(FORTUNE Magazine) – EVEN THOUGH it makes high-speed tires for BMWs, Mercedes, and Porsches, Continental should by all reckoning be stuck in the slow lane. The global tire market is plagued with overcapacity and ruinous price competition. At home it faces Germany's worst recession since World War II. And like other German manufacturers, including the country's celebrated auto producers, the company is handicapped by the highest labor costs in Europe -- perhaps in the world. But Conti, as Germans affectionately call it, earned $38.1 million on sales of $5.5 billion in 1993, making it the only profitable major tiremaker in Europe. The company also announced a dividend of $2.35 a share, its first since 1990. Along the way, it has provided an example to German industry of how to respond to its most severe postwar test. Continental is moving low-tech production abroad, working with unions at home to reduce overgenerous benefits, and adopting such American and Japanese management techniques as lean production, teams, and total quality management. Says CEO Hubertus von Grunberg: ''Germans have suffered a shock. But we are going to come back leaner, meaner, and hungrier.'' Von Grunberg took over the Hannover-based company three years ago while it was successfully fighting off a takeover by Pirelli, the Italian tiremaker. Since then he has cut the work force by 20% -- or some 10,000 employees, with 2,000 more layoffs to come this year -- and moved about a quarter of the company's tire production to the Czech Republic, Slovenia, Poland, and Portugal. He still has work to do. Continental's 1993 earnings are meager for the world's fourth-largest tiremaker (and Europe's second largest, after France's Michelin, the world's biggest). Those profits are especially meager when compared with Goodyear's. The American company, No. 2 in the world, earned $388 million last year on sales of $11.6 billion. Even so, in London the investment banks Morgan Stanley and Kleinwort Benson have begun to recommend Continental's stock. Until 1979, Continental was almost entirely German. Then in quick succession it bought Uniroyal's European operations, the Austrian producer Semperit, and, finally, America's General Tire. The acquisitions gave it nine brands made in 13 plants in Europe and four plants in the U.S. The lanky, energetic von Grunberg was a breath of fresh air for Continental. Though born in rural Pomerania and a graduate of the University of Cologne with a doctorate in physics, he had mostly worked abroad, first in Brazil and later in the U.S. In 1989 he became CEO of ITT's automotive parts unit in Auburn Hills, Michigan. ''We were happy campers in America,'' he says. ''My wife didn't want to leave and I was set on retiring with ITT.'' But the opportunity to transform Continental proved too appealing. When he arrived in Hannover, his aggressive, take-charge American manner stood out in the more sedate German corporate culture. He roared to work on a BMW motorcycle and drove the autobahns not in a Porsche but in a Corvette. Eventually his sound scientific background calmed the fears of his managers, many of whom were engineers. His company has been less successful in the country he left behind. After having spent more than $1.3 billion acquiring and restructuring General Tire, Continental expected the unit to break even in 1993. Instead, the brand continues to be weak and lost about $21 million. ''The question we are asking now,'' he says, ''is how we can prosper in the U.S. with a company only 10% the size of Goodyear.'' The question holds for Continental around the globe. Even with its strong position in Europe, the company is less than half the size of Goodyear or Japan's Bridgestone and less than a third of Michelin. Says von Grunberg: ''We want to stay independent, but if we don't do better, all options of new alliances are open.'' The stakes are large. What if, despite all its impressive efforts, Continental remains unable to keep up in world markets? That might signal that no matter what big German companies do, they can't be globally competitive. Since Europe needs a strong Germany to lead it out of recession, Continental's failure would be a disaster not only for Germany but also for the Continent.