Secrets of German Success

If you examine the phenomenon closely, there’s a curious aspect to the current European economic crisis, whose most outstanding (but not sole) manifestation is the sovereign debt crisis. I mean looking beyond the threat to the common European currency, to where you see a marked imbalance in economic fortunes. Things are bad – very bad – in Spain, especially in Greece, but in Southern Europe (and Ireland) in general, but then things are rather good in Germany and its own ring of associated economies, the Dutch and the Austrian, but also the Polish (and Slovak) and to a lesser degree the Czech.

Why is that? Hermann Simon is a German, and also Chairman of the Board at the consulting firm Simon Kucher & Partners, and he put forth his ideas in a substantial article that appeared in Germany’s newspaper-of-record, the Frankfurter Allgemeine Zeitung, a few weeks ago. Actually, his piece is but an hors-d’oeuvre to the ideas he sets out in his new book – in German only.

The one-phrase summary for Germany’s success – and that book’s title – is “Hidden Champions.” Germany is overwhelming dependent, not on its domestic demand, but on its exports. The business establishment there is very good at that game. But it’s not large firms which are responsible – Simon mentions that even France has more companies in the Fortune Global 500 than Germany – but rather the smaller firms (famously known as the Mittelstand) that do killer export business even though most people have never heard of them – the Hidden Champions. Of the 2,734 names on the list Simon compiles of them, fully 1,307 are German (and many of the rest are Austrian or Swiss).

How do they do it? Simon conveniently (unluckily?) lists thirteen reasons:

  1. Historically small states: Recall that “Germany” was but a collection of mostly mini-principalities until 1871. That meant that export was vitally necessary for businesses to thrive at an early point.
  2. Traditional competences: Many of the technical skills Germany is famous for – e.g. clock-making, making knives – go back to the Middle Ages, but laid the groundwork for present expertise. (Simon even claims that a cluster of firms located near the Black Forest and expert in medical technology somehow trace their roots to the original cuckoo-clock makers there.)
  3. Outstanding innovation: Germany is near the top when it comes to European patents awarded per capita. Only Switzerland and Sweden have more.
  4. Strong basis for production: Germany has managed to hold on to its manufacturing base, while the US and the UK largely did not – and the Germans were not so long ago even called “old-fashioned” for doing so!
  5. Wage development: It’s well-known that in the last 10 or 15 years the rise in German wages has been considerably lower than most anywhere else in Europe.
  6. Fierce competition: Internal competition, that is, within Germany’s Mittelstand itself and/or from neighboring countries. This is straight out of the Michael Porter gospel of how to become super-competitive.
  7. “Made in Germany”: Here Simon means the world-wide reputation of general German quality that makes “Made in Germany” such a powerful advertisement for German goods abroad.
  8. Industry clusters: Also out of Michael Porter (to clarify, I mean specifically his book Competitive Advantage of Nations): Firms making the same or similar products tend to cluster together in specific areas of the country, which heightens competition while also keeping everyone informed of the latest developments. Among the more interesting of the clusters Simon mentions here are the pencil cluster around Nürnberg and a relatively new wind-energy cluster in the North of the country.
  9. Enterprise clusters: This is a new idea of Simon’s. Here it’s not industries that cluster together, but rather “Hidden Champions” operating in widely different industries. The beneficial result is a social one, whereby valuable entrepreneurial inspiration and cross-fertilization take place.
  10. Regional scatter: An interesting concept: Whereas in most other countries the financial muscle and smart people are concentrated in one or two major cities – often the capital – that is not the case in Germany, there they are much more dispersed. Why this is good Simon does not explain – after all, even if most of the “Hidden Champions” were to be found near Berlin, for example, there would still surely be plenty of room there for all of them – but this does allow him to make the impressive point that 45 of those Champions are to be found within the former East Germany, an area often written off by many as still an economic basket-case.
  11. Dual job-training: It’s a little unclear here: this must have to do with the famous German system of industrial and craft apprenticeship training. But I think Simon is correct when he writes here that 1) This is unique to Germany, and 2) More and more countries are trying to copy it.
  12. Geostrategic middle-position: In Germany you can call both Japan and California within normal business hours. From Germany you can easily travel or ship somthing anywhere – certainly elsewhere in Europe, but also in the world.
  13. Mental internationalization: Germans are supposedly very cosmpolitan and international. I tend to doubt that – until Simon goes on to write that “Smaller countries like Switzerland, the Netherlands or Sweden are indeed further along.” OK, if you take away the comparison to countries such as these, then maybe Germany is cosmopolitan. Still, in my own experience the level of knowledge of English is hardly as widespread as I am used to in the Netherlands or, say, Denmark.

So there you are: Deutschland, Deutschland über alles! And I’m sure there were articles like this all over the American press back around, say, 1999 when the American economy was going great guns as the world took up the Internet and the US federal government was even wondering what to do with a budget surplus.

The point is, this is really a bit triumphalist. (Of course, it’s only in German, published in one of Germany’s leading papers, so perhaps it’s mainly meant for internal German consumption.) Yes, many of the individual points are valid, but this is not what Europe or the European Union in particular needs as it tries to find a way out of its current economic and sovereign debt difficulties.

For another important reason why the Germans have it so good is the cheap currency advantage vis-à-vis most of its EU sister states – and particularly those of the South that are in trouble now – that was baked in to the euro from the start. Getting out of this mess in any sort of satisfactory way is going to have to involve concessions on the part of Germany (and her associated cadre of prosperous Northern European states) that will inevitably smack of “punishing the virtuous to save the non-virtuous” but which nonetheless will be vital. Remember that the roles were reversed and Germany was the “sick man of Europe” economically as recently as the late 1990s. So in fact, she is really not so absolutely virtuous after all, and the EU would be better served by articles published that explore that perspective, to “soften up” the German public for the financial “give-aways” to other EU states that are going to be necessary to save the euro.

(Although Simon does make some original points here, amid all the chest-thumping. Tell you what, let’s forgive him and let him go ahead with his book, as long as he never has it translated so we can keep it between you, me and the other ~100 million worldwide German-speakers!)

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