(FORTUNE Magazine) – DIVIDED GERMANY was a vast laboratory for the 20th century's momentous experiment to prove whether centrally planned communism or democratic market capitalism could better deliver prosperity and growth. One people sharing a common language and a solid work ethic gave the rival systems the most rigorous test possible over the past 45 years. Now that capitalism has prevailed, a new experiment is under way to determine how -- and in what form -- it can take hold in the old East bloc. Once again Germany is the lab, but the process is by no means easy. The East German economy has all but collapsed since unification. Unemployment has soared. Yet, difficult as the transition is proving to be, the industrial system and management style that created West Germany's dynamic economy remain valid models for the new democratic governments of central Europe. U.S. managers can learn some lessons about competitiveness from the Germans. The new hot buttons of corporate America -- long-range thinking, uncompromising quality, and continuous training for workers -- are traits West German companies have honed over decades. Says Herbert Henzler, managing partner of McKinsey & Co.'s German consulting practice: ''Germany's old industrial virtues are in fashion again.'' West Germans call their distinctive blend of capitalism and comprehensive social security the Sozialemarktwirtschaft, or social market economy. It is particularly appealing to East Europeans fearful of the insecurities of capitalism because it includes a fine-mesh social safety net. Workers' representatives sit on the supervisory boards of all major companies, and employees have virtual job security. The system has also given West Germans an enviable balance between work and leisure. Despite their reputation for industriousness, the Germans have hardly been workaholics. Factory workers put in an average of 1,623 hours a year, some 360 hours fewer than Americans and more than 500 fewer than the hard- working Japanese. Unlike the Japanese, whose vacations average a mere 11 days annually, Germans unwind a full 30 days a year. Germans say they get away with so much leisure because they work harder when they're on the job. The cost of all this Gemutlichkeit is frightfully high for employers. Supplemental non-wage costs -- for social security, workers' compensation, and unemployment insurance -- add a staggering 85% to direct compensation, making Germany's cost of industrial labor ($19 an hour all told) the world's highest. The comparable figure in the U.S. is $14.40 and in Japan, $15.78. Corporate taxes, including federal, state, and local levies, consume an expropriatory 70.8% of gross profits, compared with 62.4% and 45.3% in Japan and the U.S., respectively. YET THE SYSTEM works because of the orthodox way the West Germans run their economy. The Bundesbank, Europe's most independent and inflation-loathing central bank, safeguards the deutsche mark with such tenacity that it has long been the European Community's most stable currency. The Federal Cartel Office, created to prevent revival of the huge prewar monopolies that stifled domestic competition, administers stringent antitrust laws. Among the industrial powers, no country -- including the U.S. -- has fewer barriers against imports. The magnitude of the problem of merging the bankrupt economy of the East into that of the West is clear in the tale of two companies that grew out of Schott Glaswerke. Their strikingly different fates have been duplicated at thousands of companies in the two Germanys. A maker of specialized glass, the original company was founded in the East German university town of Jena in the late 19th century. At the end of the war, Schott lay in ruins. American forces evacuated Erich Schott, the founder's son, and 40 senior employees to the West. With a $2 million Marshall Plan loan, the exiled glassmakers built a factory on a rubble field in Mainz, West Germany, in 1951. About the same time, East Germany's Communist regime rebuilt the ruined old company and renamed it Jenaer Glaswerk. Over the next four decades, these corporate war orphans went separate ways -- Schott responding to the risks and opportunities of the free market, Jenaer answering to the dictates of East Germany's command economy. From its single factory in Mainz, Schott grew into a lusty giant with 18,000 workers in 64 plants and sales offices worldwide. The company makes more than 50,000 products, from crystal stemware to optical lenses for space probes. In 1989, Schott rang up sales of $1.2 billion, nearly a fifth of which came from products developed in the past five years. Jenaer Glaswerk, by contrast, languished. Merged into one of East Germany's Kombinate, the bureaucracy-choked industrial conglomerates, and isolated from competition, the company mostly produced glass parts for the hugely inefficient capital goods industry. Its investment-starved factories are hazardous industrial relics. Jenaer's glassmakers toil in temperatures that can reach as high as 140 degrees F. They blow molten glass by hand a few feet from fire-belching open hearths. Measured by what in East Germany passed for an income statement, the company had sales of $73 million in 1989. EASTERN GERMANY'S most urgent task is raising labor productivity. Cord Schwartau, an expert on East Germany at Berlin's German Institute for Economic Research, estimates that the per capita output of East German workers is about half that of West Germany's efficient work force. Closing the gap will be the key to reducing the vast difference in living standards between unified Germany's two parts. Norbert Walter, chief economist for Deutsche Bank, expects large productivity gains through such simple improvements as assuring the timely delivery of raw materials -- a notorious bottleneck under the old regime. He thinks absenteeism will drop once East German workers realize that they have to show up to keep their jobs. Says he: ''These people are finished with socialism and are eager to earn the material comforts that have been denied them for so long.'' Accompanying the productivity gains, of course, has been a big jump in unemployment in the East. But since West German industry is operating at full capacity and running short on labor, it could use a fresh supply of skilled workers. That's where West Germany's superb training methods come in. An outgrowth of the country's centuries-old craft traditions, the system is called Ausbildung -- a word that means both education and training -- and it couldn't be more timely. Ausbildung is so deeply ingrained in Germany's business culture that almost every company -- even those in services such as banking -- regards participation as an obligation of corporate citizenship. The system offers youngsters who complete their mandatory public schooling, usually at 16, a rigorous dual-track apprenticeship. Typically, the Lehrlinge, as the apprentices are called, get on-the-job experience with a prospective employer for four days a week. A fifth day is reserved for classroom training in academic skills relevant to a particular craft -- for example, computer programming, statistical quality control, and flexible manufacturing methods. + Says Peter Rona, president of a New York investment banking firm bearing his name: ''The purpose of German training methods is not to turn out geniuses but to raise the ordinary talent of average people to a level of extraordinary competence.'' In West Germany young people under age 25 make up just 20% of total unemployment, the smallest proportion among industrial countries. In the U.S. and Japan jobless youth account for 37% and 25%, respectively, of all unemployed workers. Training isn't lavished only on the young. To further their careers, production workers can take two years of advanced training for certification as Meisters, or masters of virtually every aspect of their company's operations. The total training bill for all West German companies was $14 billion in 1989. The executive ranks are filled with employees who started on the production line. Because job-hopping is still relatively rare, the best German companies pay close attention to the career-long development of their managers. At Daimler-Benz, the automobile and aerospace conglomerate, a key criterion by which managers are evaluated is their success in furthering the careers of subordinates.

In East Germany the apprenticeship methods survived under the Communists, but most of the training workers received was obsolete. Now West German companies expanding into the East begin by trying to thicken the stock of workers with contemporary skills through Ausbildung. For example, Commerzbank, Germany's third-largest bank, is racing to open 120 East German branches, staffed mostly by locals, by the end of 1991. More than 10,000 East Germans answered ads for 1,000 positions. West German managers have been masters of turning the apparent disadvantages of their restrictive labor laws into virtues. By law, management is required to consult with representatives elected by their employees -- a process called Mitbestimmung, or co-determination -- over nearly every aspect of company policy. Significant shifts in corporate strategy must be approved by the company's supervisory board, where outside directors representing shareholders hold a one-vote margin over workers' representatives. All of this mandatory consultation is time-consuming and expensive. But Louis R. Hughes, an American who is chairman of General Motors' Adam Opel subsidiary, sees Germany's rule-bound system as a challenge to manage smarter. Says he: ''Closing a factory and ordering massive layoffs is evidence that < management is not doing its job. If you have lousy labor relations, it's because you made them that way.'' Opel included production workers in the planning of a major reorganization in the mid-1980s that was designed to cut costs and refurbish an aging product line. Shop floor committees pored over every detail of the proposed changes. Says Horst Borghs, a member of Opel's management board: ''Forging agreement takes time, but once it's achieved, everyone is committed to succeed.'' The company's hot-selling midsize Vectras and full-size Omegas helped lift Opel to No. 2 in the West German car market behind perennial leader Volkswagen. Workers agreed to add Saturday shifts and rely more on outside parts suppliers to keep up with demand. The payoff: Profits in 1989 hit a record $598 million, up 108% from 1988.

The benefits from paying attention to the work force are large. Says Claus Schnabel, an economist at the Institute of the German Economy, a research organization supported by German industry: ''Labor peace is an inestimable competitive advantage for German businesses, which can assure customers reliable on-time delivery and service.'' Among the major industrial economies, Germany loses the fewest days to strikes. For every 1,000 employees, West German industry suffered an annual average of just 41 days of shutdown over the past 20 years, vs. 453 for Britain, 234 for the U.S., and 67 for Japan. ADMIRERS of West German industry's spectacular postwar ascendancy often forget that many of its most successful companies trace their roots to the 19th century. Scores of companies -- including Daimler-Benz; Robert Bosch, the world's leading supplier of automotive electronics; and Allianz, Europe's largest insurance company -- celebrated their centenary anniversaries during the past decade. Sheer survival through a rocky century that brought the devastation of two world wars, hyperinflation, depression, and four changes of regime, including Hitler's rise and fall, infused German companies with strong identities -- the very essence of the trait that contemporary management practice touts as ''corporate culture.''

The East German businesses that stand a chance of surviving are the ones that have managed to keep in touch with those same industrial roots. Says McKinsey's Henzler: ''Many were vital enterprises long before the Communists took over. They have grown rusty over the past 40 years, but they have strong traditions to build on.'' Planeta, a manufacturer of printing machinery, is likely to be one of the survivors. Founded in 1898, the Dresden company was a pioneer in developing the four-color offset press and was a world leader long before nationalization in 1946. As in all East German companies, investment and marketing decisions were made by bureaucrats. But because the enterprise earned scarce hard currency by exporting presses to more than 50 countries from Italy to Indonesia, it had rare access to raw materials and skilled workers. Freed from the old regime's bureaucratic choke hold, Planeta managers have lifted their sights. Last year they bought Royal Zenith in Great Neck, New York, to expand in North America, and they are negotiating to sell a majority stake to Koenig & Bauer, a West German manufacturer whose product line dovetails with Planeta's. By the mid-1990s the company plans to boost the number of presses it builds by 50% to 1,800 a year while reducing its work force by a third. The strength of the West German economy lies in its thousands of midsize companies -- a group known in German as the Mittelstand. These mostly family- controlled enterprises account for half the nation's GNP and have created nearly all the new jobs. Their size -- and the relatively small German domestic market, which is half that of Japan -- forces Mittelstand companies to be agile competitors and to look to export sales to fuel their growth. Maho, a manufacturer of machine tools, exemplifies the Mittelstand at its best. From its base in the postcard-pretty village of Pfronten in the Bavarian Alps, Maho has developed into one of the industry's pace-setting leaders. Maho's controlling shareholder and chief executive -- just the second in its 70-year history -- is Werner Babel, son of one of the company's founders. When he took over in 1970, he realized that as a small competitor in a remote place he had just two advantages: a skilled and highly motivated work force and a tradition of technical innovation. Maho became one of the first to apply computer-integrated manufacturing methods that boost quality and reduce costs. In one installation Maho is linking 30 computerized manufacturing workstations into a single system that will operate round the clock. It will enable the company to produce twice the volume of machines that its already efficient plants turn out, with 50% fewer employees per shift. To thrive, East German industry will have to nourish its own crop of nimble Mittelstand companies. Some, like an old Eisenach machine-tool maker acquired by Maho on October 3, Germany's national unity day, will be carved out of the moribund state conglomerates. Many others will be formed by hungry new East German entrepreneurs. The process will take time, and for those who are losing their jobs the adjustment has been wrenching. But if East German managers learn to apply the lessons their western compatriots have mastered, they should eventually succeed, and the expanded German economy will play an even more powerful role in the world.