By Paul Carrel
BERLIN, Dec 12 (Reuters) - Elmar Holzaepfel has already laid off the 35 temporary workers he employed at drive-shaft maker Eugen Klein GmbH Gelenkwellen. Now he plans to shorten the working week for his 150 permanent staff.
Firms like Klein employ thousands making parts for Germany's auto makers: companies such as Daimler, maker of Mercedes-Benz cars and trucks, whose success helped make Germany the world's biggest exporter of goods.
That is a matter of national prestige, but it is these small- and mid-sized suppliers -- the Mittelstand -- that form the backbone of Germany's auto industry. Their health is crucial to Europe's largest economy, and they are suffering.
Close to one in five workers in Germany is directly or indirectly employed in the auto sector. Cars and car parts made up a fifth of German exports last year, official data show.
"Orders are being cancelled every day," said Holzaepfel from his office outside Stuttgart, a hub for Germany's auto industry.
"The outlook is like this: nobody knows what is going to happen...but we think we will produce 30 or 40 percent less next year compared to this year," added Holzaepfel, whose company makes drive-shafts for truckmakers MAN, Iveco, DAF and Daimler.
Now a reluctant government must decide whether to reverse course and deliver an aid package to the auto industry. It is already considering credit guarantees for General Motors' German unit, Opel, but has stressed this would be a unique case.
The government has so far fiercely resisted pressure from other European countries to spend more to stimulate the economy, and Finance Minister Peer Steinbrueck has criticised other countries for rushing through what he called crass and untested rescue packages at a "breathtaking and depressing" pace.
A failure of small- and mid-sized auto suppliers could cause a wide ripple-effect through the economy, as car-makers depend on their suppliers. It may also seriously undermine Germany's competitive position when growth returns.
"If a small supplier goes bust because Opel has problems, it could drag down BMW, Mercedes and Daimler," said Ferdinand Dudenhoeffer, a car sector expert at Duisburg-Essen University.
"After 2010/2011 the auto business will boom again," he added. "If we kill off these companies in Germany, they will never again be built up again in Germany -- because a Chinese firm will come and buy them and take the knowhow to China."
The suppliers are crying out for help.
"ELEVENTH HOUR"
Corporate bankruptcies in Germany are expected to rise by nearly 18 percent in 2009, according to a forecast by tracking agency CreditReform this week. Germany's automotive association, VDA, said this month loans and credit insurance for suppliers were drying up due to banks' new caution about lending.
"If the supply-chain breaks that will have a dramatic impact on the whole automotive industry in Germany and the employees in this key sector," VDA President Matthias Wissmann said. "The risk is growing every day -- this is now the eleventh hour."
Although Opel faces financial difficulties, these are linked to troubles at its U.S. parent. Germany's auto-makers are experiencing falling sales but do not face imminent collapse like GM and Chrysler in the United States.
The European Commission has warned Germany and France against subsidising the car industry, and Berlin is keen to avoid moves that would spark demands for aid from other sectors.
"If you support the big car-makers today, tomorrow you will support the big furniture-makers, the big building firms. You get a never-ending story," said analyst Dudenhoeffer.
Instead of supporting car-makers, he said the government should provide 5 billion euros ($6.35 billion) in credit for auto parts suppliers over the next two years to help these generally healthy firms through the near-term cash squeeze.
CASH CRUNCH
Joerg Riehle, chief executive of auto supplier ORIS, said he wasn't looking for subsidies but he was facing a cash crunch.
"I have customers who are closing factories over Christmas and New Year for four weeks or more. That means no sales for me. So you can already see how much will come in in January: basically nothing. But I still have to pay people," he said.
Daimler, BMW and Volkswagen have all either cut or are considering cutting output, and Volkswagen said on Tuesday it is now seeking state guarantees for its financial service units.
ORIS, which employs 660 people, makes components for companies such as Opel, Ford, BMW and Mercedes-Benz.
"Demand in the market is going down and on top of this our customers, because they are running short of cash, are trying now to minimise their stocks," said Riehle.
"(The government) should help to mobilise money," he added. "Otherwise, if you can't pay anymore, then all the things that come after that come very quickly."
Economy Minister Michael Glos is aware of the problem. This month he said banks were not lending as the economy needs them to, and insurers were making it worse.
"It's as if someone started collecting all the umbrellas ahead of a heavy downfall," he said. (Editing by Sara Ledwith)