Value Creation & Innovation
Insight No. 3

Has Production Got A Future in Germany?

by Bodo Eidenmüller



Over time the thesis of the post-industrial society has encouraged a disdainful attitude toward manufacturing. The emigration of industrial jobs was accepted as the logical consequence of globalization and outsourcing – as pursued by major corporations since the 1990s. The current economic crisis has brought a rude awaking to countries that moved furthest toward a services economy and neglected their manufacturing sectors: the USA, United Kingdom and France. In Germany a shared effort is now required by business and society as a whole so that manufacturing retains its central role as the source of employment, prosperity and growth.

Germany – classic industrial economy and location of high-value production

So far Germany has mainly lived off its craftsmanship and industrial manufacturing. The production sector remains the key driver of value added and employment. According to data from the Fraunhofer Institute for Systems and Innovation Research, no other industrial economy in the western hemisphere has such a high share of jobs (around 14.4 million) and value added (around 37 per cent) that depend, both directly and indirectly, on the production sector.

The large numbers employed in production industries in Germany, compared to other western industrial nations, is primarily due to a continuing high technological standard of production, a world-leading vocational training system, and highly-skilled professionally qualified personnel. In addition, Germany has proved better than others at transferring the scientific research of universities and institutes to business enterprises. Today, German industrial success is based upon application-oriented research, product development and process development, product manufacturing, as well as product and product-related services.

Fewer production jobs

Structural transformation in markets, business, technology and society has, in recent decades, led to significant changes — also in production. In Germany, between 1970 and 2009, the share of total employees in manufacturing fell from 37.9 per cent to 19.9 per cent. Over the same period the share of total employees in services grew from 45.1 per cent to 72.5 per cent.

Reasons given for this decline in production jobs are the relocation of manufacturing abroad, business closures, withdrawal from some branches of industry, rationalization and automation measures, but above all the transition from an industrial to a services society. This structural change has also led some to question the significance of production for Germany, as a business location, and the need for domestic manufacturing. It is argued that a high-wage economy like Germany can not compete as a location for volume and series production in a globalized world, when faced with competitors from Eastern Asia and Eastern Europe. Germany as a manufacturing location is under enormous pressure from dynamic emerging countries. In addition, German industry is faced with significant competitive disadvantages.

In order to survive in a globalized world we must — so the argument goes — focus on performing in those fields that are, at least so far, beyond the capability of Eastern Asia. That requires a stronger orientation by Germany toward high-tech products, research, innovative technologies, education and training. This leads us to the question: Has production (still) got a future in Germany?

The thesis of the post-industrial society

We should not use changes in employment statistics to prove the declining importance of production for the German economy. Statistically dividing an economy into three sectors (a primary/agricultural sector, a secondary/manufacturing sector, and a tertiary/service sector) can trick us into thinking that these three sectors exist, more or less, independently. That is wrong. Each national economy is a complex system with interdependencies not only within sectors but also between sectors. This insight is not new; nevertheless, so far it has not been taken fully into account.

Studies into the cause in recent decades of rapid growth in services show the primary source to be not private-household demand but primarily demand from the manufacturing sector. The increasing complexity of systems and equipment made by industry has given rise to disproportionate growth in software and other services. A link between industrial products and associated services is a rising trend in modern industrial production. It is no longer just the product that is sold but instead a complete solutions package, with a growing share of software relative to the hardware. The production of software often supplements or replaces the manufacture of hardware products. Moreover, services that industrial enterprises once provided in-house are now being spun-off from the production process and outsourced to other specialist enterprises. Unfortunately, the inter-dependency this creates is often overlooked; it is wrongly assumed that production consists of nothing more than manufacturing. The close links between development, manufacturing and logistics are often underestimated or ignored. This has been proven by numerous cases of ill-considered outsourcing.

The thesis that Germany is a post-industrial society is wrong. Critics, not least due to high balance of trade surpluses, have identified 'over-industrialization' and a 'large services gap' as a problem. Some experts say Germany should abandon part of its industrial base and instead focus on growing the services sector. They see the future in 'blueprints' not goods. That conclusion is wrong.

The separation of product development from manufacturing means that enterprises must willingly forgo simultaneous engineering, although it is increasingly essential for process optimization, and thus sacrifice shorter lead times, a decisive competitive advantage. In addition, those who merely sell or export 'blueprints' or services miss out on two prerequisites for continued market success: firstly, they lose expertise in production technology, and secondly, they sever the link to their end customers. The learning cycle that will lead to the next product generation is also cut off.

A technology designed on the drawing board or computer but never tested in practise will be hard to sell. In short this means a 'blueprint' is no substitute for a prototype, and a prototype is not yet a product that can be manufactured economically in large volumes. Research and development normally only pay for themselves, if the owners can turn the results into competitive products, for which a mastery of modern production technologies is essential. Numerous case studies have shown that a lack of know-how in manufacturing technology undermines any superiority in product technology. Advantages in product technology cannot be defended without competitive manufacturing methods, innovative materials technology, and the necessary personnel, machines and factories.

In fact, Germany is not moving from a manufacturing to a purely services society; it is moving from an industrial economy to something else: a society in which production in combination with products and product-related services will be the true guarantors of our prosperity.

Production: essential for employment, prosperity and economic security

In the United Kingdom we hear repeated calls for a renaissance of manufacturing. The Labour mantra of a services society is no longer sacrosanct. Peter Mandelson, the Business Secretary, has called for a return to the traditional virtues of manufacturing. He, also former EU Trade Commissioner, insisted that the UK needs less financial engineers and more real engineering. As far back as 1989, the MIT study Made in America concluded it was wrong to assume the USA could achieve a positive trade balance on services alone, to cover its huge demand for imported finished products. How fragile the US economy has become is demonstrated by the small share that production now contributes to gross domestic product (a lowly 1,8 per cent in 2010). Americans are disenchanted by the catastrophic effects from 40 years of underestimating the economic importance of production. The rush to outsource is increasingly considered a mistake. The enormous dependency of the USA on foreign production is now seen as a threat to national security. President Sarkozy also attempted to counter the further de-industrialization of France by assigning more state support to education, research, small and medium enterprises, the digital sector and sustainable development.

In Germany too we should consider the impact of de-industrialization and its wider ramifications, even if these are hardly recognized by the general public. A recent example was Siemens's decision to retreat from low-voltage electrical engineering. In 2007, when Siemens merged its telecommunication networks division into a joint venture with Nokia, there was hardly any public interest in the impact this could have on the German economy. At the latest when Siemens withdrew from both the telephone and computer technology sectors such decisions should have triggered concern. A company once the pioneer of telecommunications technology has successively retreated from the very fields that were its real strengths. In this way, key sectors of advanced technology are no longer represented in Germany economy — sectors with long traditions and experience, and above all, that provided numerous highly skilled jobs. Recently, more and more branches of industry have been relocating abroad and not just their product manufacturing, but also their product development roles: and in particular a sector that is the backbone of German exports: the automobile industry.

In view of the current finance and economic crisis that threatens above all export-oriented industries, there has been increasing criticism of Germany's industry- and production-oriented economic model. It is argued that the German economy is too export dependent, partly due to chronically weak domestic demand. German industry specializes in the development and manufacture of durable industrial goods, and in particular, investment goods. This means not only the major automobile manufacturers and their suppliers, and companies in electrical engineering and chemicals, but also, above all, countless SMEs (Mittelstand) in the machine tools sector, who are often world-market leaders in their specialist fields.

Nevertheless, in the short-term, Germany can not and should not change this exporting bias. Exports are and will remain the primary driving force behind Germany's economic upswing. Any reorientation to reduce the share of goods exported by 'traditional' industries to refocus solely on high-tech goods would ignore the competitive advantages of the German economic model, the corresponding strengths of German enterprises in 'mature' industries, as well as wider consequences. Moreover, the continuous efforts of industry to make good products even better also play a decisive role in improving overall effectiveness and efficiency, and the further development of research-intensive products and knowledge-based services.

Future strategy for high-tech is missing

The orientation of Germany toward leading technologies, such as Information and Communications Technology (ICT), the biological and optical technologies or nanotechnology, for which internationally high growth rates are expected, would not yet compensate for the loss of employment in export-oriented sectors such as machine tools, automotive, electrical engineering and chemicals. In addition, Germany is, for example, already relatively weak in fields such as ICT, so that a huge effort is required to catch up with US and Asian companies.

In ICT, a key technology, Germany holds a middle position in a worldwide comparison of industrial economies. Especially a country like Germany, that claims to be among the pioneers (and beneficiaries) of the ecological reshaping of industry, transportation and energy, cannot afford to be an also-ran in such a key technology, without which a step change in any economy is unthinkable. Now that Siemens has abandoned telecommunications technology there remain only a few German telecommunication companies such as Deutsche Telekom and SAP who can be truly called global players. However, powerful international companies such as Siemens still possess a considerable in-house software capability. In the International Delphi Study 2030, over half of German experts, asked by when Germany could close the software expertise gap to the USA, answered "probably never". Yet whoever believes that catching up is unrealistic should consider how short development lead times in ITC have become. Who could, ten years ago, have imagined the dynamism of today's world of Web 2.0?

Concentrating on leading technologies and growth sectors is a crucial step, so that Germany can prevail on the world market in the future. High labour costs, demographic trends and insufficient natural resources will themselves force Germany to continue to specialize in production and the refining of knowledge. Innovation must, as in the most fruitful phases of German economic development, be a core competence. Innovation is, more than ever, indispensible for individual entrepreneurial success.

Institutions of vocational training and education will be ever more important in a future knowledge society. German educational institutes are so far insufficiently prepared for the challenges (life-long learning) to come; the same applies to business leaders. They must face these new challenges and prove they are capable of enhancing the productivity of services and knowledge-based work. This objective calls for new concepts and new thinking which can only be achieved through a partnership approach both within and across enterprises.

Need for simple jobs — despite high-tech

However, we must appreciate that the route to a knowledge society can lead to the exclusion of many from the modern world of work. Tasks will be created that are increasingly based on knowledge, or at least the processing of information. However, people have varied talents and many do not have the training to apply information not only as a tool, but also as a source of new solutions.

If knowledge and professional qualifications are a key resource for a country like Germany, then it follows that unskilled work belongs to the past — an awkward conclusion at present when employment policies are given top priority. This means that the virtues of work, also simple work tasks, for so long undisputed, will be devalued. The division of labour (Taylorism) provided employment for numerous unskilled workers in industry and, in the twentieth century, through mass production, contributed to economic growth and prosperity in industrialized countries. However, we must not criticise the loss of semi-skilled work from the German industrial economy, as happened at AEG in Nuremberg and Nokia in Bochum. Those, across all political parties, who opposed factory closures by AEG and Nokia have also long supported a vision of the German economy that has no place for simpler work tasks. Having said that, in the long run, a nation of 80 million cannot afford to condemn the less qualified people to idleness and welfare support. Therefore, in order to limit unemployment caused by the loss of unskilled and semi-skilled work, efforts must be focused on retaining the production of simple products and simple work tasks in Germany. This calls for work models in which also less-qualified workers can also be integrated.*

Challenges for business, state and society

The future of production is closely linked to the future of German industry as a whole. Opportunities for industry will be found not only through innovation and application of high-tech in growth sectors, but also in innovation and stronger competitive positions in 'mature' industries. Efforts must be targeted on a German economy that leads on a broad front in new high-tech areas and information services. This will require considerable R&D investment in growth sectors of the future: health, energy, environment, mobility and security. Although business enterprises will play a leading role, a breakthrough in new technologies will also necessitate wide-ranging cooperation with the state, a courageous and forward-looking industrial policy, and state funding of research.

Germany ranks among the most innovative economies. However, this success does not come automatically. To keep this advantage, also in the face of demographic changes, everyone involved in the innovation process must make additional efforts. Core competences and vocational training will play a decisive role in product and process development in the high-tech field. But new ideas do not always lead to new products. Entrepreneurs are called for who can identify market opportunities and grasp them.

In 'mature' industries, enterprises must exploit their strengths in the manufacturing of capital goods to compensate for any competitive disadvantages. A continuing focus on the world market is indispensible for Germany. Existing competitive advantages can be extended through innovation, the application of new technologies and innovative production methods, as well as green production technologies. Embracing new application technologies will enable production engineering to retain its position as a cross-sector, key technology.

The making of diverse products — from complex and extremely innovative high-tech products to simple low-tech merchandise — depends on the availability of corresponding production technologies, ranging from complete factory systems to individual processing machines. Production engineering developments for new products will not emerge in isolation. The costs and risks are often too huge to carry, especially for small and medium enterprises. Therefore, here too, state policies for industry and innovation are required to provide greater support for development projects in production engineering. In addition, it cannot be emphasized enough, the successful future of production technology and industrial know-how in Germany depends directly upon the further development of the education system.

Universities have a dual responsibility in the innovation process. They serve, on the one hand, as training centers for creative R&D personnel and, on the other hand, they are initiators, research facilities and cooperation partners. Unfortunately, in international comparisons, Germany has a relatively low proportion of university graduates, especially in natural sciences and engineering. The objective must be to enhance the attractiveness and practical orientation of engineering courses. Politicians and society must respond: we must make better use of potential candidates for a university education. In this regard, the social climate toward innovation plays an important role; this is a reflection of the attitude of politicians, public, institutions, associations, and media toward natural science, technology, research and development. We should recall that, for example, microelectronics, a key enabling technology whose mastery is necessary for gaining expertise in many other areas, was for a long time in Germany demonized as a job-killer. Today we can witness the consequences that opinion formers with negative perceptions can have on an economy.

Corporate management mistakes of the recent past also prove how important creative entreprenuers are for industrial production in a national economy. Risk taking and original thinking, decision taking and persistence, technical know-how and commercial talent are called for. Those with responsible leadership functions must be capable of providing orientation by clearly communicating information, explaining why change is unavoidable, and plainly describing the consequences. Many corporate managers do not possess these capabilities. They have little or no experience of production, which they see purely as a cost factor, and fail to recognize the importance and links between production and competitive advantage. If Made in Germany is to regain its earlier standing, quality and flexibility must become the watchwords, and enterprises must place greater emphasis on production technology, in combination with production economics and work organization.

Less-qualified employees need jobs

Simple products and less-qualified employees should also be given opportunities in production. We must overcome the perceived contradiction between international competitiveness and domestic employment. The key to this will remain vocational training leading to qualifications. Where such vocational training is not or only partly possible, a composite wage system (minimum wage/welfare benefits) should step in to ensure social integration. Trade unions must also accept that in the age of globalisation, work may only be dearer to the degree that it is better. Today, competitive advantage lies, above all, in reducing costs. The potential for improving productivity through process optimization, enhanced work organization, flexibility, and above all quality improvements is often underestimated.

Automation projects must take due account of the economics of production: not as much automation as possible, but instead as much automation as necessary. Human beings are still the most flexible factor in manufacturing. Applying this insight in practice requires employees and employee representatives who are willing to help actively shape flexible solutions, as well as company cultures built on trust. It is business leaders who must face the challenge of motivating employee to embrace continuous improvements and of integrating production in a learning organization.

The future of production calls for concepts and commitment

The German economy grew strong through industrial work. The prosperity of Germany still depends upon industry and its production like no other sector. The effects of globalization and the current economic crisis are just cause to seriously discuss the dangers of de-industrialization and thus the future of production in Germany.

In Germany the visions, targets and strategies which could ensure that production remains the driver of value-added and employment are still absent. Politicians, business people and the media must recognize the importance of production as the keystone of our national economy; they must face these challenges and jointly take appropriate action. It is already high time for Germans to think about what they plan to live off in the future, and to draw the necessary conclusions for German society.

Prof. Dr. Bodo Eidenmüller


(Translated by Derek Brocklehurst)

* A large demand for simple work tasks exists in personal services, in particular for care and health services. The health sector is a neglected segment of the services society. Unfortunately, too few Germans want to work as carers and nurses. It is therefore necessary to urgently improve the conditions of employment in this sector. There is also unmet demand for other personal services such as housekeeping, as well as care and support for the elderly. Companies also have a demand for numerous ancillary tasks such as messengers, visitor care, cleaning and organization tasks. Many of these tasks, which have been rationalized away in recent years, could provide a further source of employment, with the added benefit of relieving time pressure on more highly-qualified staff members, who are becoming increasingly scarce. Finally, municipal authorities could find numerous additional ways of improving their services to citizens.

The creation of additional jobs is also held back by payroll costs. Furthermore, the comprehensive social security system in Germany offers people too little incentive to take up many simple work tasks.