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Learning from Germany’s economic model

Updated Wednesday, 15th June 2011

Matthew Hinton asks: how has Germany developed its manufacturing dominance?

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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.
 

VW factory Creative commons image Icon By j.s.clark via Flickr under Creative Commons license. 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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