The new Germany.

Some observers are touting Germany's privatization plans in the eastern states as"the white sale of the century." Western CEOs and German officials gathered at a forum cosponsored by CE and Dresdner Bank AG to discuss whether there are bargins remaining for the savvy investor

When the berlin Wall came tumbling dow , so did the economies of the eastern bloc. Alone among them, the former East Germany had its fall cusbioned by a strapping, older brother in the west. of course, the differences between the eastern (laender) states and their one-time communist kin don't end there. While Poland took the market plunge cold turkey, and other countries such as Yugoslavia and Romania remain riddled with political strife, eastern Germany has internalized whole a ready-to-serve government and economic system. The implant has accelerated the conversion process dramatically.

Equipped with an institutional frame-work, the eastern states' next step toward economic regeneration was to privatize their business and beef up the infrastructure. (Meinhard Carstensen a managing director at Dresdner Bank, estimates the necessary transportation infusion alone at $80 billion.) Overseeing the process is the Treubandanstalt, a government agency headed by Birgit Breuel. Thus far, the agency has sold about 4,300 eastern German companies, but about 6,000 remain on the block. the government is quick to point out the many advantages of planting a flag in a place that will likely soon be a thriving part of a unified European Community. But North American CEOs, aware that their investment dollars are needed to defray the costs of the German merger, remain wary.

why? Some of the Treuband's critics claim all the choice companies already have been snatched by German investors, leaving foreigners to scrape the bottom of the barrel. This accusation cuts deeply with German leaders including Economics Minister Juergen moellemann, perhaps sensitive that he's been asked by Bonn to go hat in hand to outsiders for help. To boot, bills for subsidies pumped into eastern Germany to ease the process of consolidation are coming due in the form of inflation, unemployment, and other economic ills. Growth in the German economy this year is projected at a meager 1.5 percent to 2 percents, while the public sector deficit may reach 6 percent of GPN, according to government statistics.

"We have a lot of internal problems," acknowledges Albert Jugel, managing director of FUBA Leiterplattenwerk Dresden, a producer of computer components, who addressed the ce group at a breakfast briefing. "And we have no time in eastern Germany to wait five, six, or 10 years for fresh investment," adds Jugel, who is also a professor at Germany's University of Technology.

Difficulties aside, some Western companies already are storming across the east. Among them are Procter & Gamble, General Motors, and Coca-Cola. In the wake of German consolidation, Coke found itself in an especially advantageous position: Because of advertising on eastern air-waves and the popularity of its flagship cola in East Germany's underground economy, Coke had a ready-made market for its product. Heinz Wiezorek, president of Coke's German unit projects 1991 revenues of $400 million in eastern Germany alone.

But most companies haven't been quite so lucky--or quite so apt to strike it rich. And privately, at least, American CEOs aren't bustling to board the investment bandwagon. In a spirited dinner conversation at the Dresdner Bank boardroom in Berlin and a CE roundtable question-and-answer session coventured with the bank, chief executive discussed opportunities in the great German white sale. The verdict: Soft times stateside for now will keep most American companies on the sideline. But further deregulation of German industries, solid growth in the east, and possible springboards to eastern Europe likely will continue to attract the strong, the brave and those with deep pockets.

A HELPING HAND FROM THE TREUHAND

Hero Brahms (Truhandanstalt): It is important to realize that after reunification,the whole system was changed overnight. That means the legal system, the cultural system, the social surroundings -- everything was changed that affects the people.

The other big change was due to the currency union that took place last year. That caused a complete shakeup in business. So we have destroyed the cultural surrounding for the people, and we have destroyed the business system through the currency union.

In addition to that, we somewhat underestimated the economic problems we were facing, at least in the beginning. We couldn't really see that in addition to their lack of competitiveness, the businesses in the eastern part of Germany had lost their key markets, which were, of course, the Soviet Union and the old Soviet bloc. The export rates of those industries were running up to 70 percent to the Soviet Union and Czechoslovakia.

Those exports went down so dramatically that in one year, out of nine million people, only five to 5.5 million people now have full-time work. All the others are being supported by the social net, are part-time workers, or they go from the east to the west to work during the week -- and then go back for the weekend.

This is, really, a revolution. In the center of that, only thing functioning was the Treuhandanstalt, which was formed by the former socialist government with another intention, to hold the businesses together in a centralized unit.

In addition to the industrial problems, we suddenly had millions of square meters of land: farm land, forests, and buildings. There was no organization to run it, nothing. So when you see how our business were in the past, and when you now see what has happened within one year, it is really impressive. We have already sold more than 4,300 businesses to private investors, because we deeply believe the best form of restructuring is the privatization of these businesses.

The other thing we have accomplished in the east is that investors have now obligated more than 96 billion deutsche marks ($60.17 billion) -- which they have invested into these companies -- and they have prepared to create 800,000 jobs. That is contributing to stabilization.

One point about foreign investors needs to be clarified. I know that Juergen Moellemann, the German minister of economics, is not content about the reluctance of foreign investors to become involved in eastern Germany. However, from the Treuhand's point of view, we have been rather successful, and there are two reasons for this. The first is that we have sold 220 businesses to foreign investors. Second, and more important, they have agreed to invest DM7 billion. When you compare that with the direct investment that was done by foreign investors in the old Germany -- the former West Germany -- in 1990, the figure was only DM3 million. So Treuhand has done a very good job.

But we still have 6,000 companies for sale. Whenever I read the newspapers, I see that it has become fashionable to say the Germans have sold the best part to the Germans -- they have picked the raisins, and now the scrap is for the foreigners. This is untrue.

We are in the middle of restructuring these huge combines. Under socialist logic, big was beautiful, and they had vertically integrated large businesses that, from a business point of view, have no sense of connection. We are restructuring these combines and creating new businesses. We are in the middle of that process, and we are creating attractive investment opportunities.

Also, it was difficult to attract foreign investors in the beginning because we had no financial information on privatization prospects. How can you persuade a foreign investor to meke a commitment to a company that has no balance sheet, no profit and loss statement, and no description of the business?

Now, we are providing this information on more than 200 large businesses to investment bankers. In turn, these bankers are moving to attract investors. there are more than 6,000 remaining businesses that we are trying to make salable.

There are many good reasons for going into business in eastern Germany. First of all, the country had a downward economic swing that is now coming back the other way. Eastern Germany will be a growth area for the next 10 to 15 years. Not only are German businesses investing -- I have mentioned the figure of DM96 billion -- but the government, too, is investing heavily in the infrastructure. They're building new roads, telecommunications and railroad systems -- all of which should stimulate growth.

Second, East Germany is now part of West Germany, and that means we have the same leaders. It's nothing like being in a country like Poland of Czechoslovakia where you're not aware of what's going on or how the laws will change. It's all part of the West German law from now on. And of course, it's part of the European Economic Community.

In addition, the companies in eastern Germany still have a good connection to the other countries in eastern Europe, and that should be conducive to doing business in those countries. Investors can use these companies as a springboard.

In addition, investors are eligible for subsidies for investments in Germany. It is possible to get up to 50 percent tax savings from investment grants, investment allowances, and special depreciations.

Lastly, it is attractive to deal with the Treuhandanstalt because we are not trying to maximize the sales price of the units. Our only goal is to look for enough investments to ensure a viable number of jobs. We have also solved problems that came up in the beginning like property rights and environmental problems.

Unfortunately, there is still one area in which we face a problem. Regardless of the benefits of rapid privatization, we have to deal with managers who are well trained in a command economy but have difficulties understanding our more competitive world. So we need to link good technicians and general managers in the east with people from the west who have experience in financing, marketing, and sales.

Lou Allen (Lou Allen & Sons): The Germany people realy have to come to terms with the two cultures they're now bringing together. It's no different than what we did with the north and the south in America. The task requires a long-term approach.

Brahms: One difficulty is that it's hard to get well-trained western managers to go to the east where the surroundings are not so nice, and the companies do not look so well. As a result, we try to form groups of businesses that will be attractive as working opportunities for a western manager, and we also offer special kinds of bonuses. For example, we might provide the opportunity for a manager to become a shareholder or a partner of a business. Good salary is also a lure, of course.

We are becoming more and more successful in using such approaches. Our typical candidate is a younger person who has hit a ceiling in terms of career advancement. In some cases, we offer that person the opportunity to come here and run a business himself.

Sir Michael Butler (Hambros Bank): How quickly are managers in eastern Germany learning the basics of western-style accounting?

Brahms: Hundreds of western accountants are helping in the learning process. They are examining the business, helping to create balance sheets, and helping to explain to businessman exactly what competition means. Many companies are now beginning their first management audits, and we are finding some people more than up to the task.

Even so, there aren't yet any hard figures. In other words: We don't yet know if you can completely depend on a profit and loss statement from an eastern company. Partly because of a lack of accounting sophistication, we still have a lot of questions.

J.P. Donlon (CE): Which industry segmants do you see developing quickly?

Brahms: The machine tool business should grow rapidly. That's because East Germany was a key manufacturer, for the Soviet bloc, of railroad cars and all kinds of harvest machines. In fact, it was virtually the only source for this kind of manufacturing in the eastern bloc countries. There will be a tremendous need for spare parts. Thus, the eastern world -- if they get through their crisis -- will have a constant demand for our manufacturing products.

RELUCTANT INVESTORS

Ekkehard Feustel (Union Carbide Industrial Gases GmbH): If thus far only 200 of several thousand companies have been a acquired by foreigners, that still comprises a relatively small amount of foreign investment, especially compared to that in western Germany. Why the sluggish pace?

Brahms: Given the economic problems facing Germany, it is not the most attractive place for investors. The problems involve tax rates, labor costs and quota determinations. These tend to offset some of the benefits we offer investors, including a well-trained labor force, a good market, and good technical skills.

Right now, U.S. companies also have their own problems. They are cutting costs, not expanding. That means that U.S. investors are reluctant. The British, mean-while, feel their own country to be far more attractive place to invest than Germany.

Theodor Schmidt-Scheuber (ABD Securities):

The investment picture isn't very promising right now. Problems in the American economy have me particularly worried.

Brahms: By contrast, there really are unique opportunities for investors who want to gain a foothold, either by taking over a business or starting a new project. That's partly because of available support and subsidies from the German government. Investors can touch down in an area that will undergo a significant rebound within five or 10 years.

As a result, I think any reluctance by investors is not so much that toward doing business in the east, but a reluctance about doing business in Germany itself.

Peter Weichhardt (State of Berlin): You're absolutely right. Certainly, Berlin was not prepared for the great changes that have taken place. Of course, none of Germany was prepared, but nowhere in the world did the two opposing systems collide as they did in Berlin. There was only a wall separating two halves of the same city. And when the wall came down, the challenge began.

The challenge involves such things as the traffic problem. An entrepreneur in Berlin told me we now need 25 percent more transportation capacity in order to maintain performance on a level with that before the Wall came down.

Another thing we need is more housing. Also, the price of land has gotten out of hand. So risk does exist for the investor, but all of these problems are solvable. Some of the solutions may take years to work out, but we can find them. Another thing: private investment will determine solutions much faster than the government.

Meanwhile, we are strategically positioned to go into the east European markets. We have lots of people in and around Berlin who still speak very good Russian. They don't speak English because they did'nt learn English in school and they had no reason to practice it. But they are well connected to the Russian economy, such as it is at this moment. And we all know that business depends on solid contacts.

On another front, one thing Germany has forgotten in the last two years is to look to the west. Everybody was looking to the east, and we neglected a number of countries, including Brussels. We forgot the EC. But I think the situation is changing now that unification is getting underway. We are capitalizing on our opportunities in both the west and the east.

Eckhard Rohkamm (Thyssen Industrie AG):

Foreign investors need to be selective in acquiring assets in eastern Germany. They need to be sure there is a long-term market for their product.

When you make an acquisition, you also need to determine whether you'll be working with a motivated workforce. You may have to handpick a team for a particular project. But often, once you have gone through that process, a business will grow very fast.

In terms of motivation, another problem is that work support measures for those who are out of an active job are so lucrative, there isn't much motivation to work. There must be stronger incentives for individual workers in terms of training and searching for jobs.

Donlon: Isn't the Treuhand's charge partly to keep people employed at any cost? Won't such people tend to be counter-productive, thus adding to the costs of industry?

Brahms: Our task is to act as a large holding company searching for productivity and profits. Of course, we are also responsible for keeping business alive and assisting them in restructuring.

What the politicians did -- yes, the politicians, not the Treuhand -- was to create a social net. Statistics show that only one million people are jobless, because the others are in an employment contract that is paid by the central government. So people either do nothing, or the government uses them for getting rid of some portion of the environmental problem, or they are trained on a new job.

For example, there are people working for companies on a so-called part-time basis that get up to 100 percent of their full-time pay. But imagine the reaction of a full-time employee who sees a co-worker sitting at home receiving 95 or 100 percent of his pay. Of course, that's going to lead to bad feelings and impaired motivation. So, sometime in the near future, we have to take away the social net.

Butler: Is there a time limit to such social payments?

Brahms: Yes, there is a time limit, but if you are creative, you can extend your welfare payments for quite a long time.

THE HIGH COST OF PRICING

Heinz Wiezorek (Coca-Cola GmbH): When you talk about productivity and wages, there's another side of the coin, and that is prices. If companies receiving subsides later become extremely competitive, and they are not forced to set prices that bear the cost, that might deter some prospective, young investors that otherwise would come to the new laenders.

Brahms: That is a problem. The existing companies really do not know what their costs are. Sometimes they compete against you at 30 percent below the price or, the next day, at 30 percent above. That can happen.

Indeed, what we are trying to do is to bring up so-called mittlestaend, or mid-sized companies. Germany's industry is surviving not because of the large companies but because pf the mittlestaend. In western Germany, 80 percent of manufacturing workers are in mittlestaend companies.

But in eastern Germany, it is just the opposite, or at least it was. Eighty percent were working in the large combines, and only 20 percent were working somewhere else. We have to create mittlestaend businesses in eastern Germany. We have established about 800 of these already. Of course, they have some temporary disadvantages. For one thing, they have to compete against companies heavily subsidized the Treuhand. At first, they may also have a compete against existing businesses while under the burden of a high salary level.

It's difficult to create new businesses and keep them alive. But we are optimistic that small private enterprises will take off.

Wiezorek: My fear is that some of those small, new enterprises will be killed. Because of theie lack of experience, sometimes they are not competitive.

Rohkamm: As in most small enterprises, not all of them will see the light of the next day. We are in a state of flux right now, and I can only hope that the upheavals that are taking place will start to disappear in the next years.

The biggest individual danger I could see is if the Treuhand would survive in the long run as an industrial concern owned by the state, supported by the state, and involved in industries that are not selfsufficient. We have problems, but we have to ensure the Treuhand does not become more than a short-term entity.

Brahms: The reason we have a lot of problems from politicians is because we said, "Make it quick, quick, quick." The Treuhand is the only industrial holding I know of that has a goal to get rid of itself.

Wiezorek: But we cannot allow the companies that are subsidized to have lower prices than companies that are well managed and have a clear cost structure. Otherwise, we'll destroy the whole system.

Brahms: I am sure that is only a question of time. In the near future, we'll be much more sophisticated and better able to deregulated.

Feustel: How quickly do you see deregulation coming to such key services as failways and telephone systems in the five new states?

Brahms: Ideally, the government will eventually revamp many state enterprises in eastern Germany. I would do this for utilities, for water treatment plants, and especially for telecommunications.

Meinhard Carstensen (Dresdner Bank AG):

We need about $250 billion to build a competitive infrastructure. We also need about $80 billion for transportation services; For example, our roads are built mostly from the north to the south, so we need east-west transportation.

Brahms: Essentislly,our telecommunications system hasn't changed much in recent years. The same goes for the railroad system. With all these utilities, we are seing regional monopolies much like tose in the U.S. We have continued to do in the same way, regardless of some good ideas that have come along in Europe for improving these systems. It would be good to start over with new ideas.

Feustel: Are you saying this is irreversible, that there's no chance to implement these new systems?

Brahms: No, this is not irreversible. For example, they are starting to think about privitizing some auto routes. That would be a start. I believe that Germany is starting to think like Great Britian about further deregulation of telecommunications, railroad systems, and postal systems. You can't stant against deregulation over a long period because it is too costly. You can't afford all the investments that are necessary.

Steven Andrews (U S West International):

The situation is starting to move very slowly in the direction of deregulation. It hasn't happen yet, but it will have to, largely because of the competitive global nature of industries such as communications.

GETTING OFF THE GROUND

Weichhardt: These deregulation tendencies are getting stronger and stronger. You start with the auto routes, you start with some parts of the railway, then telecommunications, and it goes on. The government's hand is forced because it has no money to carry out these projects.

You may heard that a new airport, planned near Berlin, is going to be privatized. In what way, I don't know, but that is how the government is learning. Everybody knows that privatization is the only way to make a profit and to have a reasonable cost structur. It's just a matter of time. There have already been a few companies that have made a go of it in the east.

Wiezorek: That's true. My company was very fortunate to get off the ground quickly in the east. The Coca-Cola business in Germany is one of our strongest in the world. We are very strong company with a high market share. We make a lot of money. We have excellent marketing people and managers. So we had a lot of resources at our disposal, and we used them effectively in eastern Germany.

Also, the per capita consumption of soft drinks in East Germany was as high as in West Germany. They were consuming 18 liters per inhabitant per year in soft drinks, and that was before the Wall came down. Basically, we had a ready-made market.

The other thing that helped us was that they watched western TV, and thus our advertising. Our brand was well known. So when the Wall came down, we made two very important decisions. We knew that we had to move very fast into the market because of global competition. Especially in our business, the brand awareness and the loyalty to a brand like Coca-Cola has a lot to do with availability. If Coke is not available, they will drink something else.

In order to move quickly, we developed a two-part strategy. We moved in with finished products and created a Western-type infrastructur. We wanted to be in production and create jobs as close as possible to the consumer.

In addition, in getting underway we did not worry much about the pricing, mostly because we did not know how to convert the eastern currency. On a recent tour of some supermarkets with my boss, we did some quick-and-dirty research. Based on what we found, we sold our first batches at what we thought was a high price, but it turned out that it wasn't that much compared to what they were paying for their own brand of cola.

The first truckload went over shortly after that, but nobody really knew that it would move so fast and at such a high price. I got wet hands, because we had 93 million eastern marks on our bank account within four months. Can you imagine? In those days, I was just happy that nobody from Atlanta called and asked how much money was in the bank! (laughter)

Luckily enough, we came out of it with DM31 million after the currency merger. Basically, our eastern startup was a wash. But the important thing was that within four months, we reached distribution that went from the Baltic Sea down to Dresden. We were available everywhere.

That was how we handled getting the product out. The other point was to get production. So, right after the Wall came down, we invited leaders of the combines to Essen. We spent the first weekend training staffers in marketing and accounting. During such training, it usually takes you two or three hours to separate the smart employees from those who are a little more difficult.

By the middle of 1990, we had already chosen the people we wanted to employ in the east. We had always looked into sites, into plants and wquipment, and into what we thought we could use.

We hired four types of international consultants to help us to deal with the Treuhand. We had one type for real estate evaluations; one for plant and equipment evaluations; one for people; and one for environmental considerations. We really spent a lot of effort in the latter area.

So far, the effort has really paid off. We now have five plants running. Two of them are brand new. Three of them are old plants that we converted. The equipment in all the plants except one is absolutely brand new.

In addition to the five plants, we have seven distribution centers. We have 150 fork lifts and 200 trucks, in total more than 600 cars already established. All 13 branches have computer equipment. The network is linked by satellite to our post in Essen. In total, if I include Berlin, we have 2,800 people.

What is most important is that in the east we only have 50 people from the west, and for the mose part, these are only trainers and consultants.

The revenue that we will have this year is approximately $400 million this year.

Weichhardt: Is that figures for the whole of Germany or only eastern Germany?

Wiezorek: Only eastern Germany. We have created glass, case and sugar manufacturers. We have the plants created that make labels. We will spend approximately DM120 million to DM150 million in the east on raw materials and other such items.

The last point I want to make involves the people we have in eastern Germany. We have more academics in the east than in the west. We also have technicians that became safety managers. I believe that five years ago now, the key players in the Coca-Cola business in Germany will come from the east.

Donlon: What is your selection process in getting your management?

Wiezork: As I mentioned earlier, we looked very early into the former combines. In December 1989, I visited the combines for the first time, and I met the key players. You get a feeling very fast about who has the right spirit or not. And then my people went out and looked deeply into all the organizations. So when it came to building the new structure, we had a very clear focus on which people really wanted to help.

Second, in terms of training, we started with in-class sessions, then moved to training on the job.

What we established was a "godfather" system. For example, the sales manager in Cologne became a friend of the sales manager in Rostock. They know each other. We invited both families to visit each other. So know if the sales manager in Rostock has a problem, he does not talk to his boss in Berlin; he calls his godfather in Cologne. Of course, that's assuming he gets through using the telecommunications. But with our own satellite connection, it now works far better.

It's important to create an environment for managers and workers alike that offers incentives and allows them to have fun. Our top players will get together next weekend -- the majority of them will be meeting each other for the first time in their lives -- and they're all bringing their families. They will live in a good hotel, and everything will be paid for. They have to work hard but also participate in certain events so they feel that they are contributing to something important to the company.

REDEFINING INTERNATIONAL COMPETITION

Darryl Allen (Trinova): From an American manufacturer's point of view, eastern Germany is like a big industrial sector. The reason American manufacturers are reluctant to become involved in eastern Germany is that our definition of an international competitive market is much broader than yours. America's involvement includes every product we make as a country. Tractors, earth movers, industrial equipment, and machine tools are all intensively competitive on an international basis. American industry is having difficulty coping with that, because they don't have the managerial skills to make the changes. Once this all sorts itself out, we'll realize how talented in a managerial sense the Japanese are and how much we as American and European managers have to learn to be competitive worldwide. It's a problem to step into an industrial area, where so much managerial talent is needed, and where you are going to take on additional manufacturing capacity that you don't need.

Contrary to what Moellemann says, American industry does not have a short-term problem, it has a long-term problem. It is faced with extinction. It has to solve its own problem, and I think that's one of the major reasons you don't see more industrialists kicking the Treuhand's tires in Germany.

Brahms: Businesses in the United States have lost some part of their manufacturing skills and abilities. They were too service oriented, and the Japanese took advantage of that. Isn't this a unique chance for U.S. companies to go to Germany, develop good manufacturing skills and products, and being them back to the U.S?

Darryl Allen: I'm afraid not. It will still be manufacturing in the old style. The engineeting skills that are available in eastern Germany are of great interest, but industrial manufacturing is transforming itself. We'er changing the way we actually manufactur, so these old manufacturers become an immediate burden, not an immediate asset.

On the other hand, there might be great opportunities, for example, for an engineering service company working in eastern Germany to acquire technical skills.

WILL QUALITY CARRY THE DAY?

Larry Soule (Rosemount Holding AG): In the short term, at least, Germany is the surest market we have in Europe -- certainly both for investments and for sales of our products.

There's no doubt that Germany standards -- especially in the environmental area -- are the toughest in Europe and will set the standards for the rest of Europe. If we get the approvals and make the products here, they will be accepted not only in western and eastern Germany, but throughout the rest of Europe.

When we look for manufacturing skills, we find that Germay ranks very high in attention to quality. Germans are hard working, ethical, and they do the job right. On the other hand, we don't find the same degree of enthusiasm in inventory management, profit contribution, and just-in-time production. If we don't learn how to get productivity and costs down, the quality of the product is not going to be enough to carry the day.

Charles T. Russell (Visa International): Germany has a history of getting its act together, and I see no reason why it won't do it again. Other than the general, worldwide recession, the only thing that might negatively impact the Germany situation would be more widespread political unrest like we've seen in Yugosalvia amoung some of the other neighboring states, notable the Russians or, heaven forbid, the new republics that are emerging from Czechosolvakia. That can hurt all of us, perhaps Germany even more so than the rest of the world.