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International Best Manufacturing Practices: Learnings From Germany

Donald Trump’s campaign was invigorated and emboldened by his appeal to manufacturers, one of the primary reasons his 2016 presidential campaign was successful. There was, and still is, palpable vitriol and frustration with the state of manufacturing among voters. These negative sentiments reached a fever pitch during Trump’s campaign. Whatever the reasons cited by politicians for manufacturing’s decline, what can’t be argued is that the precipitous loss of manufacturing jobs left several communities out in the cold wondering where to go next.

That said, not all developed manufacturing economies suffered to the extent that America did since 2000. If the U.S. looks beyond its own borders for how a manufacturing industry can thrive in an era of globalization, there’s still a glimmer of hope. If America wants to analyze a model that not only finds strength in manufacturing, but supports the training and employment of specialized workers, it needs only look to Germany, and perhaps Denmark, for its cues. For conservatives, liberals and moderates alike, there’s much to learn from a country that still hangs its hat on the productivity of its manufacturing sector.

Germany’s Economic Success Story

As noted by CNN, The Atlantic and others, Germany currently stands as the fourth largest economy in the world.  As recently as 2014, its unemployment rate was 5.3 percent, the second lowest in the European Union. Despite its size relative to other manufacturing powerhouses (its population is 81 million), Germany exports more manufactured goods than any country other than China. Manufacturing also accounts for 21 percent of the German economy, more than the 13 percent of the U.S. or the 12 percent of the U.K. This level of economic success for a country of that size is nothing short of remarkable and is what makes Germany the crown jewel of the now Britain-less EU.

anchor-investments-germany-blog-berlin-wall.jpgIt’s important to note, though, that this current level of success didn’t come without a fight and some ingenuity.

At the time of the fall of the Berlin Wall and the Soviet Union 1989, Germany as a country had an enormous challenge on its hands. Once the barrier between two worlds — West and East Germany (or West and East Berlin) — dissolved, West Germans found their East German counterparts riddled with high unemployment and poverty. The German reunification was a painful process that would burden the economy for more than a decade. According to a report from the Journal of Economic Perspectives, Germany’s economic growth averaged only 1.2 percent from 1998 to 2005 while unemployment rose from 9.2 to 11 percent in that same timeframe. In 1994, its relative unit labor costs exceeded that of Italy, the U.S., the U.K., France and Spain, making Germany less competitive in the global marketplace.  

There were a few factors that played into the ascendance of the German economy and manufacturing sectors. As asserted by the Journal of Economic Perspectives, Germany’s unique labor market institutions, where labor unions and employer associations negotiate wages at the firm level, gave the manufacturing industry unique flexibility that other countries couldn’t match. While the economic recession of 2008-09 was devastating for the U.S. and others, Germany’s economy rolled smoothly along. Aside from flexible wages that adjust relative to the state of the economy (this involves controversial policy, such as the 2003 Hartz reforms), the German economic and manufacturing boom can also be ascribed to a fervent dedication towards research and vocational training. This investment in training, alongside a thriving collection of small-to-medium-sized businesses that dwarf its U.K. or U.S. counterparts, made Germany a manufacturing role model for the world in shockingly short order. 

The Scientific American states the status of German success well:

“Long belittled as lowly metal bending, German manufacturing sailed through the financial crisis with hardly a dent in profits and employment, even though its workers, among the world’s most highly paid, make 10 percent more than their Chinese counterparts earn. German exports have held their share of the global market against China and other emerging countries, even as the U.S. share has plummeted.”

Engineering the German Manufacturing Infrastructure

One of the most perplexing questions of the current world economy is how can a country with notably high-wages and high government regulation directly compete with mass-production manufacturing juggernauts such as China and the U.S.? 

When people think of German manufacturing, global giants such as BMW, Siemens, BASF and Volkswagen come immediately to mind. As noted in The Atlantic, where the strength of German manufacturing really lies is in its mittelstand, or small-to-medium-sized businesses (SMEs), which constitutes roughly 99 percent of all German companies (by contrast, only 50 percent of U.S. companies are SMEs). These SMEs are known to dominate niche manufacturing markets, ranking either the number one or two position for their products on the world market.

anchor-investments-germany-blog-training.jpgThe secret sauce that fuels German manufacturing innovation, one that allows their companies to consistently pour out the highest quality end products in the world, is the level of investment, both public and private, into training and research. The most notable institution is the Fraunhofer-Gesellschaft Society, an independent organization that promotes applied R&D that many German SMEs could not otherwise afford. According to The American Society for Mechanical Engineers, the scale of the Fraunhofer project is enormous, operating 60 research institutes with more than 250 business focus areas supported by a robust $2.45 billion budget. The institute consistently pairs with German universities that specialize and support specific research areas, while companies often grant apprenticeships at their facilities. According to The Wall Street Journal, 30 percent of Frauhofer’s 22,000 employees are Ph.D. students, many of which move on to hold prominent positions at some of Germany’s largest manufacturing firms. Dedicated to methodical improvement and incremental innovation in manufacturing practices, Fraunhofer stands as one of the keystones of Germany’s state-of-the-art manufacturing. 

Government and Manufacturing Relationship in Germany and Denmark

As mentioned before, Germany’s approach to labor unions and worker representation is much different than that of the U.S., the U.K. or France. There is a notable decentralization of unions and worker representation groups. It’s also a legal requirement in Germany that all the boards in major corporations consist of workers and management in equal parts. They feel the same pains as U.S. manufacturing in many respects, such as the loss of jobs in the steel industry, but make up for this by advocating to keep the most highly skilled manufacturing jobs in Germany while sending lower-value work elsewhere (if it hasn’t already been taken by automation). The power that workers inherit, most of which receive a world-class level of vocational training from partially government-funded institutes such as Fraunhofer, allows for a culture of manufacturing excellence that is difficult to replicate. 

As an honorable mention, in Denmark, more than four percent of GDP is spent on the support of job training, which as Steven Hill of The Atlantic points out, is roughly the same percentage as the U.S. spends on its military budget (while the U.S. allots only 0.7 percent for its job training support). The Danish government will send Gallup polls to employers at Danish companies asking them to identify the jobs they will need in the short and long-term future. In this way, they can redirect labor to fill shortages, matching labor supply and demand as if it were a science. If workers don’t have the applicable skills they need for the job, the government will share the costs with the hiring employer. This approach is known by the Danes as “flexicurity,” combining “big” government with the best aspects of the free market. For this reason, fewer than 10 percent of Danes are worried about job security.

Potential Learnings for U.S. Manufacturing

anchor-investments-germany-blog-apprenticeship.jpgUnderstandably, creating both the private and public manufacturing culture or infrastructure of German manufacturing in the U.S. is unrealistic. As Charles Wessner argues in his article for The American Society of Mechanical Engineering, the German model isn’t without its flaws and isn’t easily transferred to other cultures. Fraunhofer, for instance, focuses primary on the manufacturing industries that exist rather than seeking breakthrough innovations that are the lifeblood of American tech companies such as Google, Apple or Intel. Germany’s flexible approach to wages has created a notable inequity between the top 75 percent of earners and the bottom 25 percent. Since Germany is also so dependent on exports to feed its economic machine, any bumps in the world economy are felt almost immediately.  In the case of Denmark, it’s unlikely that the U.S., especially in the current political climate, would tolerate taxation levels that would allow for such a well-oiled job replacement mechanism. There are many reasons why some principles, both in government policy and private practice, just can’t translate at the present moment. 

At the same time, there are lessons the U.S. can take from the German (or Danish) model that could help ease the pain many American manufacturers are feeling. The most important of these is the focus on robust vocational training that would keep the most skilled manufacturing jobs in the U.S.  While more worker representation is a highly debated subject in the U.S., especially as it relates to unions, higher levels of training beget workers that are in a better position to further the interests of, or lead, the companies that employ them. While the unstoppable trains of globalization and automation continue, taking a little more notice of international best practices can help U.S. manufacturing become more flexible as it adjusts out of necessity.

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