CHAPTER EIGHT
What We Can Learn from
the Germans
NO ONE THESE DAYS TALKS of a “German miracle,” least of all the Germans. And there are no bestselling books about German management, and no seminars on “What We Can Learn from the Germans.” Yet the German economic performance these last few years is every bit as impressive as that of the Japanese, and more solid.
A few years ago West Germany furnished 13 percent of all industrial goods in world trade; its share of a substantially expanded industrial-goods world trade in 1985 was up to 17 percent. It still trails the United States: our share in industrial exports is 20 percent. But Germany is substantially ahead of Japan’s 16 percent share. Yet West Germany has no more than a quarter of the U.S. population and only half as many people as Japan. Per capita West Germany’s industrial exports are thus almost four times those of the United States and twice those of Japan.
And they are better balanced than Japan’s. The Japanese have one dominant customer, the United States, which accounts for almost half of the total in Japan’s main export industries. There is only one West German company—and that a fairly small one: Porsche—that is as heavily dependent on the American customer as are practically all major Japanese exporters; more than half of Porsche’s production is sold in the United States. No other West German company sells as much as one-tenth or one-twelfth of its exports in the U.S. market. A sharply devalued U.S. dollar is a headache for a good many German companies. But it is a calamity for many Japanese manufacturers. Altogether no one foreign customer is so dominant as to make Germany dependent on it.
Similarly, West Germany is not dependent for its export income on any one product group the way the Japanese are dependent on just four: steel, automobiles, semiconductors, and consumer electronics. No one product category—not even automobiles, despite Mercedes, BMW, and Porsche—accounts for more than one-twelfth of the German export total. By contrast, the four major Japanese export categories supply more than two-thirds of Japan’s export surplus. And in every single industrial product group a West German firm, often a small or medium-size specialist, is among the world’s leading suppliers. The Japanese, by contrast, are not even represented as world-market suppliers in the majority of industrial product categories.
West Germany has also been far more successful so far in using exports to lead domestic recovery. To be sure, the Japanese export drive has prevented massive unemployment at home. Without it the Japanese smokestack industries—both the badly depressed steel industry and an automobile industry that faces stagnant domestic demand—would register double-digit unemployment, that is, unemployment that even the Japanese policy of keeping redundant workers on the payroll rather than laying them off could not possibly hide. But the Japanese domestic economy and Japanese industrial employment have remained sluggish and stagnant for almost five years now despite the tremendous export boom. By contrast West Germany’s domestic demand for such engineering industries as machine tools or forklift trucks almost doubled from 1983 to 1986, and industrial employment in 1985 grew by 200,000 to 300,000 jobs.
Finally West Germany is the only developed country other than the United States where there is a substantial entrepreneurial surge, especially in Germany’s equivalent to the “Sunbelt,” the area around Stuttgart in the country’s southwest corner. Altogether about 10,000 new businesses were started in West Germany last year, still far fewer than in the United States but about four times as many as in the Germany of the 1970s.
And all this has been accomplished with almost no inflation, with interest rates kept low, and with a sharp reduction by more than a third in the budget deficit, while the trade surplus and the payments surplus are steadily going up.
Of course there are problems, and fairly serious ones. Unemployment, while lower than in most European industrial countries, and dropping, is still very high by German standards: 9 percent. However much of this is probably the result of demographics, and self-correcting. The German baby boom did not subside until the late 1960s, that is, six or seven years after it did so in the United States and more than ten years after it subsided in Japan. As a result, very large age-groups have been entering the German labor force through the mid-1980s—but that wave has crested and is going down fairly fast. Within a few years there is likely to be a shortage of young people entering the German labor force and a corresponding drop in unemployment.
Another soft spot is high tech. Only in biotechnology is West Germany a serious contender so far. It is well behind in computers, microelectronics, and telecommunications. And whether the government-sponsored venture-capital program for high-tech start-ups will have results remains to be seen. So far the German thrust is primarily in high engineering (for example, temperature- or corrosion-resistant pumps or automated baking ovens) rather than in high tech.
The biggest threat may be labor costs. West Germany is far behind both the United States and Japan in factory automation. Labor costs are therefore crucial. Productivity has been doing well, as well as in Japan and far better than in the United States. But although the German unions have been conscious of their country’s dependence on competitive labor costs and restrained in their wage demands, there are growing signs of upward wage pressure and union militancy now that business activity is rapidly revving up. It could not come at a worse time than in 1986 when the D Mark is rapidly rising, especially against the dollar, thus cutting sharply into German export earnings and the German competitive position. If the German economy stalls in 1987 or 1988, it will be largely because labor costs will make it uncompetitive.
Still, the West German achievement is significant enough to demand more attention than it usually gets. What explains it?
There are surely some cultural factors. Chief among them is probably the unique German system of apprentice training, going back all of 150 years. Young people entering the labor force spend three days a week at work and two and one-half to three days in school, for two years or so. They thus simultaneously receive both practical experience and theoretical learning, becoming at the same time skilled workers and trained technicians. And they can apply what they have learned in school on Saturday morning back on the job on Monday and do practically on Wednesday what will be explained in school theoretically on Thursday. This is in large measure the explanation for Germany’s success in raising productivity steadily: it creates not only the right attitude but also the theoretical foundation. It also creates receptivity to change, fully as much as “quality circles” do in Japan, if not more so.
But then there is also government policy. The United States has preached supply-side economics but largely practiced Keynesianism these last few years. The German government doesn’t do much preaching, but it practices unalloyed supply-side economics, albeit with great moderation. Income taxes were cut in 1985 by $8 billion—the U.S. equivalent would be almost four times that amount. The government is now contemplating even bigger cuts for 1986 and 1987. Several government-owned enterprises have actually been “privatized,” though the extreme Right vetoed the “privatization” of the biggest of them, the government-owned airline Lufthansa. Scores of regulations have been abolished or relaxed. Capital markets have been deregulated to give small and medium-size firms access to the equity market, which formerly was virtually closed to them.
But the real secret of the Germans is probably neither culture nor government. It is business policy. Managements—with government and public opinion supporting them—have made maintenance of their firm’s competitive position in the world market their first priority and the overriding goal in their planning. For almost all of them the domestic market is still the biggest single customer, as it is, of course, also for most businesses in the United States or in Japan. Yet in making a decision, West German management, even in fairly small companies, is likely to ask first: Will this strengthen or weaken us in the world markets? Is this altogether the way the world markets are going? This is also the first question a German banker is likely to ask in financing a business. It is also the one management argument to which, at least so far, the German labor unions have been willing to listen.
Germans like to accentuate the negative; they tend to dwell on all that is wrong or precarious in their economy. But it might make sense for us on the outside to ask: Is there anything we might conceivably learn from the German achievement?
(1986)