtly manners of a diplomat. Six years ago, both Nordhoff and Volkswagen were part of the wreckage as Germany itself lay in the gutter of the world.
The Volkswagen plant in the little North German town of Wolfsburg, about 100 miles west of Berlin, had been built by Hitler to turn out "people's cars" for the 1,000-year Third Reich. In World War II it was 60% destroyed by Allied bombs. Rain slashed through the holes in its roof after V-E day while a motley crew of 8,000 refugees and former soldiers grubbed about in the ruins. Half were cleaning up rubble; the others were virtually hand-tooling a few vehicles for the British occupation army. Falling bricks were a constant menace; live wires lay tangled in the mess. The British occupiers offered the remains of the equipment to British automakers and other businessmen of the Commonwealth. They all turned it down. Says Heinz Nordhoff: "Volkswagen didn't even smell good enough for the Russians," whose occupation zone begins only ten miles away.
Nordhoff looked little better than the plant. A lifelong automan, he had risen to the top in General Motors' German subsidiary, Adam Opel, A.G., and bossed its big truck plant during the war. At war's end, he had lost his job, his money and most of his belongings. Gaunt and hungry, Nordhoff scraped along for two years on handouts from friends; because he had been a top executive, he was forbidden to work in the U.S. zone at anything except manual labor--and even such jobs were not to be had. But the British asked him to boss Volkswagen in their zone.
Still a G.M. man at heart, Nordhoff was scornful of Volkswagen and the shattered Hitlerian dream it represented. Says he: "I wanted nothing to do with that cheap competition." The British were insistent; they wanted him to take over the plant to provide employment for the depressed Wolfsburg area and produce vehicles for their army. Pressed by the hard facts of occupation life, Nordhoff agreed. Said he: "The future begins when you cut every tie with the lost past."
The Model T. If the British could have foreseen how Nordhoff would drive their own cars off the export markets, they might never have given him the job. By last week, Volkswagen estimated it was the fourth biggest automaker in the world, led only by the U.S. Big Three. Even competitors conceded that Nordhoff was probably the best automan in Europe.
Last year Nordhoff's 20,000 employees turned out 180,000 buglike Volkswagens at the rate of one every 80 seconds, sent them beetling into the markets of 83 foreign countries. The two-door, four-passenger Volkswagen (sedan, convertible and sun roof), powered by a four-cylinder (30-h.p.), air-cooled engine in the rear, has been a fast seller in almost every market it has invaded.* Peppy (top speed: 68) and economical (32 miles to the U.S. gallon), the Volkswagen has become the postwar model T. It outsells all other cars in five European nations, and is so popular that stiff import restrictions have been slapped on it by Belgium, France and Italy. On the Autobahnen of Germany, nearly one out of every two cars is a Volkswagen. In restriction-free Switzerland, Volkswagen sales lead all other makes, including American, by a wide margin. For the U.S. market, Volkswagen Boss Nordhoff knows that his car is too small and relatively too expensive ($1,500), except for two-car families; nevertheless, he hopes to triple his U.S. sales to around 4,000 this year. Says he: "Some years ago, British and French manufacturers said we didn't have a chance. Today, Morris and Renault are making 400 cars a day and we are making 750."
But Heinz Nordhoff is not yet satisfied. Last week, just before taking off on a trip to the Far East to check on car sales in India, Indonesia, Siam and Ceylon, Nordhoff made a last-minute inspection of Volkswagen's third production line at Wolfsburg, now coming into production. It will boost output from 750 to 1,000 cars a day. On top of that, a new distributor-owned assembly plant in Belgium (needed because of import restrictions) this week started up. And Australia, which last week got its first Volkswagen--the 200,000th exported since 1947--will soon have an assembly plant of its own, with an ultimate capacity of 1,000 cars a month.
Stiff Shock. How was the Volkswagen miracle performed? When Heinz Nordhoff took over in January 1948, he moved a cot into one of the plant's drafty, rat-ridden offices and started on a seven-day week with only a few hours off for sleep. Believing that "labor and management must be unified into one big group that depends on the same success," Nordhoff called a meeting of his shabby work force. "I'm afraid I gave them a stiff shock," says he. "I told them their working methods and production were miserable. It was taking us 400 man-hours to produce one car. I told them we would cut this to 100 hours. They laughed at me. But today we do that."
Because of his years of American training in G.M.'s Opel, Nordhoff did not wear the pompous, punctilious air of German industry's traditional Herr Generaldirektor. He spent hours on the production line, talking to workers and explaining what he was trying to do. When he arrived, only 700 cars a month were being built, and nobody had the faintest idea how much they actually cost. Nordhoff installed a rigid cost-accounting system.
Progress was slow at first. To get men, he had to build 4,000 housing units. To keep them, he gave them an extra meal a day, over and above their meager rations. He cannibalized damaged machines, rounded up 1,612 gear cutters, milling machines, and other tools that had been taken out during the war and stowed in nearby farm buildings. Then he turned to the Volkswagen itself. It was, said he, "a poor thing, cheap, ugly and in efficient." Its engine had a life of only 10,000 miles and a noisy death rattle from birth. Its brakes and springing were bad, its power low.
Austerity Must Go. Actually, only 210 of Hitler's Volkswagen, designed by Ferdinand Porsche, were made before the plant was converted to making German army jeeps and other war gear.* Nordhoff put his designers to revamping the old Volkswagen, had some of the original Porsche designs redrawn ten times. The engine was made quieter, its life was boosted and horsepower was raised from 25 to 30. Hydraulic brakes and shock absorbers were installed. "The most important job," says Nordhoff, "was to take the car out of the atmosphere of austerity. People said, 'We like it technically, but we can't afford to be seen in it.' Austerity touches neither the heart nor the pocketbook." (This view has since been borne out by the fact that 80% of Volkswagen's German customers prefer to pay an extra $200 for the better-looking, better-engineered deluxe export model rather than buy the stripped-down standard version for $1,038.)
Pressure Vacuum. To boost output, Nordhoff started what he calls pressure-vacuum production. Under this system, he keeps materials flowing heavily into his plant, insists on immediate delivery of cars to customers. The combination of large stocks of materials on the inside and no reserve of cars on the outside, says Nordhoff, exerts a psychological pressure on workers to produce faster. In six months, production almost tripled, to 1,800 cars a month; by mid-1949, Nord hoff had so much faith in his product that he arbitrarily ordered production doubled. Says a Volkswagen executive: "Nordhoff is a gambler. But he's the kind of gambler who sees to it that before he puts his money down, he has long odds in his favor."
Nordhoff missed no trick to make his odds still better. He set up Volkswagen assembly lines in Ireland, South Africa and Brazil, lined up sales and service stations throughout Europe with a fixed-price system of repairs. For dealers, he put out a sales manual with such hints as: "Treat the customer's car like a raw egg when he is around; also check his credit rating . . ." The manual identifies 41 varieties of potential Volkswagen customers, including absentminded professors. "You can sell even a bully a Volkswagen," it says, "but above all, don't incite him." To customers who are able to drive their Volkswagens 62,000 miles with no major repairs, Nordhoff offers gold-plated watches (28,000 have been handed out to date).
As Volkswagen's fame grew (half a dozen independent magazines are now published for Volkswagen owners), so did its versatility. Dutch farmers figured out a way to run their milking machines with the car's little engine; a German company used it to power speedboats. Heinz Nordhoff himself started to diversify, and added truck, bus, station-wagon and ambulance lines. He also planned a larger car, but junked it when he realized that much of Volkswagen's popularity stems from the fact that its model does not change annually, hence has a high resale value. Says Nordhoff: "This doesn't mean we're going to make Henry Ford's mistake with the model T. We will keep altering and improving the present model, making it better and more attractive. When the time comes for a completely new model, we will have one."
Skin & Hair. As long as Heinz Nordhoff is running the show, that is a safe bet. An engineer-salesman who combines the drive (and fluent English) of an American with the perseverance of a German, Nordhoff is sparked by "a passion to build and sell automobiles. It has me by the skin and hair."
Born (1899) at Hildesheim in Lower Saxony, Nordhoff was the second of three sons of a small-town banker who moved his family to Berlin when his bank failed in 1910-11. Young Heinz attended a technical high school, never doubted that he would be an industrial engineer. After serving as a German private in World War I (he was shot through the knees). Nordhoff became an industrial apprentice in Germany's famed BMW auto company. He soon decided that an American company was a better place for a young automotive engineer to learn his trade. In 1929 he applied for a job at Germany's Opel auto company, which had just been bought by General Motors. He was soon confronted--and impressed--by American casualness and fast action. Appearing for an interview, Nordhoff found his prospective boss in bed with a hangover. When could Nordhoff start work? In a couple of months, said Nordhoff. Said the American: "Come next week."
Nordhoff worked seven days a week (first job: writing service manuals), barely took time out for a honeymoon with his childhood sweetheart, pretty, blonde Charlotte Fassunge, whom he married in 1933. He spent his vacations working on Opel's production line, getting to know the workers and their problems, was soon making occasional trips to the U.S. to learn American sales and production methods firsthand. "Work was not a duty at Opel," he recalls. "It was a sporting event to show what you could do." In 1940 Nordhoff got the big job of running Opel's new truck factory in Brandenburg, largest in Europe--and with it the task of dealing with the Nazis. Though he turned out 3,000 to 4,000 trucks a month for the German army during the war, Nordhoff never joined the party himself.
Big Game. At Volkswagen, Nordhoff is paid modestly by U.S. standards (about $25,000 a year). He has long since moved off his office cot and into a modern Wolfsburg house, supplied by the Volkswagen company, where his wife and two grown daughters live in a manner not much different from automakers in Detroit. He collects modern art (latest acquisition: a Renoir), serves fine wines to his guests. Up at 6:30, he drives himself to work in a Volkswagen, spends his evenings reading business correspondence and studying Volkswagen problems all over the world. While most of his traveling is on business, Nordhoff found time last year for a safari in Africa (bag: two lions). It was also on this trip that he decided against making a big car, simply wired: "Stop all work on new project."
Nordhoff has not, since 1950, publicly reported Volkswagen earnings; but they soared from an estimated $2,500,000 before taxes in 1948 to $7,500,000 in 1949, and $12,500,000 in 1953 (on sales of $100 million). Volkswagen, however, has no stockholders to reap a reward: the company's ownership (it is now in government custody) is a mystery still to be solved by the courts.
The company was originally financed in 1938 by some 300,000 Germans, who poured $70 million of their savings into the project in hopes of eventually owning a people's car. A band of the original subscribers are suing to get their stake back, either in cars or money, and have recently won a tentative court decision that they have a legitimate claim. Until that suit is settled, there is little hope of finally settling Volkswagen's ownership.
Nordhoff is scornful of the original subscribers' claims. Says he: "They put their money and their trust in the 1,000-year Hitler Reich. Why should they profit through this trust while others lost all they had?" Nevertheless, he has prudently put aside an estimated $50 million against an adverse court decision.
Nordhoff is not only contemptuous of Germany's political past; like other businessmen, he is helping its economic future by discarding the old stratification of German industry, instituting closer relations between labor and management. Under Germany's "co-determination" laws, certain industries are required to have labor representatives on their boards of directors. Nordhoff carried this further by starting a profit-sharing plan, which is spreading to other companies. This growth of industrial democracy is one of the big reasons why Communism has made such little progress among West German workers.
In West Germany's comeback, many a new name besides Nordhoff's has bobbed to the top of industry, e.g., Steelman Willy Hermann Schlieker, whose mills turned out $12 million worth of goods last year; Wilhelmshaven's typewriter king, Joachim Wussow, who exports portables to 139 countries.
Many of the oldtimers, e.g., Krupp and Ernst Leitz (Leica cameras), are also back in business. Some units of the old I.G. Farben chemical combine, broken up after the war, are bigger than ever. And while the old cartels have been officially banned, price-fixing and trade agreements still play an important part in the German economy. A strong movement is afoot to legalize cartels again, despite the opposition of Economics Minister Erhard and the evidence of how free competition rebuilt the country.
One for Ten. West Germany's postwar comeback started haltingly, and in little ways--a bicycle repairman setting up shop again in Frankfurt, a Munich textile-man unearthing a few bolts of cloth and fashioning some crude jackets for his friends and relatives. In 1946 the West German production index stood at a mere 33-7 (1936: 100); in 1947 it inched up to 43. In 1948, came the big step that revived the German will to work. The step was currency reform, ordered by the Allies and administered by Economics Minister Erhard.
Currency reform (one new mark for every ten old ones) wiped out the savings of thousands, but it ended the currency inflation that was threatening the country. It gave Germans a currency in which they could put their faith. Under the stimulus of Germany's own new money--plus the first of $3.5 billion in Marshall Plan funds from the U.S.--the production index jumped to 76 in 1948; before mid-1950, when the Korean war boomed it still higher, production in West Germany passed the 1936 level for all of Germany and last year it reached 154%.
The Penny Pincher. To make the economy grow, Economics Minister Erhard ended rationing, removed controls, gave industry tax concessions to permit rebuilding and expansion. To spur exports, he instituted a system of tax rebates, waiving one sizable tax altogether when goods were sold directly abroad. Keeping the economy on an even keel was the job of wispy Finance Minister Fritz Schaeffer, 65, a Bavarian-born lawyer who had served in various medium-level government jobs until jailed by Hitler. Schaeffer pinched pennies and levied a 4% turnover tax (i.e., a levy on all sales of goods at every level) which, with customs and excises, still accounts for the bulk of government receipts. He was also helped by the U.S. Army, which was pumping $200 million a year, through its payrolls for occupation troops, into the German economy. Schaeffer made sure that he got every penny he could from the G.I.s; they even had to pay the standard German dog tax on their pets. As a lesson for hoarders, Schaeffer ostentatiously bought his cigarettes one at a time at Bonn's tobacco counters. Germany's labor unions also helped Schaeffer fight inflation by restraining themselves in wage demands. At Volkswagen, which pays the highest wages in Germany, the hourly average is still only 51-c-. Instead of suffering the kind of wild inflation that followed World War I (when the mark fell from nine to the dollar to four trillion), Germany's new currency has remained stable. Last year gross national output hit a new high of $35 billion, 40% above the 1936 figure for all of Germany. Items:
P: Chemical output up 102% over 1936.
P: Electrical equipment up 238%.
P: Coal up 20%.
P: Shipyards are now building 633,904 gross tons, second only to Britain's.
While West Germany has had to absorb 10 million refugees and expellees, unemployment is relatively low (1,000,000 last week), and the government has hopes of creating some 250,000 new jobs this year.
Import or Perish. Since Germany is not burdened with supporting an army of its own, Finance Minister Schaeffer has been able to cut taxes 15% (corporations now pay an average 60%, individuals as high as 70% of income). By the same token, Volkswagen and other companies have been free to concentrate on producing civilian goods. And since Germany is a nation that must import or perish (30-35% of its food comes from the outside), much of its production goes to foreign markets. Last year, while imports were $3.8 billion, exports totaled $4.4 billion, trailing only the U.S. ($16 billion) and Britain ($7.5 billion).
In the European Payments Union, the Germans have piled up a gold and dollar balance of $800 million and brought on a crisis. They now want any credits older than 18 months to become repayable at once, something that EPU cannot afford. In fact, if permitted, Germany might soon be able to join the select ranks of the eleven nations* whose currency is freely convertible (i.e., can be exchanged for any other currency).
While Germany boasts the second highest rate of capital outlay in Europe (highest: Norway), it still needs more capital. It wants an airline (and has already formed a company for the purpose); it wants its own passenger ships, but cannot yet finance them. Economics Minister Erhard recently toured the U.S. to stir up some investment interest, believes that more foreign money will become available as Germany keeps proving its new industrial role (German prewar bonds were readmitted to trading on the New York Stock Exchange in January).
Cards on the Table. How big a trade threat is the new Germany? Most American exporters are not worried yet, despite the undercutting they have met. Germany's rebound has not cut into their old markets; it has merely taken away possible new outlets.
Many a Briton says that Germany's big export gains have been caused by: 1) a lack of credit and capital in Britain, compared with Germany; 2) official German export incentives. The first argument does not stand up too well. Germany is indeed extending extra-long credit in South America and elsewhere; but the Federation of British Industries recently sent a man on a tour of Germany, found no instance where Germans were able to offer credit terms that a British firm could not match if it tried.
As for export incentives, Economics Minister Erhard admits that they exist in the form of tax concessions to exporters and are a "very questionable trading policy." Said he: "I am prepared to put my cards on the table and put a stop today, rather than tomorrow, to all export-promotion schemes, provided that our competitors adopt the same attitude."
More and more, Germany's competitors are realizing that its export success is the result of hard work, hard selling and low costs. Said the Federation of British Industries : "Our people are going to have to become more salesmen and less distributors."
New Responsibilities. Actually, Germany's phenomenal success in the export market threatens, in places, to defeat itself. Germany built up such a favorable balance of trade with Brazil, that Brazil ran short of marks and had to cut its German imports 21% last year. The problem of sharp competition is nevertheless real. One of the best ways to ease the problem would be for Germany to channel more of its production into domestic markets by raising wages. Said the U.S.'s Harold Stassen, who as Foreign Operations Administrator keeps an eye on the world's economies: "The nations with a highly favorable balance of payments should lead the way [to] raise internal consumption, increase mutual trade, and advance the conditions of living of the peoples of the free nations."
West Germany's standard of living, while far above that of East Germany, is still about 15% below that of Britain and France. Its average industrial wage of 38.8-c- an hour is above that of France (35.3-c-), but well below Britain (47-c-) and far below the U.S. ($1.78). The result is that German workers cannot afford to buy many of the goods they now produce for the rest of the world. Of Volkswagen's 20,000 employees, for example, only 412 drive the cars they make. Germany's per capita meat consumption last year was 88 Ibs. v. 133.8 in France and some 90 in Britain (while rationing was still in effect). And while about 2,000,000 family housing units have been built since the war, 4,000,000 more are needed. Eyen in Wolfsburg, where Volkswagen has helped build many homes, an acute shortage still exists.
By working hard and doing well, the 50 million free enterprisers in West Germany have already written a lesson not only for their 17 million countrymen in East Germany but for other European nations still hobbled by all manner of production and currency controls.
With success and prosperity come responsibilities. One of West Germany's new responsibilities should be a share of the free world's arms burden. Another would be to permit more of the fruits of success to reach its own people, thus easing some of the pressure on exporters. To this end, Germany is already working on a plan to lift some import restrictions and cut taxes in order to raise purchasing power. In such ways it can insure its own future as a working capitalist democracy and reduce the threat of a trade war that might split the West in a time of crisis.
* And its rear engine the butt of many a joke. Sample: First American, looking under the hood of his stalled Volkswagen: "No wonder it won't run. I must have lost my engine." Second American, approaching from his own Volkswagen: "Don't worry; you're lucky. I just looked in the trunk compartment, and they've given me a spare."
* Designer Porsche, who later went on to found his own company at Stuttgart, died in 1950. His son now runs the company, turns out an annual 1,920 handmade Porsche cars (mostly sports cars) at prices from $2,400 to $3,300. * The U.S., Mexico, Canada, Venezuela, El Salvador, the Dominican Republic, Guatemala, Panama, Cuba, Honduras, Haiti.
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