Germany's Economic Renaissance

Lessons for the United States

J. Ewing

• Publisher: Palgrave Macmillan
• Year: 2014
• ISBN:
  9781137340542
• Topic: Business
• Subtopic: Business Strategy
• Index: Business

In Germany's Economic Renaissance, veteran European correspondent Jack Ewing of The International New York Times explains how a country with some of the highest labor and energy costs in the world beat the odds to become the third-largest exporter of manufactured goods, after China and the United States. Men and women who manage German companies both big and small explain how any company can behave like a multinational, as well as the secrets of conquering the high end of the market where quality is more important than price. Both informative and entertaining, filled with rich character studies, this book is essential reading for everyone wondering how to bring factories - and the jobs they provide - back to American shores.

1

A Brief History of Made in Germany

The British officials who coined the phrase “Made in Germany” intended it as an insult. In 1887, alarmed at an influx of low-priced German products, the British government required goods imported from Germany to be labeled as such. Back then, Germany was to Britain something like China is to Europe or the United States today. It was an aggressive emerging economy with a large store of cheap labor and ambitions to become an economic superpower. But Britain’s attempt to shield domestic companies from competition backfired. Made in Germany became a synonym for quality.¹ The story of how Germany succeeded within a few decades still tells us something about the German mindset and tradition.

The Industrial Revolution came late to Germany, but transformed the economy with astonishing speed once it did. Well into the nineteenth century, Germany had been politically fragmented and economically backward. Serfdom, the system that tied farmers to landowners and gave the nobility far-reaching powers over farmers’ lives, persisted until the beginning of the 1800s in some regions, including Prussia, the most powerful German state. Centuries after the end of feudalism in Britain, a significant percentage of the German population was locked into an agrarian economy, miserably poor and uneducated, unavailable as factory labor much less as a source of entrepreneurship.

What we know as Germany today did not yet exist. The German-speaking world then revolved around two empires, Prussia and Austria, German-dominated but with a polyglot citizenry, with a patchwork of fiefdoms sandwiched in-between. Goods traversing the region were subject to duties each time they crossed the borders of independent states like Württemberg or Bavaria. The barriers suppressed trade, and were deep enough that some of their legacy persists today. While high German is the language of the educated classes and business interchange, many regional dialects survive and are still the everyday means of communication in places like Bavaria or the area bordering Denmark. These are more than just regional accents. Some dialects are so impenetrable that, when a native is interviewed on German television, broadcasters superimpose subtitles so that viewers elsewhere in the country can understand. These linguistic demarcations are, in a sense, the ghosts of ancient economic and political barriers.

Reform of the German system began after the French Revolution at the end of the eighteenth century. Germany’s own democratic movement during that period would eventually fail, but the ruling class was well aware of the unrest brewing among the broad German population. Living standards for the poor, already abysmal, were declining at the same time that expectations were rising, as mechanized farming displaced farm laborers and citizens learned of the democratic change taking place elsewhere. Fear of French-style chaos served as an impetus for the ruling class and bourgeoisie to reluctantly accept limited change, including liberation of the serfs and, beginning in 1818 in Prussia, the creation of the Zollverein, a customs union. The free trade zone expanded in the years to come, allowing easier movement of goods within the German-speaking world.

The creation of Germany as a coherent political entity in the 1870s was largely the product of the machinations of Otto von Bismarck, the chancellor of Prussia. Ruthless and pragmatic, Bismarck was clever enough to see that concessions to the popular will were necessary to preserve the power and privileges of the nobility. He managed to thwart true democratic rule, yet introduced changes such as health insurance that improved the lot of ordinary workers. In 1883, 130 years before Obamacare, German workers received free medical treatment and medicines, as well as sick pay when they were unable to work for longer periods. Thanks in part to Bismarck, Germans today take it for granted that the government will pay for health care and education and protect them from the harsher effects of free-market capitalism.

Intertwined with political change was the unstoppable advance of a new technology, the railroad. The advent of rail travel was significant not only because it speeded the transport of goods and people but also because it created huge demand for rails and locomotives. The first railroad equipment was imported from Britain, but Germans quickly learned to produce their own. By 1853, domestic companies accounted for 94 percent of German locomotive production.² The German steel and machinery industries were born.

Why did Germany so readily develop its own manufacturing base for railroads when other countries like Italy did not? The presence of coal, particularly in the Ruhr ­Valley, offers a partial explanation. But Germany—by which I mean the region we now call Germany—also seemed to have an abundant supply of what today we would call entrepreneurs: restless, ambitious souls who single-mindedly pursued new markets and technologies. The militarism of Prussian society also played a role, creating a demand for military engineers and a route for young men of common birth to acquire training. The poverty and overpopulation of the German-speaking regions also provided a powerful impetus for people to seek routes to better lives. Huge numbers immigrated to America, but some remained and built companies whose names are still to be found on corporate logos. Alfred Krupp springs to mind. Krupp was just 14 when his father’s death in 1826 left him with much of the responsibility for the family iron works.³ The young man recognized the opportunity offered by the advent of railroads, and began producing axles and other parts for locomotives. The company’s breakthrough came in 1852 and 1853 when Alfred Krupp developed a seamless rail wheel, which could operate at faster speeds without disintegrating. The firm Krupp began producing ingots for artillery pieces in 1847. Not content with being merely a subcontractor, producing blanks to be finished by someone else, Alfred Krupp developed his own cannons, which he began selling to the Prussian military in 1859. The name Krupp would soon become synonymous with German military aggression.

To a great extent, Alfred Krupp set the template for hundreds of German business leaders to follow. He was not a founder in the strict sense of the word. He took over a family business, but transformed it into something far grander than the company he inherited. Many of the companies we will meet later in this book adhere to this pattern. Krupp was an innovator, who did not merely exploit the inventions of others but built sales by developing new products that were superior to the competition and owned exclusively by the company. Today we take it for granted that companies conduct their own research and development, but this was a novelty in that era. Alfred Krupp recognized that the most sophisticated products generated the most profit. Nowadays we would say that Krupp aimed for the premium market, the top of the value chain. He was not satisfied merely to make tubes that another company would upgrade into field pieces. The way to make money was to deliver the most technically challenging part of the process, to do things that competitors could not.

But the Krupp company in the nineteenth century also aimed for the bottom of the value chain. Alfred Krupp wanted to control every step of production, even the mines that produced iron ore. The Krupp firm also maintained its own international sales force. Economic historian Richard Tilly has argued that this vertical integration, as we would call it today, gave Krupp and other German companies an advantage over British competitors, which operated under a mercantile system steered by the government and used as an instrument of foreign policy. The German companies were closer to their customers and suppliers, and had better information about what was happening in the market.⁴ That level of vertical integration is pursued by only a few companies today, but there are occasional exceptions. In 2013, when BMW began mass producing an electric car with a body made largely of lightweight carbon fiber, it decided to produce the raw material itself in Washington State by way of a joint venture with SGL Carbon. No existing supplier could produce what BMW needed. And the practice of building and maintaining a foreign sales and service organization remains widespread, even for smaller German companies.

Werner von Siemens is another name that looms large in German economic history. Born in 1816, a few years after Krupp, Siemens was one of 14 children of a poor tenant farmer in a small town near Hanover. He is an example of the human potential that was set free after cracks appeared in the class system, and the Industrial Revolution offered a path of upward mobility for young men of talent and ambition. (Siemens earned the aristocratic “von” much later.) Unable to afford a higher education, Siemens joined the Prussian Army as a way to learn engineering. While still serving, he invented a so-called pointer telegraph that did not require knowledge of Morse code to use. It became the basis for the company he formed with a partner in 1847, Siemens & Halske.⁵ After winning an order to build the first telegraph line between Berlin and Frankfurt, Siemens moved abroad in search of new business, building telegraph lines in Russia and Britain. Later he played an important role in the development and commercialization of large-scale electrical power generation, which remains a major part of the modern Siemens empire.

Like Krupp, Werner von Siemens established enduring precedents for German business leaders to follow. He was an engineer first, albeit with a keen nose for business, who seemed to take intrinsic pleasure in inventing things. Siemens once wrote to his brother Carl: “For me the business is only secondarily important as a source of wealth: I see it rather as a realm that I have founded and that I would like to pass on undiminished to my descendants so that they can continue to operate within it.”⁶ That statement could serve as a motto for countless German entrepreneurs today, for whom the act of making something is more satisfying than the accumulation of money. Werner von Siemens was also an early example of a German entrepreneur who moved fearlessly into foreign markets like Russia or the Middle East, which offered much greater potential than the German market alone.

Alongside the industrial giants were thousands of small companies that filled the niches in which the big companies had no interest. According to historian Paul Erker, “practically every mid-sized city in Germany had small family-owned machinery factories.”⁷ These were the forerunners of the Mittelstand, the smaller, highly focused companies that more than any other sector drive the German economy today. Glasbau Hahn, a maker of museum display cases that we will meet later in this book, already existed in this era.

One reason that Krupp and Siemens and many other ­German entrepreneurs were innovative and international was because they had no choice if they were to compete abroad with England. Germany had limited natural resources. Germany’s navy was far inferior to Britain’s, and its access to the open ocean was constrained. Germany had only a modest foreign empire compared to Britain. As we have seen, Germany was not even a unified country until the Industrial Revolution was well under way.

Despite, or perhaps because of, these drawbacks, by the end of the nineteenth century Germany had by far the more inventive, technology-oriented economy. German inventors registered 11 times as many patents between 1885 and 1890 as Britain. Building on the Prussian educational system, which was designed to provide technical expertise for the army, German colleges trained 3,000 engineers a year by the turn of the century, eight times as many as Britain. The number of university-educated managers in Germany was at a level that Britain did not reach for another half century.⁸ German managers served apprenticeships in British factories to learn their methods and technology, and imported British experts to work in German factories.⁹ They also traveled to the United States to learn mass-production methods.¹⁰ This emphasis on technical training and education, on Ausbildung, remains a key feature of the German economy. And ambitious young German men and women still spend time traveling and working abroad to learn about other cultures and ways of doing things.

In the second half of the nineteenth century, German exports grew faster than Britain’s, threatening English preeminence in the global economy. The British were well aware of the threat, convening a Royal commission to study the issue, which in 1887 issued the edict requiring the Made in Germany label. However, more than feeble protectionism was required to stop the German industrial advance. By 1913, on the eve of World War I, Germany accounted for 12.3 percent of world trade, just behind Britain with 14.2 percent, and ahead of the United States with 11 percent.¹¹ Sales abroad accounted for more than one-third of German national income. The Krupp company employed 64,000 workers in 1907, as many as its modern incarnation, ThyssenKrupp, had in Germany in 2012.¹² Germany had become unequivocally an export nation, which makes the decisions of German political and military leaders during those years seem, in retrospect, all the more foolish and inexplicable, to say nothing of tragic.

It would be misleading, however, to portray the nineteenth century as a steady advance toward prosperity that was derailed only by the hubris of Kaiser Wilhelm and his generals. It was a volatile period, marked by frequent military conflict and recurrent economic crises. For most ordinary people, life was difficult at best and often miserable. Working conditions were abysmal, the pay was barely enough to survive, and getting enough to eat was an overwhelming concern. German managers could be as reckless as they were innovative. The Krupp company was continually beset by financial crises due to overexpansion and miscalculation by Alfred Krupp and his successors. As Krupp, Siemens, and other companies like Bayer grew into giant enterprises, they sought to protect themselves from the competition that, decades earlier, they had once personified. They coined a new term, the Interessengemeinschaft, or IG. Literally, it meant a community of interests; in practice it was a cartel. Toward the end of the 1880s, m...

Table of contents

• Cover
• Title
• Copyright
• Content
• Introduction
• 1 A Brief History of Made in Germany
• 2 Revival
• 3 The Seeds of Complacency
• 4 Renaissance
• 5 The Soul of the German Economy
• 6 Boldly Cautious
• 7 “We’re Never the Cheapest”
• 8 Mini Multinationals
• 9 Little Swabia and the Art of Global Manufacturing
• 10 Cars, Engineers, and the Internet
• 11 Azubis and the Skills Pipeline
• 12 The Education of a German Manager
• 13 The Seeds of Complacency (II)
• 14 Lessons for the Rest of the World
• Notes
• Index