23 Jun 2011 | World

Germany Charges Ahead 

Germany's economy is the envy of its European
counterparts, underpinned by its solid industrial
base.  David Craik and Heather Farmbrough look at
the reasons for Germany's continuing industrial
success.

Much of Europe from Portugal to Greece to Ireland has been a story of financial bail-outs, austerity and social unrest over the last two-and-a-half years since the financial crisis, while the UK experienced low economic growth and rising inflation.  Yet Germany stands apart.

Over 2010, the German economy grew by 3.6 per cent and in 2011 it is predicted to grow by 2.3 per cent. Germany is the largest economy in Europe and has practically been a powerhouse for the last six decades, having rebuilt itself from the ashes of the Second World War.  Germany’s traditional pillars of strength – fiscal prudence, a powerful and exported manufacturing base, good industrial relations and a strong entrepreneurial sector – have helped to steer it through the crisis.

Around 10 years ago however, Germany did hit a black spot. As the country’s European counterparts enjoyed creditfuelled consumer and property growth, it limped along, weighed down by the costly implications of re-unification with communist East Germany. As Holger Schmieding, chief economist at Berenberg Bank said, unification created a fabulous party but with a ‘hangover’ of low growth in GDP (gross domestic product), high unemployment and taxes, soaring labour costs and big government spending to rebuild East Germany’s dilapidated infrastructure. Schmieding believes Germany had to correct its post-unification excesses the hard way and the solution, from around 2002, was fiscal austerity - a return to Germany’s well-rooted and peculiar penchant for public and private prudence.

As consumers in the UK flashed their credit cards, those in Germany lived through unemployment and a series of cuts in welfare, pension and healthcare entitlements. Domestic spending fell, but the cure worked and by the time of the global downturn in 2008, the government was deficit-free and did not need to take additional fiscal austerity measures. Over the next two years, prudence and consensus helped Germany to return to growth.   Schemes that reduced working hours helped companies to retain rather than cut workforces, avoiding the costs of large scale redundancies, while tax cuts helped domestic demand for goods from the country’s traditionally strong manufacturing sector.
 

THE GERMAN INDUSTRIAL LEGACY

Throughout the downturn, Germany has continued its tradition of producing goods that the global consumer wants, particularly outside the Eurozone. Global demand for German cars and machinery has held up. “For Germany’s exportoriented companies, competitiveness in the traditional sense is rarely a serious problem,” Schmieding commented.  “Whipped into shape by six decades of almost unfettered global competition, Germany’s top-end manufacturers are world leaders in exploiting their niches and slashing costs if need be.” The roots of Germany’s strong industrial base go back a long way. Germany industrialised very late in comparison with the UK, but overtook it by the 1880s in terms of labour productivity. Its relatively late start enabled Germany to invest in the latest, most efficient technology.

Attitude has also been consistently important, as management consultant and author, Stephen Bungay* pointed out. “German businesses have constantly deployed capital to establish a long-term position rather than short-term profitability. The people running those businesses come from a culture which believes in high quality work at every level and are prepared to invest in the training needed to achieve that. Pride in doing a good, thorough job is found at all levels of the social hierarchy. The apprenticeship scheme provides for professional qualifications in all kinds of work – even if you are a refuse collector you will have a qualification.  German factories are run by a qualified foreman, who has a similar role to a non-commissioned officer (NCO) or a centurion in the Roman army.”

Unlike Britain, Germany did not have a powerful aristocracy which turned its back on trade and industry. In fact, Germany’s industrial dynasties were almost an aristocracy in themselves. By the end of the Second World War, this had helped to create a large, well-educated entrepreneurial middle class.

“In Stunde Null (‘hour zero’, the time immediately after the war), everything had been destroyed, so there was demand for everything,” said Bungay. “The work force had to work to survive. Germany had no colonies, no cheap raw materials. They had to survive in world markets and they realised they had to export. Every German citizen was given a small sum and many chose to be entrepreneurs.”

Indeed, the ‘Mittelstand’ – the small and medium-sized enterprises comprising the backbone of Germany’s economy, has continued to play a key role in the economy despite constraints in bank lending during the credit crunch. According to the sector’s trade association, the Bundesverband mittelständische Wirtschaft (BVMW), these businesses, such as domestic appliances producer, Miele, account for over 90 per cent of all German companies.

“The special characteristic about Germany is that we have more medium-sized companies than other countries, employing between 250 and 500 employees, which makes them stronger than small companies employing 10 or 15 people,” said a BVMW spokesperson.  “These firms make individual and innovative products for niche markets, not mass products, and many have been family-owned for generations. Their goal is long-term sustainability with investment in research and development - they don’t just think about the next quarterly results.”

Leading engineering firms such as Porsche have helped to power the Mittelstand and in contrast with many in the UK, have stayed true to their original engineering culture.

Good industrial relations have also played an important part. Larger companies are obliged to have workers’ councils which will have representation on the board; this helps to nip potential labour disputes in the bud and to ensure that management and workforce share the same goals.

According to Bungay, German society is characterised by a belief in the individual and recognition of the individual’s responsibility to society. “Back in postwar Germany, almost every single German male had served in the Army, an organisation which combined control with autonomy. This meant that people were used to taking decisions on their own in line with the intentions of the upper management.”

This social responsibility has continued with workers’ councils and unions exerting a strong role in decision-making in many companies. For instance, Siemens, the engineering group agreed last year with its works council and the IG Metall workers’ union that it would not make any forced redundancies among its 128,000 German workforce despite the effects of the financial crisis on its business. Employee savings plans, and in some cases, share ownership schemes also encourage employees to dedicate time and effort towards long-term rewards rather than short-term financial gain.

At Berenberg Bank, Schmieding offered an interesting perspective on the so-called German work ethic. “It is not an eagerness to work, as many Germans have short working hours,” he said. “It is more a traditional attention to detail that has been deeply engrained in German culture for centuries. Germany shares that trait with Japan.”

Germany, however has a longer industrial track record and is in a very different position financially. This allows industrial companies to get on with doing what they do best: making high quality, reliable products.

* Stephen Bungay is the author of The Art of Action – How Leaders Close the Gaps between Plans, Actions and Results - Nicholas Brealey Publishing 2011

Author: Heather Farmbrough
Heather Farmbrough worked in the city as a stockbroker and fund manager before joining the Financial Times where she was Junior Markets and Smaller Companies correspondent. She has contributed to publications including Weekend FT, and Management Today and broadcasts on Radio 4.