Eastern Germany Seeks US Capital
Midway through a bumpy transition to capitalism, east German states look to sell more state-owned firms to investors from America
THIS week, a giant travelling yard sale stopped in Boston and Washington. The merchandise: 7,000 companies that used to be owned by communist East Germany. The "yard:" a portable computer loaded with information on the companies for sale.Of the 3,000 industrial companies already privatized, foreign investors have bought only 4 percent. By visiting the United States, officials from the new eastern German states hope to boost foreign involvement in the costly transition to capitalism. "Never before have investment conditions been so attractive in Germany for investors from abroad," says Joachim Gunther, a member of parliament from Saxony. The 130 US businessmen who listened to the sales pitch in a hotel near Boston were interested enough to flood the computer database with requests for company profiles. But this is only a preliminary step. Mr. Gunther and other visiting officials acknowledge there are obstacles to surmount: inadequate phone links, severe environmental problems, and labor costs that are higher than in other East European nations.The goal of the Treuhandanstalt, the agency undertaking the massive privatization effort, is not to get the best price for the assets it holds, but to maximize employment and economic growth."We are trying to make sure that people take these assets and do something productive," says Helmut Fischer, a Treuhand official based in Gera. Among the US companies already committed to eastern Germany are General Motors (through its Opel subsidiary), Procter & Gamble, Philip Morris, IBM, and Coca Cola. The officials point to numerous attractions for investment: * The opportunity to gain access to the world's largest consumer market - the European Community. Germany is the Continent's largest and central economy, but has traditionally been difficult for foreign mergers and acquisitions because of the high level of private or bank ownership of companies. * A skilled labor force. Eastern Germany has a higher percentage of college graduates and engineers than western Germany. * The economic merger with West Germany. This gave what was East Germany a hard currency and legal and tax systems familiar to Western businesses. * A generous program of grants, tax incentives, and subsidies that cover as much as half the costs of an investment. * Strong projected growth - with gross domestic product forecast to rise 10 percent next year. * Considerable information on investment opportunities. The Treuhand now has business plans and opening balance sheets for the companies it holds, whereas at the beginning of this year information on companies was scant. * An improving infrastructure. Thousands of new phone lines are going in as part of a 55 billion deutsche mark (US$32 billion) program to revamp a backward telecommunications system. * Legal advantages. A private investor takes priority over restitution claims by previous owners, as long as the investor creates or safeguards jobs. The restitution claim would then be settled by the government on a cash basis. "Three thousand investors cannot be wrong," says Hans Moock, a Treuhand official based in Dresden. He says the early investors did not get all the "pearls," and that 23 percent of the Treuhand-held companies are currently profitable. Another 32 percent have good turnaround prospects, while 23 percent face an uncertain future, and 22 percent are being prepared for liquidation unless a buyer appears. Investors will clearly need solid long-term business plans, however, and should not expect a return on their investment within a year, notes Jacob Saliba, the chairman of Katy Industries. The company, whose businesses include making tools for shoe manufacturers, is negotiating with the Treuhand on a possible deal. The primary markets for many East German companies were the nations in Comecon - the Council for Mutual Economic Assistance, which coordinated the economies of the Soviet-bloc countries. This framework collapsed almost overnight. Dr. Fischer gives the example of a machine tool company where 1,200 workers made drill bits for Comecon countries. Today, the payroll has dropped to 150, and the company is struggling to survive. Fischer says some companies are maintaining their former markets, in a few cases being paid with hard currency that was sent to the Soviet Union as grants from west German taxpayers. But the more immediate opportunities are in Western markets. Earlier this week, German Chancellor Helmut Kohl said there were signs that the east German economic decline had reached bottom, and that a recovery was set to begin, aided by Soviet commitments to buy goods from eastern Germany. The Treuhand officials note several reasons why foreign investors might have more to gain than German ones. For some companies in western Germany, the prospective acquisitions are only an hour's drive from their existing plants, and offer little strategic advantage. Also, Fischer notes that many in the eastern states resent the influx of western Germans like himself, and the massive unemployment that has ensued after last year's reunification. Still, he is happy with the work - a challenge that brought him out of retirement. ve never worked so hard in all my life and I've never enjoyed it so much."