Cost competition or innovation competition? Lessons from the case of the BMW plant location in Leipzig, Germany

Abstract

Globalisation and increasing inter- and intra-company competition raise the question whether industrial production has any future in the European Union. This article argues that company decisions on where to locate production are based not only on ‘hard factors' (such as labour costs), but also on ‘soft factors' (such as labour flexibility and working time schemes). Whereas there is no doubt about the importance of ‘hard factors’, and indeed the argument of cost competition and the need for cost reduction is repeated in almost every management declaration, the significance of ‘soft factors' is often underestimated and less discussed. Taking the case study of BMW's decision to locate a completely new car production plant in Leipzig, Germany, this article argues that western European countries could have an advantage in ‘soft factors' like work relations on the shop floor, the nature of employment contracts and arrangements for employee participation. In the case of BMW Leipzig, work and working time flexibility, as well as a culture of ‘cooperative conflict partnership’, played a decisive role in counterbalancing the disadvantages in direct labour costs. Focusing on innovation competition and on ‘soft factors' of competition could be a sustainable alternative to a business model based exclusively on cost competition.