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  The Comeback of the German Dinosaurs : Industry Returns as Economic Engine

The Comeback of the German Dinosaurs Industry Returns as Economic Engine

By Christian Reiermann

Part 2: Growth Through 2010 and Beyond?

This development is by no means self-evident. In the last boom, in 1999 and 2000, manufacturing companies laid off large numbers of workers, even though the economy grew by more than three percent. After shrinking rapidly, manufacturing has begun to gain ground once again. Its share of annual economic output has declined from 40 percent in 1970 to less than a quarter today, but that number has begun to increase again recently.

According to a forecast prepared for the German Economics Ministry, this trend is expected to continue until at least 2010. Manufacturing is expanding at an especially high rate in the former East German states, where it has grown twice as fast as in the West since 2003. Eastern Germany accounts for more than 11 percent of industrial production today.

Exports reflect the importance of manufacturing. Almost nine-tenths of all German exports are industrial products. This is not without consequences for the service sector. According to a position paper by the Economics Ministry, "industry provides the impulse for growth in the service sector." Forty percent of all services, as well as 63 percent of all research and development activities and engineering services are provided for industrial companies.

"The strength of German companies in world markets is based on the fact that they offer a package of their products and services that go along with the products," says Hans-Joachim Hass, director of the economic policy division of the Federation of German Industries (BDI). For instance, a German machine tool manufacturer that supplies a production line to a customer in the United States may operate it using personnel from its own service company until local workers have been trained.

Bernd Pfaffenbach, a senior Economics Ministry official, has identified another secret of the success of German industrial companies. "The cooperation and distribution of labor in large and small companies is unique; it's something that doesn't exist anywhere else in the world," he says.

Germany has far more industrial competency and substance than Great Britain, for example. Unlike the British, the Germans do not treat industry as an economic structure that is essentially a holdover from the 19th century, nor do they see the service sector as the only possible saving grace for the country's future. "We have consistently focused on an industrial core, and now it's paying off," says Pfaffenbach. "We cannot survive by cutting each other's hair."

On the other hand, Germany benefits from the industrial diversity it has managed to preserve. China and India, which represent large parts of the world, are becoming industrialized, and German companies can offer precisely the range of products that emerging economies need to continue industrializing, from machine tools to entire steel mills to the cars that the rising middle class in these countries will want to start buying soon.

Rising Exports

This demand is reflected in the increase in the share of German industrial production designated for export, from 28.3 percent in 1994 to 42.3 percent in 2006. The machine building, chemical and automobile industries export well over half of their entire production.

In addition, German companies have been extremely proficient at adapting to the needs of globalization. They have become specialized, and in many cases they are now the global market leaders in their niches. Gutehoffnungshütte Radsatz, for example, is the world's leading manufacturer of low floor trams. Wheels made in Oberhausen roll in Perth, Hiroshima and Vancouver. The main reason behind this traditional company's success is that it kept reinventing the wheel. One of its specialties is a wheel that can be steered individually, which allows streetcars to navigate through even the narrowest of streets. The technically sophisticated design of the wheel calls for 400 individual parts. "This isn't something just anyone can do," says CEO Walter, one of the company's owners.

Many manufacturing executives believe that the economic environment has also improved in Germany. "Unit labor costs didn't increase for years," says business owner Bauer. "This substantially increases our ability to compete against competitors from other countries." According to Bauer, the so-called Agenda 2010 economic and labor market reforms passed by the government of former Chancellor Gerhard Schröder are also a factor.

Bringing Jobs Back to Germany

These factors have helped make Germany become so attractive as a manufacturing location that many companies that had outsourced their production abroad are now coming back. "Wages are undoubtedly lower abroad, but outsourcing isn't all that easy after all," Bauer explains. In other countries, workers must be trained first, which sometimes creates problems when it comes to challenging activities. Bauer has discovered that manufacturing at home has its advantages over outsourcing abroad after all, advantages like the ready availability of materials or proximity to suppliers.

Notwithstanding these opinions, there are no reliable statistics on how many companies are bringing outsourced jobs back home to Germany, just as there are no reliable statistics on how many domestic jobs are lost to outsourcing. In any case, employees also benefit from the industry's successes. Steelworkers, for example, have seen pay increases of about four percent a year since 2005, while the metal industry experienced similar pay increases across the board last year. Employees in chemical companies have also done well.

Meanwhile, workers in the service industry must routinely make do with shrinking incomes. In many sectors, wages are now so low that the unions are demanding a legal minimum wage. With the exception of the chronically ailing construction industry, minimum wages are not an issue in any branch of manufacturing.

Minimum wages are also irrelevant for the CEO of Gutehoffnungshütte Radsatz. Walter pays all of his lathe operators, cutters and metalworkers wages above the standard rate. They even receive a share of the company's profits at the end of the year.

The company still has money left over, and last week it acquired its key competitor from France, doubling its size.

Translated from the German by Christopher Sultan