A Lesson from Germany:
What Lies Behind Its Manufacturing Success
While the prospects for the European economies remain uncertain in the haze of the European debt crisis, German’s economy has reported a healthy pick-up, particularly in the manufacturing sector.
Since the European debt crisis broke four years ago, European countries have been struggling in the face of tough challenges, such as sluggish markets, high unemployment rates and an increasing debt burden. Despite the negative impact of the debt crisis, Germany retains a robust economic strength that has outshone its European counterparts. The country has also taken up the leading role in responding to the issues of the debt crisis, including bailout plans, rescue measures and closer collaboration between Eurozone countries, which in turn has made Germany’s economic conditions and political development a focal point for the world.
PMI hits two-year high
According to the newly released German PMI (Purchasing Managers’ Index) for August 2013 produced by research firm Markit, the German PMI for manufacturing rose from 50.7 in July to a new two-year high of 51.8 in August, while its service PMI also improved from 51.3 in July to 52.8. As Chris Williamson, chief economist at Markit pointed out, the signs of recovery in the Eurozone are mainly boosted by Germany, whose PMI growth is the result of an increase of domestic demand and exports.
Germany is the largest economy in Europe and the second largest exporter in the world after China. The country’s 2.7 trillion euro GDP accounts for nearly 30% of Eurozone output. Over the past decade it has posted the fastest GDP per capita growth, making it the second largest production powerhouse among the G7 economies. With the second-lowest unemployment rate in Europe and an economic growth at 0.7% in the second quarter of 2013, the country successfully weathered the 18-month economic downturn in the Eurozone. As seen from the recent Global Manufacturing Competitiveness Index 2013, Germany ranked second in global manufacturing competitiveness after China, but topped the list among the developed countries. It has also gained political clout thanks to its role as the biggest financial contributor to Europe’s bailouts.
Known for its industrial and manufacturing excellence, the manufacturing sector makes up 20% of the country’s economy, a key driver of economic growth, and has created a list of world famous brands, including BMW, Siemens and Volkswagen. Considered as the birthplace of the automobile, the country is the absolute leader in automobile production in Europe. Many globally renowned automobile manufacturers, including Audi, BMW, Daimler, Ford, Opel, Porsche and VW, have chosen to expand or set up factories in Germany. Besides renowned large-scale enterprises, there are also numerous world-class SMEs in the German manufacturing sector, many of which dominate the global market in their fields. With one-third of SME workers belonging to the manufacturing sector in Germany, SMEs form the backbone of the economy.
The winning edge
The fact that Germany is immune to the slackening economic climate is attributed to the strong support from the manufacturing sector. So what are the success factors that enable the country to maintain its competitive advantages in spite of the debt crisis?
One major factor for Germany’s success is a supportive government policy. Germany possesses a strong and well-developed mechanical-engineering industry with a solid tradition and foundation and enjoys a leading status in technology development, again with strong support from the government. Over the decades, the German government has invested heavily in boosting its production capability. For example, the government readjusted its education system to guarantee manufacturers access to a skilled workforce through apprenticeship programs, while dozens of applied-science research institutes are funded by the government to develop advanced manufacturing projects. It also assured access to funding for many manufacturing SMEs via municipal banks.
Technology development and innovation are of course essential to the growth of any economy. Technology is the key force that enables a country to progress and flourish. Germany knows it very well and thus makes good use of new innovative technologies to combat the cheaper manufacturers in Asia. Over the years, the German government has emphasized the long-term development of the manufacturing sector and invested a great deal of resources in research and development of innovative technologies, including renewable resources, environmentally friendly biotechnologies, and so on. With long-established institutes such as Fraunhofer and the Max Planck Society contributing to technology development and innovation, Germany has become a world leader in those fields.
A focus on technology also enables German companies to retain a commanding share of the global market for the ever more complex machinery being used by manufacturing industry riding the investment boom in low-wage countries. Meanwhile, many of Germany's former textile makers also went high-tech, shifting their specialty to industrial textiles for the automotive and aerospace sectors, thus creating another competitive edge for the country.
Support from the German government also fosters its close cooperation with manufacturers and universities. With the unstinting support of government policy, manufacturers, universities and government research centers work closely in technology research and development, such as developing precision textile machinery for local and overseas factories. They also cooperate with machinery manufacturers, software developers and robotics companies on state-of-the-art technologies that make the whole manufacturing process more efficient and productive. In fact, the three parties have established a unique trust over the decades that enables them to share their valuable knowledge and experience with each other and seek out the best technical solutions for the sector together. Such unique cooperation is rarely seen in other countries and has molded Germany’s privileged place in technology development internationally.
Such close cooperation between the government, manufacturers and schools has produced a steady supply of skilled labor in the manufacturing sector. As the entire German economy depends greatly on skilled labor, a steady supply of skilled labor is of the utmost importance. Therefore, the government works to ensure that manufacturers have the access to well-trained technicians, engineers and skilled workers through the means of vocational training and technical apprenticeships. Meanwhile, employers from different fields all actively participate in the nurture of talent. They work together with schools and sponsor vocational training programs to get graduates well-prepared for their future jobs. Germany’s robust education system and job-oriented training for specific sectors enables the country to nurture around 80,000 technicians and skilled workers every year.
With the supply of skilled labor ensured, a robust employment system should result. Germany is well known for its employee-friendly employment system, where workers are well paid, given a strong voice on labor issues, and enjoy comprehensive healthcare and good job security. Even at the height of the crisis, when waves of layoffs swept across Eurozone countries, there were few layoffs in Germany. Since workers enjoy good job security, it is easier for the country to introduce new and more efficient technologies as most of the workers are willing to embrace new technologies and see them as ensuring the long-term viability of their jobs. In the meantime, job security reduces the employee turnover rate, which is the main reason why German employers are happy to invest heavily in the employee training that is conducive to the long-term development of the whole sector.
To conclude, the secret to Germany’s manufacturing success lies in the country’s commitment to the sector. Its all-round efforts to drive growth have also enabled its economy to perform in a very solid fashion. Some see the resilience of Germany in the European debt crisis as a miracle. Even US president Barack Obama said Americans can learn from Germany’s success, which has made it the envy of many of its counterparts.