Germany’s economic model: What Germany offers the world

April 19th, 2012

Other countries would love to import Germany’s economic model. But its way of doing things is a lot less amenable to export than the wares it produces – Published on The Economist, April 14, 2012.

THE European Central Bank controls Europe’s currency from Frankfurt, Germany’s financial centre. Beckhoff Automation, in a bucolic corner of Westphalia, controls the bank. Or more precisely, its devices control the bank’s lighting and ventilation. Other Beckhoff gizmos raise the curtain and dim the lights at Milan’s Teatro alla Scala. Yet more are embedded in luxury sailboats, in dancing fountains outside Las Vegas hotels and in half the wind turbines made in China.  

Omnipresent but obscure, family owned but by no means puny, Beckhoff is among thousands of “hidden champions” that account for much of Germany’s prowess as a manufacturer and exporter. Its sales leapt 34% to €465m ($608m) last year. It is aiming for €2 billion by 2020. Beckhoff exports more than half its output. But its manufacturing is mainly in high-wage, rule-bound Germany.

Largely thanks to its Beckhoffs, Germany looks like a bright exception to the dispiriting rule among developed economies. True, its economy contracted more than those of most rich countries during the 2008-09 world recession (see chart 1). But the jobless rate rose by less than in all the others, peaking at 7.9%. And nobody talks about downgrading Germany’s AAA credit rating; it can borrow money for practically nothing.

Envy and emulation: … //

… Small towns in Germany:

Hans Beckhoff, boss of the automation company that bears his name, does not come off as a throwback. His silver-grey hair is modishly long, his collar unbuttoned. But some of his habits seem distinctly old-fashioned. Take his approach to debt: he’s against it. Investment in the company is funded by him and his three siblings, the only shareholders. It is the same with nearby Miele, a 113-year-old maker of kitchen equipment and white goods, with annual sales of €3 billion. This is not the most efficient way to run a company. With more leverage Mittelstand firms could boost their pre-tax profit by several points, notes Armin Schmiedeberg of Bain, a consultancy. He thinks they are wise not to.

The point is not to maximise short-term profit, says Markus Miele, a managing director at his firm, but to aim at “where we want to be when we hand over to the next generation.” Mr Beckhoff says he fends off monthly offers to buy his company. Lack of financial ambition goes along with the observance of unwritten sumptuary laws. “Families behind the Mittelstand live in an acceptable, modest and healthy way,” says Mr Beckhoff.

Maybe that is because they lean so heavily on the skilled workers the country is so good at producing. Around half of German high-school students go on to dual training in one of 344 trades, from tanner to dental technician. Many of the courses are set by unions and employers’ federations. State and local governments provide the schools where apprentices get their theory. Chambers of commerce and industry run the exams. When foreigners ask why youth unemployment is so low (just 8.2% compared with Spain’s 50.5%), older Germans tout the dual system.

Young Germans are not so convinced; it is the first choice of just a fifth of high-school students, says Swen Binner of the Bielefeld chamber of commerce. And the number of school leavers in OWL is dropping by 2% a year while demand for skills is rising. Business is adapting by blurring the previously sharp distinction between vocational and university training. Beckhoff now offers “academic apprenticeships”, which combine hands-on experience with study at a technical university.

The relationship between conscientious proprietors and diligent craftsmen is not without conflict, but it is set in a governance framework that contains disagreements without stifling them, and can deliver flexibility. In the metal and electrical engineering sector, the heart of manufacturing, labour contracts still tend to be settled on an industry-wide basis (outsourcing trouble, as some bosses see it).

Knowing what’s kneaded: … (full text).

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