Economics and the 2008 crisis: a Keynesian view
Economics and the 2008 crisis: a Keynesian view

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Economics and the 2008 crisis: a Keynesian view

Firms in Italy and Germany

Activity 17

Watch the following video, Facing the competition, which examines how firms in Italy and Germany are facing up to strong international competition. Then answer the questions below.

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Transcript: Facing the competition

NARRATOR
The rise of low wage manufacturing has fundamentally changed the nature of international competition. Firms in western economies with higher wages and costs have struggled to remain competitive. This film explores how firms in two of Europe's largest economies - Italy and Germany - are facing up to competition from low cost international producers. Should they force down their own costs, or are there other ways they can compete?
Historically, the two countries have taken very different routes towards improving industrial competitiveness. The German success story in exporting manufactured goods is well documented, but less well known is Italy's track record.
SANDRO TRENTO
Italy is among the top exporter in the world. We are the second largest manufacturing country in Europe. After Germany, there is Italy as the largest manufacturing sector in Europe.
NARRATOR
Before the introduction of the euro in 1999, the Italians relied on manipulating their currency.
SANDRO TRENTO
Up to the nineties, the Italian economy could gain competitiveness through the devaluation of the Italian lira, the currency. That gave competitiveness gain to the Italian industry.
NARRATOR
After Italy joined the euro, devaluation was no longer an option, and structural economic changes were vital to improve competitiveness and economic growth.
SANDRO TRENTO
The real problem is growth. We have a very bad performance in terms of GDP growth. Most of the problem are micro, labour market, firm size, education. If the justice sector is very inefficient, if the state sector is very inefficient, if transportation are not very efficient, the easiness or the difficulty to make business, enforcing contracts, getting credit, they are very difficult to solve in Italy compared to other advanced economies. Most of the problem, the urgent problem, are micro economic today.
LUIGI ORSENIGO
Productivity has been stagnating for over 20 years now, whereas in other countries, it has been growing at higher rates. There has been very little investment, especially in training, R&D, not necessarily stand up, high sky R&D, but day-to-day operations. I remember 28 years ago, when some friend of mine and I were complaining, saying, listen, we're spending too little in this kind of investments. We are going to suffer. Here we are.
MARIANA MAZZUCATO
Italy has not actually made the kind of investments that countries like Germany have been making in human capital, in research and development, in different variables that increase productivity. Fiat has not been investing in new engines at the same level that Volkswagen has.
NARRATOR
Low productivity has meant Italian companies have struggled with competition from countries with lower labour costs. In textiles, Italy is a significant exporter but, over the last 20 years, cheap clothes and fabrics from Asia have had a big impact on sales.
FERNANDO ALBERTI
In the nineties and the first years in 2000, this was the most horrific time: 2005 is actually the turning point, where most of the companies which were not prepared in order to compete very fiercely and strongly towards survival, they started to fail.
NARRATOR
Italian companies across all sectors tend to be smaller than their competitors, making them more vulnerable: 95 per cent have fewer than ten workers.
FERNANDO ALBERTI
If we take the typical size of furniture company in Italy, it's about six employees. If we take the average size of German firms in furniture, it's sixty employees, so it's one to ten in comparison. And this, I think, is important in many respects, especially when it comes to face the global competition.
NARRATOR
Small firm size makes it difficult to invest in new technology and exploit economies of scale. The companies that have proved most resilient have controlled costs and been the most innovative. Biella - an historic textile district in northern Italy. Giovanni Germanetti is a family owner of a medium-sized woollen and cashmere business that has survived.
GIOVANNI GERMANETTI
In Biella, many companies have closed down in the past years. Most of the competition came from Eastern Europe and China because in those countries, the labour force is much, much cheaper than in Italy. The people who are doing higher stuff has stayed in the market. The people who are doing very lower stuff, they have been taken over from China.
NARRATOR
And in Prata, a famous Tuscan textile district, the changes were even more dramatic. When Italian businesses went bust, Chinese entrepreneurs took over the factory space with Chinese workers on lower wages than the surviving Italian companies. The Chinese were keen to exploit the 'Made in Italy' label. Initially, they supplied Italian businesses with cheaper fabrics and clothes but, once established, they began to directly compete with the Italians at the low end of the market.
NARRATOR
Although Italian clothing firms at the low end have been wiped out, there's still a strong global market for Italian high end textiles. But there's also a heightened awareness that even these businesses cannot afford to be complacent.
NARRATOR
In Germany, like Italy, family firms form the backbone of the economy. The so-called mittelstand of small and medium sized companies employ over 60 per cent of the labour force. But, unlike Italy, there's a strong history of high investment.
GERNOT NERB
We have quite a few medium sized companies which are very successful. Often, they are world champion in a specific niche. In Germany, the companies normally stick to their main product line or improve it, of course, and leave the money there, and I think this reinvestment by the owners is helping them to be successful.
NARRATOR
One of Germany's most successful companies is Miele. Set up in 1899 to make high quality butter churns, it's evolved into a premium white goods manufacturer, selling high end washing machines and household appliances around the world.
MARKUS MIELE
We have a higher quality. We test the appliances to last 20 years, and this means we have to charge a higher price for that. We have just one brand, and this is different to most of the competitors in the white goods industry. They have a lot of brands.
MARKUS MIELE
We charge a higher price, but we have the quality and we have the features inside. And this strategy has served us well for more than 100 years.
NARRATOR
Like many mittelstand companies, Miele invest in high levels of R and D, to keep up quality levels, but also to create new and improved products.
MARKUS MIELE
Innovations are very, very important in the white goods industries, like our honeycomb drum, for example, in the washer. So you have to add something in order that the consumer says, wow, this is really a great machine. So we have to constantly innovate, and we spend between five to seven per cent of the whole turnover on research and development, which is quite a lot. So you have to invest.
Sometimes, features or products do better than others. We also have products which are not successful, of course. We also stop products where we said we don't make much money on them.
NARRATOR
Despite charging high prices to cover their investments, Miele are conscious about costs and maximising profits.
MARKUS MIELE
We have to really look into every detail and see how can we optimise costs. Sometimes, we have to automate. Sometimes, we have to find different solutions, but in the end, you have to also look at profitability. So what's the most profitable point for your company in the market? Economies of scale are important, but sometimes they stop for the premium positioning, for example. And then you go into the mass market, which others can do much better than we do, so you have to observe what is the right point for your company, concerning sales quantities, and so on.
NARRATOR
The German economy is currently flourishing but, ten years ago, in the early 2000s, growth was stagnant with high unemployment. This led the Schroder government to introduce labour market reforms, including cuts to unemployment benefit.
GERNOT NERB
This put pressure on employees to take up jobs which are less well paid than they used to be. Also, the temporary work became a very important element, and this gave lots of flexibility to companies like - if you take companies like BMW or others - they employ almost one-third of their staff with the help of such agencies.
NARRATOR
But just how important were the Schroder reforms for improving German competitiveness?
MARIANA MAZZUCATO
Alone that would have never, in and of itself, allowed Germany to produce the kind of goods that the world wants to buy. I think it's really in combination with the investments that Germany was making in R and D, in human capital, and its varied institutional structure that those Schroder reforms had an effect. Instead, what we're hearing today is that, if the weaker eurozone countries want to grow and to be like Germany, then they should hold down wages, as if that was the only source of its success. That is a very ideological interpretation of the German miracle.
NARRATOR
Back in Italy, many of the textile companies that have survived have adopted an approach with similarities to that of the German mittelstand, by targeting the high end of the market.
NARRATOR
Lenzi Egisto used to specialise in shoes but, after being undercut by the Chinese in the 1990s, they shifted to collaborating with American company DuPont on new textile innovations.
ROBERTO FENZI
DuPont was producing very nice fibres, very nice yarns, and they had a gap between the yarn and the end user. And we were the link between those two points, so we become a sort of operating lab, receiving the special fibre, making the fabric. Thanks to this operation, we went in touch with some of the major brand names, offering very high tech materials, but with a very fashion look.
NARRATOR
Over the last ten years, Lenzi have developed a series of innovative textile based products, including bulletproof clothing, protective footwear, and specialised fabrics for the health and fashion sectors. More and more companies are also opting for vertical integration, where all stages of production are kept in-house, as much as possible, to ensure consistency and top quality.
ROBERTA RABELLOTTI
We've a very important process of selection of companies, the good firms have survived, and probably the bad or so-and-so firms have now disappeared. So, from this point of view, this could even be a good sign for the future.
NARRATOR
Another growing trend in both German and Italian manufacturing is to take a much more global perspective on production and on sales.
MARKUS MIELE
In 1994, we still had a share of 50 per cent in Germany and 50 per cent abroad. Now, last year, it was 30 per cent Germany and 70 per cent abroad, although we were growing in Germany. This means, if you think about development for example, that people have to think much more about the needs of the consumers outside Germany. With 47 countries where we're selling, we have to make sure the products we produce have the right features for the right consumers in those countries. So it's not only Far East, it's not only Italy, it's not Germany any more. It's a worldwide competition.
NARRATOR
Part of meeting that competition has been to offshore some of the labour intensive aspects of the production process, to save costs. But this can threaten the quality control of companies that are used to high levels of vertical integration.
MARKUS MIELE
We have factories, also abroad, where we manufacture parts and sometimes also whole appliances for Miele, but always the same quality level. So the most difficult decision is to find the right persons to run that factory because they have to understand how we think about quality, what we want the product to look like, and if they can really get our spirit. Once they got it, then it's not a problem, and then you can run a factory in almost any country.
NARRATOR
And even in Italian textiles, where the 'Made in Italy' label is crucial, there's a growing trend to offshore at least the early stages of production.
GIOVANNI GERMANETTI
We have invested 15 years ago in Poland, and we have a spinning mill over there where we produce part of our yarn that is used in our weaving facility. When we started 15 years ago, it wasn't easy, and they didn't have that know-how that we had in Biella. But things were going so expensive for the labour force in Italy that we were obliged to move to Poland. And so now, after a long time of training our employees, we can say that we achieve the same level of quality as we do in Italy. But if the production, the weaving, and the finishing is done in Italy, it's made in Italy.
NARRATOR
And some Italian textile companies have taken a step further by developing international partnerships.
ROBERTA RABELLOTTI
This is an important strategy for the competitiveness of Italian firms. Probably it's less widespread than one can imagine, and this is due to the small size of Italian companies, but the successful companies, companies which have been able to scale up and to outsource. And this is, of course, very important in terms of reducing cost.
ROBERTO FENZI
We have found a very profitable cooperation with the Chinese. And so Chinese are not always an enemy, but they can be an opportunity because, for Lenzi, China is a good customer. It's a good partner. They want a local service. They want a logistic to buy directly from China. Doesn't matter if it is made in Italy or somewhere else. The problem for them is to buy China on China.
NARRATOR
But although many companies have made those international partnerships work, they're not always successful.
HAGEN REIMER
The skills are not something you can just train people on for a year or a few month and then expect them to work like workers who have been doing this for years or even for generations, in Germany. For example, there's a big manufacturer of bearings for industry needs and for automotive, and he pushed production a few years ago to Romania. And he send German people to train the workers there on the job, and it just didn't work out. They lost millions of euros, and then, finally, they decided to get their production back here because it just didn't work the way it was supposed to.
NARRATOR
Another danger is that international partnerships seem to speed up the process of catch-up with Italy and Germany, even at the high end of production.
GERNOT NERB
We did a study some years ago to what extent China could be a competitor for German high-tech industry. Well, at that stage, we thought it will take at least 10, 15 years before they catch up but, nowadays, we have to face the problem that, in some areas, the Chinese are catching up faster than expected. This makes it necessary that we push ahead in the field of innovation in order not to lose the technological leadership.
NARRATOR
This film has shown that, despite their very different economic contexts, there are some striking similarities in the way the strongest Italian and German firms compete on the global market.
FERNANDO ALBERTI
We notice that those companies that are much more performing compared to others, they have the same kind of patterns. So first of all, they [are] innovating in the products, these companies are companies that continuously introduce new kind of products. The second thing is process innovation, so they continue to renew their production process and also to renew machineries and to renew the technology. The third thing is that they repositioned theirself on higher part of the market, so they differentiate their brand, style, design but, on the other side, they didn't lose the control of costs. So it's a combination of two different strategies - the differentiation on one side, but the strict control of costs on the other side.
End transcript: Facing the competition
Facing the competition
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Question (a)

(a) What are the different challenges faced by firms in Germany compared to firms in Italy?

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Answer

The video raises a variety of issues at both the macro and microeconomic level, so your notes may be different from those here.

The video describes the story of a strong German economy with rising exports and falling unemployment compared to a struggling Italian economy. In Italy, the video indicates some of the macro problems related to lack of productivity growth and a lack of investment. A lot of Italian firms are very small so this can be a barrier towards improving production technology and human capital. Being able to increase productivity is one strategy for competing with firms based in countries with lower wages.

Question (b)

(b) How do macroeconomic conditions relate to firm performance?

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Answer

The direct relationship between macro and micro performance is not clear in the video. Dr Nerb emphasises the role of change to Germany’s labour market – increasing flexibility of labour by allowing firms to recruit workers on a temporary basis, which is supposed to encourage reduced unemployment. However, Professor Mazzucato strongly disagrees, suggesting the real change is also due to Germany investing in research and development (R&D) and human capital to make firms perform better.

Question (c)

(c) What factors determine the success of firms? How are these factors different in Italy and Germany?

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Answer

Successful firms, whether in Germany or Italy, share similarities: instead of trying to compete directly with low-cost producers, they have differentiated their products, focusing on very high-quality goods requiring specialist expertise. So even though the macroeconomic situation in each country is different, there are similar examples shown for how firms can succeed. In this section, we will investigate some of the ways we can model how firms compete.

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