Germany’s Economic Renaissance This page intentionally left blank Germany’s Economic Renaissance Lessons for the United States Jack Ewing germany’s economic renaissance Copyright © Jack Ewing, 2014 Softcover reprint of the hardcover 1st edition 2014 978-1-137-34973-6 All rights reserved. First published in 2014 by PALGRAVE MACMILLAN® in the United States—a division of St. Martin’s Press LLC, 175 Fifth Avenue, New York, NY 10010. Where this book is distributed in the UK, Europe, and the rest of the world, this is by Palgrave Macmillan, a division of Macmillan Publishers Limited, registered in England, company number 785998, of Houndmills, Basingstoke, Hampshire RG21 6XS. Palgrave Macmillan is the global academic imprint of the above companies and has companies and representatives throughout the world. Palgrave® and Macmillan® are registered trademarks in the United States, the United Kingdom, Europe and other countries. ISBN 978-1-349-46804-1 ISBN 978-1-137-34054-2 (eBook) DOI 10.1057/9781137340542 Library of Congress Cataloging-in-Publication Data Ewing, Jack. Germany’s economic renaissance : lessons for the United States / by Jack Ewing. pages cm Includes bibliographical references and index. 1. Industrial policy—Germany. 2. Small business—Germany. 3. International business enterprises—Germany. 4. Manpower policy—Germany. I. Title. HD3616.G4E95 2014 338.0943—dc23 2013039979 A catalogue record of the book is available from the British Library. Design by Amnet. First edition: April 2014 10 9 8 7 6 5 4 3 2 1 To Zita Lee, my mother, who encouraged my interest in writing and will always be a model of patience, selflessness, and fortitude. This page intentionally left blank Contents Introduction ix 1 A Brief History of Made in Germany 1 2 Revival 15 3 The Seeds of Complacency 23 4 Renaissance 37 5 The Soul of the German Economy 47 6 Boldly Cautious 53 7 “We’re Never the Cheapest” 65 8 Mini Multinationals 75 9 Little Swabia and the Art of Global Manufacturing 85 10 Cars, Engineers, and the Internet 97 11 Azubis and the Skills Pipeline 113 12 The Education of a German Manager 129 13 The Seeds of Complacency (II) 141 14 Lessons for the Rest of the World 157 Notes 167 Index 179 This page intentionally left blank Introduction This page intentionally left blank INTRODUCTION xi ot so long ago, it looked as if Germany was slouching Ntoward global irrelevance. Its once powerful economy was sagging under the burden of the welfare state. German workers were expensive and hard to fire. Unions were powerful and inflexible, with the power to set wages for whole industries. Taxes were high and rising, draining more than 37 percent of gross domestic product (GDP) by the end of the 1990.1 Unemployment rose steadily through 2006, to more than 12 percent.2 Domestic demand was shrinking as the birthrate fell and the number of retirees rose. Germany had no reply to the entrepreneurial energy of Silicon Valley and was a bystander in the development of the Internet. As America converted to a service economy and outsourced production to China, German managers—engineers, as a rule, rather than MBAs—clung to manufacturing, a strategy that seemed anachronistic and foolish. The fall of the Berlin Wall and the reunification of Germany, one of the only truly joyous moments in twentieth-century German history, gave way to the realization that the East German economy was bankrupt and grossly inefficient, and would take years and trillions of deutsche marks to become competitive. And with the end of the Cold War, Berlin was no longer a locus of geopolitical tension. If Germany was also a fading economic power, diplomats in a world no longer divided by the Iron Curtain could safely ignore it. By the beginning of the new millennium, the postwar economic miracle, the Wirtschaftswunder, seemed like a distant memory. Yet less than a decade later, the country rebounded. German workers were still expensive, and taxes among the highest in the world. But the refusal to give up on old- fashioned metal banging now seemed like wise pol- icy. German unemployment fell while joblessness rose in other developed countries, including America, which had become too dependent on real estate and financial services for growth. In 2012, Germany was a close third behind China and the United States among the world’s largest xii INTRODUCTION exporters of merchandise. Germany, with about 81 million people, sold almost as many goods abroad as the United States, with about 314 million.3 With just 6 percent of the population of China, Germany generated exports equal to more than 70 percent of what China produced for over- seas consumption. As the eurozone debt crisis devastated nearby countries like Spain and Italy, Germany remained supremely aloof. In the most prosperous regions like Bavaria or Baden-Württemberg, there was full employment. The Bavarian city of Ingolstadt, the home of automaker Audi, had a jobless rate of less than 3 percent in 2012, and this was in the midst of recession in the rest of the eurozone. Nationwide, the unemployment rate had been cut in half. It was not an exaggeration to say that Germany had created a second Wirtschaftswunder. Why? What allowed Germany to revive its economy in an amazingly short time? And what can America and other developed and developing nations learn from Germany’s example? The answer holds lessons for managers and policymakers in the United States and any other economy that is trying to revive or build a manufacturing base, which, as the unfortu- nate citizens of cities like Detroit can testify, is indispensable to a balanced economy with low unemployment. It holds lessons for managers wondering how they can compete with Chinese companies that pay their workers one-tenth as much as American workers earn. In Germany, part of the credit for the country’s rebound goes to household names like Audi, BMW and Daimler. They invested in China and other emerging countries at the right moment. They used automation to compensate for high labor costs in Germany, and judiciously relocated some production to Eastern Europe or Asia. At the same time, they were careful to keep research and development and intellectual property close to home. German companies dominated the global market for premium automobiles even INTRODUCTION xiii as competitors like Fiat, Ford of Europe or General Motors’ Opel unit accumulated huge losses on the Continent. German policymakers also deserve some of the credit. Under Chancellor Gerhard Schröder, a Social Democrat and nominally a socialist, the German government addressed some, though not all, of the rigid labor regulations that made it so difficult for German companies to respond to fluctuations in demand. Under Schröder’s successor, Angela Merkel, Germany cut the basic corporate tax rate to 15 percent from 25 percent, well below the 35 percent rate in the United States.4 (The total tax burden in Germany is still greater, because of higher personal income taxes, value- added taxes, and other levies.) Even labor unions deserve a share of the praise. While they often talk tough, German labor leaders rarely stage massive strikes and are fundamen- tally pragmatic. They allowed wages to effectively stagnate in return for job guarantees. But much of the change took place below anybody’s radar at companies like Pickhan Heavy Fabrication. You probably have never heard of Pickhan, based in the small city of Sie- gen, in a hilly region of western Germany. But if you have been to the Museum of Modern Art in New York or the Gap headquarters in San Francisco, you have probably seen its products. When I visited Pickhan in 2007, its main factory looked like little more than an oversized welding workshop. The owner, Friedhelm Pickhan, did not come across as your typical CEO. He was a compact man with a voice like sand- paper, who smoked Marlboro Lights, which he stubbed out when they were halfway done, putting the rest back in the package to enjoy later. Pickhan was what Germans call a Handwerker. They mean it as a compliment. Pickhan’s most famous customer was Richard Serra, the American sculptor. Pickhan fabricated Serra’s huge sculp- tures of undulating steel, in part because no American com- pany was capable of doing the work to his standards. Works that Pickhan made for Serra are found in leading museums, xiv INTRODUCTION prominent public spaces, and corporate headquarters around the world. Pickhan was, moreover, one of the few companies anywhere near capable of shaping huge pieces of steel with great precision into irregular shapes. Pickhan took a huge risk when it accepted its first com- mission from Serra in 1997. As Friedhelm Pickhan told me the story in 2007,5 the artist, who had heard about the shop from his German art dealer, faxed over a few curved lines drawn with a thick pencil on a sheet of paper. He asked Pick- han if he could make it. Pickhan did not know much about art or have much use for artists, but he had just bought a big new machine and needed work to do on it. He said he would try. Pickhan had to knock out a wall of the factory building to accommodate the huge sheets of steel needed to construct Serra’s sculpture. Centimeter by centimeter, Pickhan and his workers fed the sheets through a press that folded them into the precise, subtle shapes that the artist wanted. It was part heavy industry, part origami. Serra entitled that first workPickhan’s Progress. It later went on view at the Museum of Contemporary Art in Los Angeles. Pickhan made dozens of Serra sculptures in the years that followed.