Germany Revs Its Export Engine by Korn Ferry

L a t e s t thinking

Germany Revs Its Export Engine Specialized manufacturing, high-quality domestic production and enlightened labor policies have made Germany the world’s leading exporter.

ony Blair, the former prime min ister of Britain, once asked German Chan cellor Angela Merkel why her country’s economy was so resilient. Her response was at once playful, a bit chiding and very matter-of-fact: “Mr. Blair, we still make things.” Indeed, over the past decade, Germany has emerged as Europe’s dom inant economic power because it has chosen to stake its fortunes on manufac turing and exports when many others were feasting on a profligate financial industry and debt-fueled domestic con sumption. Even more interesting is that Germany did so while pursuing laborfriendly policies that limited outsourcing and unemployment and gave most Ger man workers healthy salaries and bene fits, high job security and a real voice in their companies’ boardrooms. Today, German wages and benefits are among the highest in the world — in manufacturing industries, they are about 50 percent higher than in the United States. Yet Germany is also the leading exporter in a world driven by lowest-cost production. There are a number of expla nations for this. Central among them is that, when it comes to competing in global markets, high wages can be miti gated by the skill of the work force, the efficiency of processes, and some help ful public policy. The Germans have long focused on efficiently producing quality products that can command a premium price, notably in the manufacturing sector and specifi cally in machine tools. There is global

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demand for that value proposition, espe cially in emerging markets that are in the process of building out their own physical infrastructure and production capacity. “Increasingly, German companies are providing China, India and other emerg ing economies with the high-tech preci sion tools they need to become the mass production factories of the world,” said Steven Hill, author of “Europe’s Promise.” In 2010, total German exports — not only to China and India, but also to the United States, Russia, the rest of Europe and elsewhere — jumped 18.5 percent and currently account for roughly one-third of Germany’s $3.35 trillion gross domestic product. In the steel in dustry, ThyssenKrupp now outproduces United States Steel. In the electrical in dustry, Siemens’ exports were up 30 percent. The German auto industry, including companies like Volkswagen,

velopment and tend to develop highly specialized niche products. “There is a long list of specialty areas in which even remarkably small German makers dominate world markets,” said Eamonn Fingleton, author of “In Praise of Hard Industries.” Windmoeller & Holscher, for example, has a 90 percent

When it comes to competing in global markets, high wages can be BMW and Porsche, now represents 17 percent of global vehicle production. But Germany’s real competitive ad vantage in international markets comes from its smaller, often family-owned en terprises, many of which are manufac turers. Collectively known as Mittelstand, these companies employ more than twothirds of all German workers. Encouraged by tax breaks and depreciation allow ances and supported with debt financing from cash-rich German banks, Mittel stand invest heavily in research and de

share of the world market for machines that make heavy-duty paper bags. Achenbach Buschhütten is similarly dominant in the market for aluminumrolling mills. Tente specializes in heavy duty casters for industrial use, Hegra Linear produces low-friction shelves, slides and drawers, and Würth is the leading industrial supplier of assembly and fastening materials worldwide. Mit telstand have also established themselves as leaders in biotechnology, medical technology, and renewable energy.

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All of this is predicated on having a highly skilled and stable work force, and a good deal of German public and private policy has been aimed at achieving that through cooperation between manage ment and labor. A policy known as “codetermination” allows German workers in businesses of more than 2,000 em

tiating positions in an effort to help their employers — and themselves — remain viable against low-cost, global competi tion. That is one reason Germany has not embraced outsourcing to the degree other countries have. Gary Herrigel, a professor at the University of Chicago, cited the example of a company that

work.” Instead of laying off millions of people, firms kept many workers on the payroll at reduced hours. The wages lost by those workers were largely reimbursed from a government fund that accrued in better times through payroll deductions and company contributions. As a result, the government and employers spent less to keep workers at their jobs part time while retaining their productivity than they would have spent on full unemploy ment benefits with no productive return. There have been other benefits as well. Reduced worker turnover has made com panies more willing to invest in vocational training and technical apprenticeships. Increased job security has encouraged workers to see the introduction of new, more efficient technologies and processes not as a threat, but as a boon to their jobs’ long-term viability. Although Germany’s labor policies have fueled its worker productivity, ex port dominance and current-account surplus, they have so far done little to boost the country’s domestic consump tion. Merkel, however, has taken the position that Germany’s export engine benefits all of Europe and that the an swer is not to reform German policy, but rather to strengthen the weaker economies in the euro zone.

mitigated by the skill of the work force, the efficiency of processes, and some helpful public policy. ployees to elect half the board of direc tors. Companies of all sizes have “works councils” of elected employees that meet with management to discuss budgets, mergers, layoffs and plans to introduce new processes to the workplace. While this culture of consultation may seem to be an open invitation to labor strife and wage inflation, research has shown that it has led to greater effi ciency and productivity. In fact, despite significant unionization, German workers tend to take moderate and flexible nego

made ball bearings for the shipbuilding industry. “The task of polishing and as sembling the bearings was considered too labor intensive for German workers. As a result of works-level consultation, the union suggested new work proce dures that made it preferable to retain production in Germany.” To support the retention of domestic production and to keep Germans working during the recent economic crisis, Chan cellor Merkel instituted a highly success ful policy known as kurzarbeit, or “short

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Merkel’s is a compelling argument. Herrigel has pointed out that compared with Spain, Ireland and other countries in the euro zone whose growth was “dis torted by the financial bubble, Germany’s growth has always been healthier and the wealth it created has been more sus tainable.” In fact, for many developed countries that have been frantically trying to figure out how to compete in a world of low-cost emerging economies, Ger many may be providing a realistic and much-needed model for success.

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