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The UK manufacturing sector has suffered long-term decline. It accounts for just 12 per cent of national output, half its share 30 years ago. This trend is reflected in all major developed economies, with the notable exception of Germany, as production has moved to low cost producers in developing countries. Manufacturing also underperformed the rest of the economy during the recent recession. In the US several leading economists have recognised that a failure to export manufactured goods has largely undermined their balance of trade and increased their deficit. Furthermore, there is now a growing belief that the world is entering a golden age for manufacturing and that the countries that fail to develop a successful strategy for developing advanced manufacturing will miss out. By contrast to both the UK and the USA, Germany enjoys trading surpluses with all other leading economies. German success is built on a national commitment to advanced manufacturing which makes up about 20 per cent of Germany’s total output. So how has Germany developed its manufacturing dominance?
There are several elements to the German economic model: closer relationships between the financial and industrial sectors, innovative industrial relations, and an emphasis on vocational training. There are close ties between German banks and industry through the hausbank system, where the bank will often own significant stakes in many of its corporate customers and thereby be able to apply considerable influence. A key part of Germany’s manufacturing based is contained in its small and medium sized enterprises (known as the mittelstand) – these companies account for 70 per cent of employment and the hausbank system plays a vital role in financing them regardless of the short-term economic conditions. This is in stark contrast to the experience of most British SMEs who struggle to secure such long-term investment. German banks also play a key role in maintaining a national savings culture, rather than facilitating the uninhibited levels of consumer credit that have marked out the last decade in UK.
By j.s.clark via Flickr under Creative Commons license.
The VW factory in Germany
Under the German model employees enjoy far greater representation at both company and industry level than is seen in the UK. The strength of this setup is the cooperation among unions and management councils. Employees see that they have a far stronger vested interest in the success of their organisation and enjoy greater job security and are therefore not prone to excessive pay demands that might damage their industry long term. The system of vocational training is perhaps the most important element of the German Model with a far stronger system of apprenticeships than other developed economies. The apprenticeship system is deeply embedded in most industries and provides the backbone of Germany’s national skill base. Much of the UK’s apprenticeship system was stripped out in the 1970s and 1980s. Once such skills are lost they can prove difficult to remaster. David Haines, CEO Grohe AG (a huge German fittings company) highlights just how critical apprenticeships are to the German way of working:
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Whether it is desirable or even possible for the UK to emulate the German model is open to debate. But it is perhaps safe to assume that the current industrial policy of laissez-faire is likely to mean the UK will miss out on the anticipated golden age of manufacturing.
What stories do you have to add to this debate? Leave your comments below.
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German Economic Model
This is an area I have personal and professional interest in.
During a time that our British manufacturing company owned our largest German customer (yes, a rarity) I took the opportunity to work in Germany. Many of the direct observations I made at the time (2000-2003) and now continue to make, when visiting the in-laws, still concur with your summary. It was clear that, although in many respects Germany felt rather conservative and 20 years behind the time, had actually not stripped out those core "future-proofing" functions such as apprenticeships, commitment to it's workforce and updtaing it's kit (most of which was of course German). In particular is was the tightness of the relationship between bank and business ie. trust, that enabled the business to have the confidence in it's longer term position to continue investing in its people and equipment - I don't think that it would have ever occured to them that this could be in jeopardy, and that they wouldn't be in business in another 70 years time - such is the mindset. The banks see their customers long-term capability, wealth and prosperity as their own. There is a heavy culture of tacit protectionism in the German psychi, born partly I think from being at the centre of Europe with now natural boundaries, which has enabled many firms
From the commercial perspective they were also very effective at marketing and keeping their customers "happy" ie. willing to keep buying and be charged a premium for doing so.
Contrary to popular belief, I don't think that German manufacturing is particularly efficient, if we simply compare inputs to outputs. It is their effectiveness that dominates the equation - making stuff that the rest of us want (or think we want), so that they can spend the spare cash on what we might see as "nice-to-haves" ie. not directly reducing the cost of the product, but enhance the outlook of business and it's stakeholders.
By contrast, the British side was constantly under pressure to meet the needs of it's investors, and their return on investment, in shorter and shorter timescales, that could never support that type of investment culture. The machines were old, so we made do, the staff comparatively poorly trained and under threat, less competent, and constantly reacting to the next problem (which actually made us quite good problem solvers, which arguably drives creativity and innovation).
Can we be like the Germans ?
No, not entirely. There's a deep cultural element to this, which I alluded to, that goes back as far as you care to look. But actually many of the industrial and educational practices that work for supporting the German industrial culture, originated in the UK, so we can look to own own past for clues.
The trust , or lack of it, between our investment institutions, who see their own short-term profitability as paramount, as opposed to their customers prosperity in the long term, and UK manufacturers seems to be a fundamental piece of the jigsaw. Overcome this issue and I think with guidance a lot of the other pieces could drop into place.
Dr. John Homewood
(Now an "independent" researcher, but working with the Lean Enterprise Research Centre at Cardiff Business School)