German Industry

PROFESSOR FELDMAN: You have had a remarkable career in German management, and many people don't fully understand how German business is organized. You've been a chairman of a managing board, but you've also been on the supervisory boards of numerous companies -- Munich Reinsurance, for example, and others. In addition, you've been also very much involved in organizations. That is, you were a leading figure in the steel organization, both nationally and then internationally in the Common Market.

Germany has a rather unique combination of different types of organizations. I don't know what you think about that -- I would be very curious to know whether you think there are advantages or disadvantages to the German system.

But in any case, you've been both a representative of your own company, and also a representative of your industry, which, obviously, involves some conflicts, internal conflicts in yourself, in a sense, and in your obligations. I wonder if you would comment about some of the aspects of German industrial organizations, as you've experienced it on so many different levels?

Yes. Again, it was a matter of transition. The industrial federations that had been in place twenty, forty, fifty years ago are either no longer in place today or are less influential. The industrial federations in Germany were a phase of transition, again, from the period when industrialization began, and that was the middle of the nineteenth century. Today, we have multinational companies, and such a company can no longer adhere to any important federation of national industries. So it was a period of transition of, let's say, 150 years or so, but, certainly, the years and decades afterward were a phase of transition.

I participated in such federations out of necessity, because it was of use to my company for which I was responsible. Yes, I found it helpful to my company and to me, personally, to be at the same time on the supervisory boards of other companies. It helped me; it helped, of course, Thyssen, because it gave me an additional influence, which I used in the interest of "my own company," in quotation marks. And the stewardships as chairman of influential supervisory boards were also something to help my personal independence.

PROFESSOR FELDMAN: What do you think of that system? There have been criticisms of having, on the one hand, a board of management, and on the other hand, the supervisory boards, which are composed very often of a great many persons. One wonders how much they pay attention to the individual affairs of companies. Also, there's a certain kind of succession, that many CEOs then become heads of the supervisory boards. This system has been criticized, and it has also been praised as one of the strengths of the German management system. How would you balance that out?

After more than half a century of experience, I have come to the conclusion that there are overwhelming advantages to the Anglo-American management system. My main observations are that the Anglo-American system permits all executive directors to participate in the final vote. In other words, they are members of the entire board, and each member of that board has a vote in the final decision. This is not so under the German system. Under the German system, the supervisory board members have, alone, the last word on an issue. The members of the executive board have no vote in the final vote. That is my principal objection against the German system.

Again, you are a historian, you know that the supervisory board under German law was created in 1867 by the Norddeutscher Bund. In those days, the corporation, as such, was a very young animal, and Germany was mainly an agricultural state. It was only at around 1900 that in Germany, the number of industrial workers was equivalent to the number of agricultural workers. So the overwhelming figure in 1867 when the Norddeutscher Bund took the vote on das Aktienrecht, [the law governing] the corporation, the overwhelming number of all workers in Germany were agricultural. So they had the idea that the shareholders should form a committee, and this committee should be the supervisory board, and the supervisory board should do everything else.

That is the long-range impact of decision, and something that was understandable and written into law in 1867 must not by necessity be convincing in 2002. I hold the liberty of preferring the Anglo-American system.

PROFESSOR FELDMAN: Do you think the German system has been changing?

No, I don't think so, because from 1950 onward, it was written into concrete. It is almost unchangeable now that we have co-determination, because half the members of the supervisory board in a German corporation today are union members or labor members from the shop floor. And neither the German unions nor the representatives of corporate labor will, in my humble opinion, at any time agree to their withdrawal form the supervisory boards. So that is written into stone.

What has the European Union meant for a businessman like you, as you led this industry?

Liberalization, of course, because the Coal and Steel Community in 1951 was only the first step. It meant the freedom of markets for coal and steel within the six member states -- France, Italy, the Benelux countries, and then West Germany. Six years later, the treaty followed on the general common market. This treaty offered four liberties -- the liberty for trade, for services, for finance, and for settlement. And to me, this meant that I could from then on widen my thoughts to acquire new customers outside of Germany and to establish subsidiaries outside of Germany whenever my company hit a market. So slowly and gradually Thyssen went into other European countries, and in 1997, we came to this market.

Now, I know that you're speaking later today at the European Institute on European monetary matters, and that suggests that you really feel that the changes going on there are really important. Tell us a little about that.

If you are a producer of industrial goods in a small country, then your cost structure tells you that you should increase here and there the total volume of production because of the economies of scale. So Germany, the same as the end of World War 2, has become more and more export dependent because we need the economies of scale to reach low costs, and the product we produce we can no longer sell in Germany alone. So we had the various phases -- the Coal and Steel Community, the Common Market since 1957 -- but beyond that, we had to develop the world market. And for Germany, the presence in the world market for industrial goods is just viable, in one word. So that has nothing to do with globalization, it is the simple spirit of convincing customers in another country, and yet another country, and yet another country. We have done so before the word "globalization" has ever been used in public.

PROFESSOR FELDMAN: There's another aspect of this, though, and that is the financial aspect. When we were talking earlier, you mentioned the key role that finance plays. And, of course, you have also been in contact with some very formidable members of the German banking community, although perhaps there are some changes that are taking place there. But I think of Hermann Joseph Abs of the Deutsche Bank, of Sigmund Warburg, and also of Alfred Herhaussen, who was a very important figure, apparently, in your work. Would you care to comment on how you see the evolution of the German financial system, in this relationship through business, as, let's say, represented by these figures that you got to know rather well?

Yes. If you develop an asset side of a balance sheet, you have developed the other side, the finance. Unless the other side is sound, your assets cannot be sound. A profitable asset is unsound if it is not solidly financed. So this is a very simple consideration that every businessman has to learn -- the sooner, the better. It is an eternal truth in any currency.

Now, currency. The American occupation force brought to the three Western occupation zones of Germany in June 1948 -- and that was well ahead of the second German Republic -- new currency, the Deutschmark. It was primarily a U.S. idea, it was a U.S. structure. The bills had been printed in the United States. And the two other occupation forces were glad that the Americans went ahead on that.

The German banks in those days were completely decentralized. Deutsche Bank, Dresdner, Commerzbank, you name it, they were decentralized, in that their Dusseldorf office was solely responsible for the neighborhood of Dusseldorf, and this as an independent corporation. So was Frankfurt, so was Munich, so were fifty others. In other words, central functions of international business were not done. The opening for additional functions for the German banks came only with the year 1957, and one year later, the Deutschmark reached convertibility. Only ten years after its introduction, convertibility was reached. That has often been forgotten. So convertibility and the opening for new functions for the banking system fell together in '57, '58. They developed slowly. But mind you, Alfred Herrhausen came to New York when he had left university, and that was 1954, and he considered it an important section of his life that he could spend a year or two in New York, and then go back to Germany. The big influence of German banks over industry developed only later, much later.

PROFESSOR FELDMAN: And would you say it was a salutary one? I mean, do you think this was a good system? Because now, as you know, there's talk about it being in some dissolution. The days of the "house bank" seem to be over, I don't know.

I think German industry made a major mistake in 1959 and '60, when the banks came and [requested] that the registered shares with which we had been equipped by the Allies in our deconcentration proceedings be changed into bearer shares. We made a mistake. As long as we had registered shares, we had the name and the address of the shareholder, and we could communicate directly. To substitute the registered share by the bearer share, as the banks suggested and as we unluckily did, meant that the banks had the names of the shareholders and the addresses, and no longer us. So that was a drastic change, forty-three years ago, and it was our mistake.

Today, the asset sides of big industrial companies have grown beyond the influence of any individual bank. And that is why the house bank is no longer viable. It was a good principle for twenty, thirty, forty years; but today, one has to be independent because, [for example], Thyssen has to do financing for its U.S. subsidiaries, it has to do financing for Asian subsidiaries, and all that has to take place with the inclusion of local banks, because if you have to finance business in Thailand, you'd better do in the Thai currency, and not in Deutschmark or now Euro or dollars. So these considerations have outlived the house bank.

Why is the Euro so important in its adoption for Germany and for Europe?

Well, people weren't asked in Germany. They were asked in France, and they consented in September, 1992, with a very narrow margin of 51-49. Other voters expressed their dislike, like in Denmark. And, well, the Euro is an undertaking, it is not yet a conviction.

PROFESSOR FELDMAN: Well, that's interesting, because you had a correspondence with former Chancellor Kohl on this subject in 1991. You suggested to him that the Euro, in fact, as being planned, was a rather bad idea, and that the Germans would be very, very reluctant to give up their D-Mark, and that you thought that this was going too far, in terms of asking for confidence. Kohl responded that he would try to do this very carefully in all the rest, but obviously you disagreed. Where do you now stand? The Euro is now here. When you go back home, you will be using it, and when I visit, I'll be using it, too. Should we have that confidence in it, or do you think that there still is something to your reservations of 1991?

Whether you have confidence in a person or in a currency is solely your own discretion. I have a restricted confidence in the Euro, and no more than that. My restriction comes from the very simple understanding that when twelve nation states with 300 million or so inhabitants are brought under one currency, they are not brought under one productivity. What matters in commercial life and in financial life is productivity and not supremacy. So we will see what happens over the years to come. The first case will come before too long, I am convinced, that within a region, maybe a nation state or two nation states, I don't know, that within a region, the productivity development [will be] less than the currency will permit. We had Argentina, a comparable case. We had the unification of Germany, a comparable case.

So if you take the financial scales of the German investment into the Common Market, or the German investment into reunification, you will come to surprising conclusions. Within forty-four years, Germany invested into the Common Market a net contribution of 250 billion DM. Within eleven years, Germany invested into its eastern provinces eight times that amount, 2,000 billion German marks, but for only seventeen million inhabitants, without a purchase power of [comparable] size. So these two figures may show you that political decisions of this type and character have financial implications that overreach the abilities of judgment of the acting politicians.

PROFESSOR FELDMAN: Can you think of alternatives that you would have preferred?

I did suggest to Chancellor Kohl the Karolingian Monetary Union, which was a monetary union with some transfer union attached. I had learned that from the history of the Deutschmark, because the entire history of Deutschmark -- 50 years, 6 months, 10 days -- is only understandable if you know that from 1950 onward, the third year of Deutschmark, the Germans developed a mild transfer union that held out if one of the eleven states of the then Federal Republic was still too strong in agriculture, another one was ahead in industry -- okay, then, a certain transfer mechanism saw to it that the populace overwhelmingly in still agricultural state did not suffer from too low an income. And that was my conviction after then forty years of Deutschmark, what I suggested to Chancellor Kohl and President Mitterrand in Paris, as well, to prefer a monetary union with some transfer mechanism. But I failed.

You've had a bird's eye view of America's role in the recovery of Germany, its emergence as a great economic power, with ups and downs. I wonder if you would reflect on that relationship, and how you see it today.

President Roosevelt's perspective happily disappeared when President Truman took over. If you read the Truman Papers from 1947 onward, you find a realistic approach towards the then three Western military occupation zones of Germany. Then two years later, General Marshall came along with his very generous suggestion, and the Marshall Fund means were of vital importance to many European countries, not only Germany. And then, of course, came the last, Moscow's suggestion for the political structure of the whole of Germany, which was 1952, which was turned down. And from then onward, I think, the political, the geo-political and the general political thinking of Washington was vital for Western Germany. So in 1955, Eisenhower was then president, Germany was asked to become a member of NATO, and NATO, of course, was the decisive element, which led to the tumbling of the Berlin Wall in 1989.

So to your question, my answer: yes, postwar Germany to me is unthinkable without the closest possible, I wouldn't say alliance, closest possible neighborhood and togetherness with the United States.

PROFESSOR FELDMAN: How do you see the situation, though, today? If you take your industry, the steel industry, there have been some difficulties of late in connection with tariffs and other such things. Do you see this as a major matter, or do you see this as something that will pass?

Steel is a major matter for political decisions because if a government cuts its own economy of foreign steel supply, this government may do harm to its own people, if not in the short run, then the medium-term and in the long run. So steel, as many commodities, has to do with monetary exchange rates. If you have a profitable steel plant in a country with an under-valued currency, the profitability of that plant changes drastically the very moment that the exchange rate of their home currency is being changed. It's obvious. So since steel makes a living on very low profit margins, 2%, 3%, 4%, if the exchange range is varied by more than 5%, you may lose your entire profitability, certainly to the extent that the exported products are concerned.

So, currency rates and low profit commodities are strongly intertwined. As long as steel was of some importance to the German gross domestic product, the impact was stronger. Today, the contribution of steel to the German GDP is, I think, below 3%, so its impact is no longer as it used to be.

PROFESSOR FELDMAN: How about the European steel market?

You have higher contributions of the steel industry in Belgium, for instance, so for Belgium it may be different. But, in general, I would say, although the income per capita is only two-thirds of the U.S. -- the U.S. income is, I think, around $36,000 and the European weighted is $25,000 -- although that is the case, you have inside Europe a variable dependence between steel and export and monetary matters. It is intricate, it has to be from case to case.

Your industry went through the throes of transition a few years back. Do you have any advice for our steel industry, or for our president, about the way he should be handling the present situation?

No, as a matter of principle, I never give unpaid advice.

That's very good.

PROFESSOR FELDMAN: If one reflects on Germany, there has been a greening of the Ruhr. I remember when I first went to the Ruhr in the sixties, there was an awful lot of smoke and an awful lot of dust. Now it's awfully clean. Do you think that this transition has been a successful and a good one?

Oh, absolutely. Absolutely. First of all, modern technologies have helped the steel industry to reduce their emissions to something that is almost invisible. Then, proactive politics and proactive decisions in corporate boards have led to new industries and have led to service industries which now contribute, I think, 60 percent to the total GDP of Germany. And then comes my magnetic train, that is one of the leftovers that I left when I retired from Thyssen eleven years ago. It will be built in the Ruhr district, of a district of seventy-eight kilometers, which is forty-seven miles or so. It will connect the big cities within the Ruhr area, and you save two-thirds of your travel time, once that train will be there. It will be there four years from now. I don't know whether the first train will bear my name, but I hope so.

PROFESSOR FELDMAN: Do you see this as a great step towards the future?

Yes. You see that here in California, you have old industries, old economies, you have the most recent ones, and you have successful wine making in this country. They all live together jointly, and they prosper. You have the objectivity of your universities. Your universities attract the best brains from all around the world, and where you have brains, you have future. So California, I think, is a wonderful example for the togetherness of man, brains, as I said, innovation, cable expenditure, and a viable life.

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