Germany’s Surprising Manufacturing Woes

The so-called engine of growth for Europe has stalled. How should corporate heads respond?

It’s been called the engine of growth for all of Europe. Only now it has stalled—big time.

Germany’s industrial sector, so reliable and critical for so many years, has hit a serious slump that experts worry could spread across the continent. According to recent figures, manufacturing output shrank for the 10th straight month in October. Worse still, there are signs that the contraction will continue for longer, with orders for new business falling for the 13th month in a row.

“There are no forecasts for improvement,” says Yannick Binvel, president of Korn Ferry’s Global Industrial Markets practice. He even notes that the government didn’t see the problem coming.

The dramatic slowdown was caused mainly by some large-scale issues from outside the country. Global trade tensions, particularly with the US and uncertainty over the UK leaving the EU, have weighed heavily on the country’s economy, experts say. That’s in large part because Germany’s exports are significant, totaling $865 billion last year and consisting mainly of manufactured goods.

Part of the problem for Germany is that manufacturing is rarely a local-only thing. A factory in one country relies on supply chains that span the globe, so a slowdown in China has the potential to hit Wiesbaden, Germany, just as severely as Akron, Ohio. “All this is pushing Germany into something that looks like a recession,” he says. The broader worry is that as goes Germany, so goes Europe, experts say. Still, as always, “you judge the company and the leaders by their capacity to resist a downturn,” says Binvel.

As with any slowdown, costs will need cutting, but in Germany, that requires an especially careful approach, says Eric Wenzel, a Korn Ferry senior client partner. The process of laying off workers in Germany requires managers to work closely with the Works Council, which acts on behalf of employees. In turn, that means there’s potential for friction between worker representatives and executives. “It requires skillful negotiators to integrate the Works Council into the process and not work against it,” Wenzel says.

But layoffs in one part of the company shouldn’t mean a blanket hiring freeze. Instead, an economic slowdown could be a good time to seek out new talent, especially tech-savvy people, Wenzel says. Certainly, Germany stands strong in this department: companies’ constant investment in worker training has made output per worker, or productivity, jump in Germany over the past few years. Since 2010, Germany’s productivity growth consistently surpassed that of both the US and the UK, according to government data.

That bedrock of a constant push for better efficiency and technical innovation has produced a solid bench of small- and medium-sized businesses in Germany, says Werner Penk, Korn Ferry’s president of technology. Many of these companies, which usually each employ between 2,000 and 5,000 people, provide technologies that support the automotive industry as well as aerospace and locomotive enterprises globally. “The globe is crying out for their products and services,” Penk says. “They are operating behind the scenes, but they are making a difference.”