Want a smarter workforce? A stronger manufacturing sector? Germany seems to offer a blueprint for Obama's middle-out economic agenda -- if we take away the right lessons
Americans have experienced a strong case of Germany Envy throughout the recession and slow recovery. In 2010, when the president pledged to double export growth in five years, policymakers looked to Germany for tips. In his latest State of the Union, the president plugged Germany, not only as a manufacturing powerhouse, but also as a standard for vocational training for young people.
The new liberal vision of a competitive economy built around a resurgent manufacturing sector and an educated middle class seems to ape what Germany does best. But how much do we really understand what makes the German economy a world-class leader?
It's true that, by U.S. standards, Germany has a model system for technical training of workers. The Land of Bismarck has fed its manufacturing machine with a steady supply of technicians, engineers and skilled workers through a superb apparatus of vocational training and technical apprenticeships. Companies work closely with regional technical schools, sometimes sponsoring programs to prepare the graduates so they are immediately job-ready.
But Germany's vocational training isn't top of the class by European standards. That prize goes to Denmark. Over four percent of Danish gross domestic product is spent on job training and support -- about the same percentage the U.S. spends on its military budget while allotting a mere 0.7 percent to job retraining and support. And Danes have job placement down to a quasi-science. Experts prepare what is known as a "bottleneck analysis," using pollsters to survey employers on what jobs they will need in coming years. The feedback is then used to identify the next labor shortages and to pick the correct training courses for individuals. One Danish jobs analyst said, "In our system, we can make supply and demand match," an impressive boast that shows a proactive government can help a flexible labor market.
THE SECRET SAUCE IS S.M.E.
Beyond vocational training, a huge factor in Germany's manufacturing and export success lies in its vibrant mittelstand -- those small and medium-size enterprises (SMEs) that form the backbone of the economy. Germany has a cornucopia of Fortune 500 companies that are manufacturing leaders -- global brand names like BMW, Siemens, ThyssenKrupp, Volkswagen, Daimler and BASF -- but what really sets Germany apart is its beehive of small and medium-size businesses.
About 99 percent of all German companies are SMEs, which are enterprises with annual sales of below EUR 50 million and a payroll with fewer than 500 workers. And around two-thirds of all German workers are employed in this sector. While that's the same as the EU average, it's higher than the United Kingdom (60% SMEs) and much higher than the U.S. (about 50%). While America's policy makers pay lip service to sound bites like "small business is the backbone of the American economy," Germany actually follows through with smart policy. The results speak for themselves.
While Germany's entire SME sector is impressive, its manufacturing SMEs are world-class. Nearly a third of Germany's SME workers are employed in the manufacturing sector, but those workers account for a disproportionate share of Germany's total exports, about 40 percent (compared to American SMEs which account for 31 percent of U.S. exports). Many enterprises have been run by the same family for decades, and companies are often handed down from generation to generation.
'KING OF NICHE MARKETS'
"America concentrates on the mass market and quantity, but Germany is king of niche markets," says Professor Bernd Venohr of Berlin's School of Economics. That entrepreneurial strategy has allowed these German companies to be manufacturing and export dynamos, providing developing nations like China and India with the high tech precision tools they need to become the mass production factories of the world.
A typical enterprise will focus on making a single, high quality product that is crucially needed by other industrial enterprises, and they are the best in the world at producing it. Many manufacturing SMEs have become world market leaders in their field, dominating the global market in an astonishing range of areas.
-- Tente specializes in heavy duty casters and wheels for industrial uses.
-- Würth is the leading industrial supplier of assembly and fastening materials worldwide.
-- Dorma makes doors and related accessories.
-- Rational makes ovens for professional kitchens.
-- Other examples include RUD (industrial chains), Koenig & Bauer (printing presses), Utsch (licence plates), Aeroxon (environmentally-safe insecticides) and Kärcher (high-pressure cleaners). The German renewable energy sector (wind energy, solar photovoltaics and biomass) has been the world's leader for many years, and much of it is driven by SMEs that are now expanding into international markets.
I interviewed the co-owner of Hegra Linear, a leading manufacturer of what is known as mechanical motion technology, based near Frankfurt. Their company has about 25 employees, and produces a little-known niche product: telescopic slides and linear guiding systems. These are high tech, low-friction shelves, slides and drawers needed in a wide range of industrial applications, including factory automation, automotive assembly, airplane production and more. For example, if you have a very large, heavy battery for a metro bus that you need to have easy access to for maintenance, then you need a way to smoothly slide that battery in and out. By setting that battery on one of Hegra Linear's high tech, near frictionless drawers, that makes it easy to slide it in and out and gain access. Hegra Linear does this extremely well, and business has grown rapidly in recent years. Said the owner, "We rely on our good reputation to bring in new customers."
These kinds of companies are not flashy or household names, but they are noted for having a relentless drive to produce high quality products, as well as stellar productivity and an obsession with improving operational performance. These SMEs are particularly strong in shop floor operations, with state-of-the-art, lean manufacturing practices that flows from their intensive investment in research and development.
While Germany's economy shrank in the last measured quarter, mostly due to the collapse of the overall European economy, it still runs a trade surplus with much lower unemployment than the U.S. German Chancellor Angela Merkel once was asked by then-British prime minister Tony Blair what the secret was of her country's impressive success. She famously replied, "Mr. Blair, we still make things." In Germany, manufacturing still dominates finance, not the other way around, as Germany has continued to emphasize manufacturing and exports over the financial industry.
THE POWER OF WAGES
The conventional wisdom among some observers of the U.S. economy is that manufacturing can't compete with low-cost labor in China. Germany has shown this viewpoint to be utter rubbish. One study by the US Bureau of Labor Statistics found that hourly manufacturing compensation (wages plus benefits) was $48 in Germany and only $32 in the United States (that study was for all manufacturing workers, not just those in SMEs, but Germany's manufacturing workers in SMEs make comparable wages to those working for their large corporations).
German workers in SMEs also all have quality, affordable health care. In the U.S., many workers in SMEs tend to have inferior health care if they have it at all. American apparel workers employed by SMEs are likelier to work in sweatshop-like conditions, with Sweatshop Watch reporting that "67% of Los Angeles garment factories don't pay their workers minimum wage or overtime." Workers in Germany's SMEs are not subjected to such deprived conditions.
All of these components have allowed the German manufacturing and export sectors to enjoy a sterling reputation around the world, and contributed greatly to Germany being the world's fourth-largest economy with a sizable trade surplus. And Germans have harnessed that wealth to foster an equitable and broadly shared prosperity that has given Germans an enviable living standard.
Moreover, unlike in the U.S. where Democrats and Republicans, left and right, fight bitter battles over the best manufacturing strategy, in Germany its various governments from both the right and the left mostly have been joined at the hip when it comes to manufacturing policy, as well as other economic policies. This has included specific policies to deal with the economic crisis, as well as longer term strategies. Good policies can make a difference, and Germany's have given it a competitive edge.
So for President Obama to cite Germany's vocational training for youth as a model is certainly a step in the right direction. But the German example cannot be cherry-picked. It is the sum of its parts -- from vocational training, through the strength of its SMEs, to its high-productivity export focus -- that makes it the envy of so many Americans.