The German Model

While the economic recovery may be on shaky ground these days, U.S. manufacturing is still growing. And when the recovery regains some steam, many experts predict good times ahead for the nation’s makers and builders. If manufacturing is to become an economic leader again, we may want to follow the German model. That country appears to be what we are aiming for. 

German manufacturers recovered faster from the recession than those in other countries, largely because they include a core group of small and mid-sized companies called the Mittelstand. These companies comprise 99.7 percent of German companies, and many are involved in mechanical engineering, according to the Economics Ministry of Germany.

“Mittelstand companies, often family-run, have a seemingly simple recipe: a mixture of financial prudence, engineering spirit, long-standing internationalization and a strategy to hold on to highly skilled workers,” wrote Daniel Schaefer in an article in The Financial Times titled “The German drive to globalize.” “The overriding element of their market success is a focus on exports and highly advanced market niches.”

Schaefer explained that German companies often concentrate on high-tech, expensive products that are hard to duplicate. “This specialization has forced [German] companies to expand rapidly beyond their relatively small domestic markets, so that even small, family-owned engineering companies often sell more than 80 percent of their production abroad,” he wrote.

Not surprisingly, many of those companies are in the metalworking industry, such as machine builder EMAG and toolmakers Walter AG and Paul Horn GmbH. I’ve had the opportunity to visit both toolmakers’ operations, Walter 2 years ago and Paul Horn this past May. Both companies have the latest grinding technologies, advanced automation and strict environmental controls. Both factories were among the cleanest I’ve seen. For example, the Horn factory could have been a school or an art museum, with polished floors and indirect light filling the plant. The plant has an air filtration system so efficient that you cannot smell any machine oil despite the presence of hundreds of machine tools. It seems like a great place to work.

That apparently is true throughout German manufacturing, which has a highly skilled, well-trained and well-paid workforce that produces superb products. “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 German car parts and engineering group, once said.

The Germans kept that labor model intact even during the Great Recession. When other countries were slashing manufacturing jobs, Germany went a different way. In 2009, the German government created a job-sharing program. Companies agreed that instead of laying off workers, they would cut back their hours, with the government making up the difference in pay. About 1.4 million workers were covered under the program, and when they were not working, many went to training classes. The program saved nearly 500,000 jobs, according to the Organization of Economic Cooperation and Development. And, as the global economy recovered, German companies were ready to get back up to speed immediately. 

That has made a big difference in Germany’s unemployment rate, which in May dropped to 7 percent. That’s the lowest since German reunification in 1991, and better than the 9 percent rate in the U.S., which has traditionally had lower unemployment than European countries like Germany.

This strikes me as a much more sensible policy than laying people off and paying them unemployment for a long time, as we do in the U.S.

Of course, it will be impossible to directly duplicate Germany’s manufacturing success in the U.S., but it does offer a good lesson: High-quality products can help support a well-trained and, yes, well-paid workforce. There’s no reason we can’t do that here, and some companies already are.