Outlook for 2010: German Economy on Brink of Radical Restructuring

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The global balance of economic power is shifting radically. Young, ambitious companies today dominate the global market for iron, steel and electrical appliances. Tomorrow they may be dominating the markets for automobiles, IT services or telecommunications. Their founders are now among the top global decision-makers. They run companies that hardly anyone had heard of just a few years ago, such as the Brazilian raw materials giant Vale, the Mexican construction materials group Cemex, Indian steelmaker ArcelorMittal or Chinese engine producer Johnson Electric.

The newcomers are competing with established Western companies for capital, labor, raw materials and know-how. They are expanding at an enormous pace through organic growth but, increasingly, through acquisitions as well. They are benefiting from low costs, an ample stock of employees hungry for advancement and home markets that have been growing at double-digit rates for years. They serve a new global middle class that is expanding by 80 million people a year and wants to savor the fruits of prosperity.

Now those companies even want to overtake the West in the field of high technology. They are pushing into sectors where German firms thought they were safely positioned as market leaders. They're even attacking companies in their home markets.

Take the Chinese solar power equipment firm Suntech, for example. Germany is one of its most important markets, accounting for almost a third of its annual sales of just under $2 billion. The secret of its success is easily explained: Its modules are a third cheaper than comparable products made by German manufacturers. It manufactures them in a business park in Wuxi, two hours by car northwest of Shanghai.

The roof and façade of the building are covered with around 4,400 solar panels that generate more than one megawatt of electricity. That's enough to provide the plant with 80 percent of its power needs. The dust-free factory hall looks nothing like the archaic workshops that China was known for in the past. Workers in white overalls push the thin solar cells into machines that resemble elongated ovens. Suntech employs 350 scientists who constantly try to boost the effectiveness of the silicon cells, and the firm now ranks among the world leaders in research.

Company founder Zhengrong Shi tirelessly repeats his vision of boosting his global market position by reducing the cost of solar power compared to that of coal-fired power generation. In 2010, Suntech might overtake German world market leader, Q-Cells.

Creeping Job Losses

Germany is being squeezed by both east and west. The US is launching an export drive aided by the weak dollar, while the Chinese are challenging German leadership in key world markets.

Chinese-made products accounted for 10.9 percent of the world market in 2007, up from 7.2 percent at the start of the century. The German share has fallen to 4.4 percent from 5.2 percent in the same period. So what does the future hold in store for German firms? And how can the country modernize its economy for the second decade of the 21st century?

Not much can be expected from auto manufacturing, the classic German industry, at least not in terms of employment. Even if VW, Daimler and BMW stand their ground in the face of fierce global competition, they will employ ever fewer people in Germany.

The country has to find something to offset creeping job losses in the auto sector, which still accounts for one in seven German jobs. Its chances of success aren't that bad, however, given that Germany has a comparatively broad industrial base that serves as a foundation for countless ancillary businesses, ranging from advertising agencies to security services. Whereas the UK's manufacturing sector accounts for just 13 percent of output, the figure in Germany is 23 percent. That includes industries that are building new factories and creating new jobs in Germany.

Specialist Firms Providing New Jobs

Medical technology company B. Braun Melsungen, founded in 1839, has increased its workforce in Germany by almost 20 percent in the last five years to 10,300. It is investing some €1.4 billion between 2008 and 2011, of which half will be spent in Germany. The family-owned firm is expanding its factory for knee and hip replacements, and it plans to enlarge two factories in the eastern state of Saxony.

Germany has some 1,250 firms in the medical products sector, most of them small and medium-sized businesses. They employ almost 100,000 people. That's not a lot compared with the auto sector, but the number of jobs in this field has risen continuously in recent years.

In these times of scarce energy, all industries that deal with fuel efficiency have a bright future as well. Companies that offer products ranging from efficient heating pumps to entire power plants are operating in a "gigantic growth market," says Manfred Wittenstein, president of the German Engineering Federation.

This opens up an array of new opportunities for an engineering company such as Siemens. These days, the Munich-based company sees itself as a supplier of environmental technology rather than an electrical engineering firm, and it wants to grow into one of the world leaders for wind power technology in the coming years. It has supplied 175 turbines for the London Array wind farm located some 20 kilometers off the coast of the British county of Kent. The farm will provide power for 750,000 British households.

German companies are among the global leaders in wind power, but several of them have encountered financing problems in the course of the crisis. High-tech firms are particularly under threat from the credit crunch because they have invested large sums in the future but often have relatively little capital of their own. Falling revenues and problems with debt repayments can quickly plunge them into ruin.

Berthold Huber, the head of engineering union IG Metall, has demanded that the government assume stakes in technologically important companies "to avoid losing important know-how in the technologies of the future." The stakes should only be held temporarily, he adds.

Government Aid Often Misdirected

But how should the government decide what is worth protecting and what isn't? So far, it has spent billions helping industries in trouble, for example, with the so-called "scrapping bonus," which boosted sales of small cars. The problem is that by helping some industries and companies, the government automatically hurts others that may have been better managed. It's also wrong for the state to subsidize industries without checking whether there's a sensible relationship between investment and return. In the photovoltaic industry, for example, every job is being subsidized to the tune of €150,000, but the return is meager, as solar power accounts for just half a percent of electricity generation in Germany.

Politicians presume to know which industries are worth subsidizing and which aren't, but they're often wrong. Instead of financing finished products, such as solar modules, the money would be better spent on developing new technologies in power generation, climate protection or environmental technology. Economists at the DIW economic institute have suggested that corporate spending on research and development should be fully tax-deductible, as is the case in most OECD states. "Innovation requires an economic push from the government," the DIW said in a recent study.

Meanwhile, the education system isn't doing enough to prepare Germans for the needs of an ever-changing labor market in which many people will have to retrain repeatedly. Germany is among the few OECD countries in which spending on higher education actually declined in recent years. OECD states on average invest 6.1 percent of GDP in education, while Germany spends less than 5 percent, according to the most recent available studies. Merkel has recognized the problem and wants to boost the share to 7 percent by 2015. That should be possible.

German Economy Adaptable

So far, the German economy has always proven itself to be able to overcome crises. A few years ago, when economists warned that German labor was too expensive and would force companies to relocate jobs abroad on a massive scale, managers and trade unions got together and successfully reduced costs.

The crisis has cast doubt on America's philosophy of shareholder value, held high as a model for Germany by executives and management consultants until a few years ago. The downturn has highlighted the advantages of the German model -- the long-term focus of businesses, the partnership between management and labor, and the social safety net, which offers instruments such as government-assisted short-time working schemes.

So there's justified hope that the German economy will be able to modernize itself once again. After all, crises offer the best basis for such renewal. Germany should seek inspiration in its economic heritage of a century ago, when science and business was more closely intertwined here than anywhere else in the world, when the country produced engineers like Alfried Krupp, Werner Siemens and the Mannesmann brothers who conquered world markets with their products.

So does Germany need a new business model? Werner Abelshauser, a specialist in economic history at the University of Bielefeld, doesn't think so. He says it would be foolish to abandon the focus on exports just because of a temporary slump in world trade. After all, he points out, "not many are capable of the things we can do."

DIETMAR HAWRANEK, ALEXANDER JUNG, ALEXANDER NEUBACHER, THOMAS SCHULZ, WIELAND WAGNER

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• Part 1: German Economy on Brink of Radical Restructuring
• Part 2: A Race Against Time
• Part 3: Newcomers Dominating Old Industries