Lessons for the U.S. from Germany’s Growth Machine
Business + Economy

Lessons for the U.S. from Germany’s Growth Machine

Earlier this summer, as most of the world wallowed in discouraging news about the global economy, one bright spot emerged in Europe: Germany. Despite being the primary national funder of the Greek bailout, the German economy grew by nine percent in the second quarter — the country’s fastest rate of growth since the fall of the Berlin Wall. In the days following this unexpected news, German bankers raised GDP projections from 2 percent to 3 percent for the year, boosting euro zone growth to nearly 4 percent. The DAX — the German stock index — is also up nearly 3 percent for the year.

While other world economies continued to limp toward recovery, Germany unexpectedly emerged as the growth leader, defying those who predicted the economy would stall due to Chancellor Angela Merkel’s austerity budget, her decision to help bail out Greece, general pessimism about the euro zone, and the health of the world economy. 

So how did Germany beat expectations? What are they doing right that the rest of the world is doing wrong? The answers may be relatively simple: reining in spending on social programs, even at the expense of approval polls, and leveraging the German work ethic and commitment to quality as emerging markets continue to produce cheaper goods and services. “In Germany, there is the availability of skilled employees, effective innovation strategies, and an export-oriented economy,” said Christian Ketels, a professor at the Harvard Business School’s Institute for Strategy and Competitiveness. “U.S. companies aren’t nearly as well positioned.”

Other success factors: German business leaders take a long-term view and are willing to work with government and labor to save jobs and innovate. The so-called “German Way” may provide a blue print for how other developed countries, including the United States, can turn things around.

Unlike many U.S. companies, a large majority of mid-sized German companies are privately owned and not burdened by the demands of quarterly stock performance.  The privately owned KOSTAL of North America, a subsidiary of the German-based KOSTAL Group, once manufactured auto parts. During the recent downturn, this business dried up. Instead of firing workers, KOSTAL invested in reeducation for its workers. Now these workers are producing parts for solar panels with enough success that KOSTAL plans to open a new manufacturing facility outside of Detroit. 

Global presence
German companies actively seek global distribution for their products. For instance, the Komet Group, a German-owned metal cutting tool manufacturer with a plant in suburban Chicago, also has plants in 50 other countries. Such a broad global presence help buffer the company from the often dramatic vicissitudes in one market or another.
Germany’s emergence as a global leader in the face of Europe’s woes also led to an uptick in German consumer confidence, which led to a boost in domestic spending and investing, said Ansgar Belke, research director for international economics at the German Institute for Economic Research in Berlin. “The [Greek financial] crisis proved not as damaging as it might have been. German workers made additional income through exports, which were increasing unexpectedly. It was a classical multiplier,” Belke said.  Why?

Focus on innovation, quality and collaboration
For most consumers, the term “German engineering” is synonymous with quality and innovation. Building this reputation has been the mission of companies like Siemens and Volkswagen since reunification twenty years ago. Mid-and small-market German firms have embraced this brand and have continued to bring high-quality products to market.

Demand for German products is not driven by cheap prices or low wages, like goods from China. “German companies have a very clear view that the only way they are going to succeed in the future is if they out-innovate others.” Harvard’s Ketels said. “German companies don’t see reducing the price base as an option. Innovation is the only way to keep the U.S. afloat in the future.”

Although Merkel has implemented an austerity plan that cuts the German budget by €80 billion ($100 billion) through to 2014, the country continues to invest in growth. For instance, the German government pays companies directly to keep workers employed. This allows German firms to keep research and development staff — usually among the first to be laid off — at work and creating new ideas.

This approach doesn’t just help R&D workers; the German government also pays for companies to keep workers in all job functions. It’s a cost-effective strategy for Berlin, as money that would have been spent on unemployment insurance is instead used to keep German workers in their jobs. “You have people sitting in these companies who are smart and do their jobs every day who now have extra time and look for improvement in operations and education,” Tompkins said.

More Belt-Tightening Ahead
“Despite the good news, there are dark clouds on the horizon,” Belke warned. He does not expect Germany’s success in the second quarter to continue. Stimulus funds in countries where Germany exports its products are running out, which means less money in the pockets of German businesses, which will lead to a decrease in domestic spending. Also, political infighting within Merkel’s coalition has paralyzed the German parliament, making additional help for business from Berlin unlikely. Lastly, threats of new debt crises in Spain and Portugal loom.

Even if growth slows in the coming quarters, the resiliency of German companies in recent months shows that these firms are poised to thrive if and when a more robust recovery comes. German patience for profit and presence in emerging markets has companies well positioned for the future.