US embassy cable - 04FRANKFURT6240

UNCLAS SECTION 01 OF 02 FRANKFURT 006240 
 
SIPDIS 
 
DEPARTMENT FOR DRL/IL 
DEPT PASS DOL/ILAB (BRUMFIELD) 
TREASURY/OASIA FOR MCDOWELL 
DEPT PASS FEDERAL RESERVE BOARD FOR ELLEN MEADE 
 
USDOC FOR COMMERCIAL SERVICE 
 
E.O. 12958: N/A 
TAGS: EIND, ELAB, ECON, ETRD, ELTN, GM 
SUBJECT: Proposed Daimler-Chrysler Cost-Cutting Measures 
Spark Union Outrage 
 
REF: BERLIN 2178 
 
Sensitive but unclassified -- not for internet distribution 
 
1.  (U) SUMMARY: Emulating an earlier approach by Siemens, 
German auto giant Daimler-Chrysler has demanded from IG 
Metall cuts in bonuses under the threat of moving 6,000 
jobs from their main plant in Sindelfingen to either Bremen 
(where the Mercedes C-Class model costs 500 Euro less to 
produce) or South Africa to save 500 million Euro (USD 617 
million).  The Daimler-Chrysler works council has agreed to 
make concessions totaling 180 million Euro so far.  On July 
15, about 80,000 Daimler-Chrysler employees participated in 
a nationwide two-hour strike to protest the company's 
drastic cost-cutting plans.  Daimler-Chrysler management has 
expressed provisional willingness to reduce management 
salaries as a gesture of goodwill to works council and 
union members.  Daimler sources are confident that they can 
reach an agreement that allows C-Class production to remain 
in Sindelfingen.  END SUMMARY. 
 
2.  (U) In response to sluggish sales, Daimler-Chrysler has 
called for cost reductions totaling 500 million Euro for 
its 42,000-employee Sindelfingen plant, the primary site of 
C-Class production and the largest Mercedes plant in 
Germany.  Using its production facility in Bremen as a 
model, the company is seeking concessions from its works 
council and the Metal Workers Union (IG Metall) on cutting 
special bonuses granted only to workers in Baden- 
Wuerttemberg, including a five-minute break every hour and 
late-shift supplements starting at noon.  B-W Daimler 
employees also currently enjoy three more public holidays 
per year than their Bremen colleagues.  Mercedes Chief 
Juergen Hubbert claims that Bremen employees work 72 more 
hours per year than their Sindelfingen colleagues and 
attributes the disparity to the  "Baden-Wuerttemberg 
disease."  Hubbert has called for the elimination of these 
"Sindelfingen" benefits by spring of 2005 and has 
threatened relocation of C-Class production to Bremen or 
South Africa if union and works council do not accept the 
reductions.  Relocation of C-Class production would make 
approximately 6000 jobs at the Sindelfingen facility 
redundant. 
 
3.  (U) In response to management's demand, Daimler- 
Chrysler's works council has agreed to cost reductions 
totaling 180 million Euro so far, but indicated that 
further cuts also required concession by management.  Erich 
Klemm, chairman of the Daimler-Chrysler works council, and 
Joerg Hoffmann, chief of IG Metall Baden-Wuerttemberg, 
accuse Daimler-Chrysler management of jumping on the 
Siemens bandwagon to extend the workweek and cut benefits 
(reftel).  Klemm described Hubbert's offer as a violation 
of existing contracts and said that management proposed the 
cuts only to increase its own profit margin.  Worker 
response has been considerable: on July 10 and 17, ten 
thousand employees failed to report for the early shift at 
the Sindelfingen plant, and on July 15, 60,000 Daimler- 
Chrysler workers participated in a nationwide "action day" 
to protest the Daimler-Chrysler initiative. 
 
4.  (U) B-W Minister-President Erwin Teufel (Christian 
Democrat-CDU) condemned Hubbert's use of the term "Baden- 
Wuerttemberg disease" while conceding that B-W needed to 
extend its workweek to remain competitive.  Teufel noted 
that Daimler-Chrysler should coordinate any curtailment of 
Christian holidays with B-W churches.  B-W employer 
association chairman Hans-Eberhard Koch concurred with 
Teufel's assessment that Hubbert's statement was far too 
negative but agreed that relatively higher labor costs in 
Baden-Wuerttemberg were a barrier to effective competition 
within Germany. 
 
5.  (U) In a lunch with consulate representatives, Daimler- 
Chrysler chief economist Peter-Ruediger Puf echoed the 
message that labor and production costs in SW Germany were 
too high.  Puf took issue, however, with the tenor of 
Hubbert's cost-cutting strategy and criticized as unhelpful 
his threat to move production facilities to South Africa. 
He noted that it would have been better to advertise the 
cuts as a necessary step to keep jobs and production at 
home.  He pointed out that Daimler-Chrysler competitor BMW 
does not provide additional Sindelfingen-style benefits to 
its employees and as a result enjoys a cost advantage of 
around eight percent.  (NOTE: Other observers also cite 
BMW's highly flexible production schedule  virtually 
around the clock, six days a week  as a significant reason 
for the company's cost advantage.  END NOTE.) 
 
6.  (U) On July 15, Daimler-Chrysler CEO Juergen Schrempp 
expressed his public expectation that a compromise could be 
reached and added that he expects a resolution of the 
dispute by July 23 or earlier.  Schrempp qualified 
Hubbert's use of the term "Baden-Wuerttemberg disease" by 
saying that the term applied only to working conditions in 
Sindelfingen and not to B-W as a whole.  Meanwhile, a 
company spokesperson confirmed on July 18 that management 
has agreed to wage cuts as an incentive for works council 
and union to accept the overall package of cost reductions. 
 
7.  (SBU) COMMENT:  Mercedes has long been the most 
important profit center within the Daimler-Chrysler group. 
In 2003, the Mercedes-Benz group contributed 3.1 billion 
Euro to Daimler-Chrysler's overall 5.7 billion Euro net 
operating profit.  Daimler-Chrysler often has used its 
extensive benefits system in SW Germany to negotiate 
favorable packages with IG Metall and worker 
representatives that smaller companies are unable to match. 
 
8.  (SBU) COMMENT (cont'd): Chrysler Group COO and Mercedes 
heir apparent Wolfgang Bernhard lost his job recently for 
discussing publicly the need for cost-cutting measures and 
the movement of production facilities abroad.  Hubbert's 
absolutist ultimatum has further aggravated sensitivities 
on this issue and alienated some labor representatives. 
Since Hubbert's announcement, Daimler has focused on damage 
control (downplaying his comment on the "Baden-Wuerttemberg 
disease") and concessions designed to entice labor back 
into the fold (the mooted cuts in management compensation.) 
Although the company likely will reach a compromise that 
allows production to remain in Sindelfingen, Daimler's 
initial lack of surefootedness in announcing the cuts has 
certainly muddied the waters.  END COMMENT. 
 
BODDE