This Week in Leadership
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Tony Blair, the former prime minister of Britain, once asked German Chancellor 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 dominant economic power because it has chosen to stake its fortunes on manufacturing and exports when many others were feasting on a profligate financial industry and debt-fueled domestic consumption. Even more interesting is that Germany did so while pursuing labor-friendly policies that limited outsourcing and unemployment and gave most German workers healthy salaries and benefits, 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 explanations for this. Central among them is that, when it comes to competing in global markets, high wages can be mitigated by the skill of the work force, the efficiency of processes, and some helpful public policy.
The Germans have long focused on efficiently producing quality products that can command a premium price, notably in the manufacturing sector and specifically in machine tools. There is global demand for that value proposition, especially 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 emerging economies with the high-tech precision 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 industry, ThyssenKrupp now outproduces United States Steel. In the electrical industry, Siemens’ exports were up 30 percent. The German auto industry, including companies like Volkswagen, BMW and Porsche, now represents 17 percent of global vehicle production.
But Germany’s real competitive advantage in international markets comes from its smaller, often family-owned enterprises, many of which are manufacturers. Collectively known as Mittelstand, these companies employ more than two-thirds of all German workers. Encouraged by tax breaks and depreciation allowances and supported with debt financing from cash-rich German banks, Mittelstand invest heavily in research and development 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 share of the world market for machines that make heavy-duty paper bags. Achenbach Buschhütten is similarly dominant in the market for aluminum-rolling 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. Mittelstand have also established themselves as leaders in biotechnology, medical technology, and renewable energy.
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 management and labor. A policy known as “co-determination” allows German workers in businesses of more than 2,000 employees to elect half the board of directors. 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 efficiency and productivity. In fact, despite significant unionization, German workers tend to take moderate and flexible negotiating positions in an effort to help their employers — and themselves — remain viable against low-cost, global competition. 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 made ball bearings for the shipbuilding industry. “The task of polishing and assembling the bearings was considered too labor intensive for German workers. As a result of works-level consultation, the union suggested new work procedures 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, Chancellor Merkel instituted a highly successful policy known as kurzarbeit, or “short 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 unemployment benefits with no productive return. There have been other benefits as well. Reduced worker turnover has made companies 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 proces-ses not as a threat, but as a boon to their jobs’ long-term viability.
Although Germany’s labor policies have fueled its worker productivity, export dominance and current-account surplus, they have so far done little to boost the country’s domestic consumption. Merkel, however, has taken the position that Germany’s export engine benefits all of Europe and that the answer is not to reform German policy, but rather to strengthen the weaker economies in the euro zone.
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 “distorted by the financial bubble, Germany’s growth has always been healthier and the wealth it created has been more sustainable.” 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, Germany may be providing a realistic and much-needed model for success.