Germany: the engine of success

When the financial crisis hit in 2008, the main owner of SMS, the German engineering group, embarked on a rather counter-intuitive strategy.

Instead of slashing the company’s workforce or cutting development and capital expenditure, Heinrich Weiss, its chairman, decided to increase spending on training, research and machinery. Despite not receiving any orders of meaningful size for months, he doubled SMS’s investment budget for 2009 to €70m ($104m).

“After the party, it is time for spring-cleaning,” Mr Weiss says. “And the most important thing during times of crisis is to look after your workforce.”

The strategy paid off, not only for SMS, but for other German industrial companies. In the past year, the volume of German goods sold abroad rose 18.5 per cent to €951.8bn – a rapid bounce-back from the 19.3 per cent drop the year before, data from the exporters’ association show.

A mixture of financial prudence, enterprising spirit and a strategy to retain a highly skilled workforce has been at the heart of the country’s success. But are there any lessons for the UK, which is itself seeking to expand its export base?

One important reason why export-driven companies in sectors such as machinery, cars and chemical goods have emerged from the crisis stronger in Germany is that many specialise in highly advanced niche markets.

Germany is home to a host of small, medium-sized and often family-owned companies – the so-called Mittelstand – that are dedicated to the production of often-sophisticated and expensive products.

These include the likes of Ebm-Papst, the world’s leading producer by sales of energy-saving industrial fans used in products ranging from refrigerators to car air-conditioning. What appear to be commodities that could easily be copied by mass-market manufacturers in the emerging markets are in fact highly engineered components. About 500 engineers and technicians are responsible for Ebm-Papst’s range of almost 15,000 fans, ventilators and electric engines. The group’s specialisation and research focus are emblematic of Mittelstand strategies.

“A large part of Germany’s products are simply indispensable. Companies can postpone such investments but they cannot skip them altogether,” says Hermann Simon, founder and chairman of Simon-Kucher & Partners, a strategy consultancy.

This is underpinned by intricately connected “clusters” that combine the knowledge of companies, universities, private research institutes, chambers of commerce and sector associations.

“Nowhere else in the world will you find a similar interplay between industry and universities,” says Michael Paul, chief executive of FVA, a German research partnership for propulsion technology where 2,000 industrial experts from more than 200 engineering and automotive companies and 50 scientific institutes co-operate to train employees, share software and exchange knowledge.

Like many other German engineering companies, family-owned Ebm-Papst was also quick to look for markets farther afield than the rolling landscape of northern Swabia where it is based. It has sales operations in 57 countries and manufacturing centres around the globe.

“Germans were quick to adapt to international markets, because we learnt languages at school and went abroad for holidays at an early age,” says Hans-Jochen Beilke, chief executive.

Another example is Bosch, Germany’s largest privately owned industrial conglomerate, and some say its largest Mittelstand company. The group has sales offices or production facilities in more than 150 countries, some of which date back more than a century. Three-quarters of its revenues come from abroad, and 47,300 of its 283,500 employees are based in China and India.

An additional Mittelstand characteristic is a culture of prudent financing. Most family-owned engineering companies are not listed on the stock market and rely on internal cash flow or investment instead of running up large debts with banks.

“I would spend a couple of hundred million euros on a deal but I would never leverage the company a lot – this is what the financial crisis has taught us,” says Mr Weiss at SMS.

“I have built all this up and I do not want to lose this again in my old age. I prefer to be super-solid,” the 68-year-old says.

Another asset of Mittelstand companies is their friendly relationship with their employees, which leads to a great amount of flexibility and one of the lowest workforce fluctuation rates in the world. This cosy relationship often dates back more than a century, when manufacturers learnt that their competitive edge could be kept only by having a highly skilled and committed workforce.

“I am not paying high wages because I have a lot of money, but I have a lot of money because I pay high wages,” Robert Bosch, the late founder of the engineering group, famously said.

The labour-friendly system proved to be an important asset during the drastic downturn in 2009. Faced with a sharp decline in revenues, many companies held on to their workers by using a mixture of state-sponsored short-term work and flexibility measures such as “working accounts” in which staff could store up credit during good times for overtime and draw on those savings to work fewer hours during a crisis.

“The truce between the unions and the employers has been a decisive factor. We had a very broad consensus that forced redundancies would only be the last resort, and the unions have shown a great amount of flexibility to achieve this,” says Thomas Lindner, president of VDMA, the German engineering association.

At first glance, this approach might have useful lessons for a country such as the UK, where fewer large companies exist that bear the Mittelstand characteristics of family ownership, conservative financing and specialisation in high-tech goods.

Such export success does, however, have a flip side – namely that the country’s enormous trade surplus creates an essentially unbalanced economy. “Germany is putting a lot of resources into something that is basically a giveaway …Britain should not copy this example,” says Albrecht Ritschl, an economic historian at the London School of Economics.

Even Mr Lindner of the engineering association is wary of drawing too many lessons from Germany’s export-driven success. “The German model is not easily transferable …and it would be arrogant to assume we should be a permanent role model for the world.”