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March 1996

Munich means business: Still a top place for business, but what does the future hold?

A look into the future of Munich's business and industry

Germans recently voted Munich to the top of the list of cities they would most like to work and live in.The poll, conducted by Focus magazine last summer, put Munich ahead of Hamburg, Koblenz, Berlin and Cologne.For many businesses eager to attract internationally-minded clients and employees, the benefits Munich offers - -location, financial services and quality of life - -outweigh the fact that Munich is an expensive place to live and work. Indeed, it is hard to beat this city's cultural and economic offerings. The architecture, music, theater, art galleries, restaurants, shopping and natural assets make Munich a very attractive place to locate a business. In fact, Munich tops the list in all these categories in recent opinion polls. A MAJOR BUSINESS CENTER Some say Munich's business success dates back more than a century to the Wittelsbach kings' promotion of education and science. The technical university was founded in 1868, and later the Deutsches Museum, one of the world's greatest museums and scientific libraries, as well as the German Patent Office. Engineering and insurance found their place beside brewing as Munich's main industries. Siemens, BMW and MAN had plants here before World War II, and Siemens moved its headquarters from Berlin to Munich in 1945, bringing other industry in its wake. Today, major companies still comprise the giants above, as well as Kraft, Motorola and much of Germany's software industry, including the European headquarters for Compaq computers. In Garching, Munich's biggest research complex, hundreds of scientists and technicians work with some of the world's most powerful experimental hardware. In manufacturing output, Munich ranks among the top cities in Germany, and the insurance and banking industries have helped make the city a major financial center. Munich also leads the country in other industries such as fashion, advertising, printing and publishing, and it is home to the country's biggest film studios, Bavaria-Film. Since hosting the 1972 Olympic Games, Munich has become an even more popular tourist destination, as well as a major venue for congresses and trade fairs. The city has created a dependable and efficient infrastructure for its population of 1.3 million. It has seen to the development of office and industrial space to house expanding businesses and attract new industry. Of course, the completion of the new Munich International Airport in 1992 has made travel to major business centers even more convenient. Even so, doing business in Munich is not a simple task. Though attracting people to Munich is easy, salaries are higher to compensate for the higher cost of living. Telecommunications costs, mailing costs and social costs make doing business in Germany very expensive. In addition, the strict German bureaucracy makes hiring technical experts from other countries extremely difficult. Add to this one of the highest business tax rates in Europe, and you can see why businesses might think twice about locating anywhere in Germany. Yet Munich's appeal remains strong. Like Germany's own version of the Sirens, Munich draws international business to itself. Here's why two businesses have chosen to locate here, and why they plan to be here in the future. POINT INFORMATIONSSYSTEME GMBH Point could be the American dream come true, except that it is taking place in Munich, rather than the U.S. Three men with an idea and a little money set up shop in Bavaria's capital and haven't looked back.Point co-founder and director Galen Bales said the choice to locate in Munich was made after a six-month self-funded market study proved their hunch about a new type of sales and marketing software was right. The product would sell. "David Lehrer, Peter Zahnd and I were all working in Munich when we developed the Point concept. At the time we considered staying in Munich or moving to either Switzerland or the Côte d'Azure," said Bales. "While Switzerland offered a lower tax burden and a major world banking center, it was not a member of the EU, which would make sales difficult. The Côte d'Azure could boast a huge high-tech community, but offered no market for Point's product." The three founders made the decision to stay in Munich. "One factor that swayed our decision toward Munich was purely psychological," noted Bales. "The perception that products made in Germany - -particularly Munich - -are of a higher quality than those made elsewhere has helped us in our marketing efforts." Munich is also an excellent location from which to access central European markets, according to Bales. "Munich is an obvious choice when you are setting up an office to serve the tremendous opportunities in central Europe." Also, Bales feels that Munich's central location and good air and rail connections make it a strategic location for serving a customer base across Europe. Beyond that, says Bales, Germany represents a significant part of the European market. If Point could get a foothold in Germany, they figured, the rest of Europe would be easier to reach. "When we earned the business of companies like DEC in Germany, implementation worldwide became easier," he explained. "If we could scale to meet the demands of the German market, then it followed that we could support virtually every other market in Europe and Asia." Munich is also a hotbed of high-tech software activity, unlike Düsseldorf which is more oriented toward hardware development. As a start-up software company, it was important to be where companies like Siemens, Microsoft and Compaq were located. "We soon realized that there were not many international companies that did not have offices in Munich. This is a city where the global community meets to do business and it has been for years," Bales explained. Still, what Bales calls "the hidden costs of doing business" are sometimes significant deterrents. Telecommunication costs, postal fees and travel are all very expensive. As an example, Bales points out that mailing costs from Ireland can be 80 percent less expensive than using the Deutsche Post. "One has to be innovative and invest in an infrastructure which allows you to take advantage of it and bring a quicker return on an investment," Bales said. In addition, the tax on profits is effectively 70 percent in Germany, according to Bales. As a consequence, two years ago the company moved its development center to Dublin, where specialized manufacturers, like software companies, are granted a 10-percent tax status. "As a technology company, Point was ahead of the current visible trend in relocating manufacturing outside of Germany," notes Bales. "For a high-tech company that requires its profits to reinvest in development, this lower tax rate is essential. We realized early on that Munich would be a great place to base our sales, marketing and support functions, but that our manufacturing had to take place somewhere else." Though its manufacturing is now based elsewhere, unlike many growing companies, Point has moved further into the city rather than out as it expanded. Just last fall the company moved to new offices on Karlsplatz which house the company's sales, marketing, consulting and support functions. The Munich operations have grown from four people to nearly 40 in five years; worldwide Point has more than 140 employees. "Office rents have come down in the last few years and we needed a location that reflected our growth and maturity as a company," said Bales. "What better place than the heart of the Altstadt to show our clients what the city and Point have to offer. It is a wonderful welcome to our international visitors." Bales also feels Point has benefited from the quality of life Munich can offer. Point can attract people who are international in their outlook, multi-lingual and can be deployed throughout the world. "We have had no problems recruiting people from elsewhere in Germany. People are eager to come here," he says. Yet the cost of all this quality of life is steep; salaries are generally higher than elsewhere in Germany. "Social costs are high and increasing and the cost of bringing in technical experts from other countries - -essential in our business - -is extremely high," Bales explained. German employment termination requirements also make hiring difficult, he added. Despite these challenges, the company chooses to remain in Munich. Bales explains, "The city is big without being overwhelming and it welcomes me back every time I've been away. Certainly there are business challenges here, but there is something vital about Munich that makes doing business here both profitable and enjoyable." VALLEY FORGE TECHNICAL INFORMATION SERVICES Valley Forge Technical Communications began operations in Munich in 1987 after being awarded its first contract to develop technical service information for BMW AG. BMW AG required local support as part of the contract. Munich was the parent company's entrance into the European market and was considered a branch office of the U.S. parent operation. Today, Valley Forge Technical Information Services GmbH (VFTIS) is made up of 57 people creating technical documentation and performing information processing for companies throughout Europe.Michael Brians, Managing Director, explains, "We decided to incorporate into a GmbH in 1991 in order to signal to our customers that we were here for the long term and not pulling up roots any time soon. This gave our customers more confidence in us and resulted in Valley Forge being awarded more long-term contracts." He says that the benefits of being located in Munich outweigh the obvious problems of higher costs. Brians notes that the city's internationalism helps Valley Forge's business in a variety of ways. "Munich and the surrounding area have developed into an international 'high-tech' center over the past 15 years," he says. "Many high-growth computer and electronics companies have chosen Munich as their German headquarters and this has led to the growth of supplier industries like ours." "When we came here nine years ago the high-tech boom in Munich was just beginning. Now, there is much more competition and our customer base has grown to include all of Europe, not just Germany. Munich's central location has helped our expansion." Brians added. "Munich offers excellent distribution facilities throughout central Europe including air traffic, rail and auto in all directions. Additionally, our business requires multi-lingual, multi-cultural employees and Munich attracts people with an international outlook. More indirectly, since our customer base is not confined to Germany, Munich offers a good destination for customers who want to combine business with pleasure." Growing from one employee in 1987 to nearly 60 today has posed challenges in finding office space for people and equipment in a timely fashion. "Our business has expanded faster than we anticipated and we outgrew each of our facilities sooner than expected," says Brians. "The office has moved four times because of business expansion, but the company has always been located in the northern part of Munich and I expect that to continue." Attracting qualified employees is not difficult, says Brians, because of Munich's rich history and instant name recognition. "Munich is an affluent city," he said. "Working in Munich can be compared with working in New York City. Its brings along its status symbols, glitz and glamour." A wide range of activities is also important to people relocating here, he added. Brians admits, however, that there are challenges in doing business here. "High costs of living require higher salaries," he says. "It is also expensive to recruit employees, particularly through the local papers. Because of the nature of our business, German employment termination requirements are a challenge when we have an immediate need. To compensate, we have had to create excellent forward-planning procedures and be able to be flexible enough to modify them as our environment changes." No longer a subsidiary of the American company, VFTIS now has what Brians calls a "sister" relationship with its U.S. counterpart. The company's revenues have grown nearly 500 percent since 1989 and they now hire the majority of their employees locally rather than transfer them from the U.S. He sees this as further evidence of the company's commitment to Munich. "We see ourselves as part of Munich's future. While the challenges of doing business in this country will always remain, Munich's advantages and resources make it worth the effort."

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