The Factory Of Factories

If you think farm machines are boring and low-tech, you haven't seen the Lexion. The world's most efficient combine harvester is precision-guided by satellite and laser optics to mow grain at the rate of 60 metric tons an hour—enough to feed a city of 350,000 for a day. Real-time sensors measure each square meter's yield, instantaneously adjusting next season's seed and fertilizer quantities. Built by Claas GmbH in a German hamlet called Harsewinkel, the Lexion's €400,000 price tag is one third higher than the competition's top-end model, but its greater productivity means that big farm operators from Russia to Australia can't get enough of them. The 3,000-worker Harsewinkel plant, which ships 76 percent of its production abroad, has an order backlog well into 2009. Competitors in China don't worry Claas. "As long as we keep innovating, we're not afraid of anyone," says Theo Freye, chairman of the fast-growing, €2.7 billion-a-year company.

Companies that turn ordinary metal-bending into worldbeating technological wonders are a prime reason German firms have been among the leading beneficiaries of globalization. Of the world's major economies, only Germany and China have boosted their share of world exports since 2000. Germany's share is up 5 percent, while France, Japan and the United States have steadily slipped—minus 10, 25 and 30 percent, respectively. The United States now represents some 8.6 percent of global exports, up from 12 percent in 2006. Germany's share rose from 8.5 to 9.4, and China's from 3.8 to 8.1.

While other Western countries worry about a slowdown, Germany seems to be chugging right along. In November, the country's machinery producers' association—which accounts for one third of German exports—revised 2007 production numbers upward, showing the sector growing by 15 percent, the fastest rate since 1969. Fresh auto-industry numbers show exports racing ahead by 11 percent in 2007; the sector has boosted employment by 20 percent, or 160,000 workers, since 1995, while the number of jobs dependent on exports has gone up from 5.9 million in 1995 to 8.3 million workers today. With other manufacturing sectors like trains, turbines and chemicals also surging, economists have recently begun to talk about the "reindustrialization of Germany" and a "second economic miracle."

It's a miracle that is based largely on the success of the very countries that were supposed to undermine Germany—emerging markets with cheap manufacturing labor. Rather than undercutting German manufacturers, these nations have actually bolstered them, as their new middle classes buy more German cars and local factories shell out for topnotch German heavy machinery. These are sectors where German companies have long been strong, and have been gaining competitiveness vis-à-vis other Western countries. It's a trend evidenced by the fact that it was Germany, not China, that in 2003 passed the United States to become the world's leading exporter of merchandise; in 2006 German companies shipped $1.11 trillion worth of products abroad, versus America's $1.04 trillion and China's $969 billion. (If you add services, the United States remains slightly ahead.)

All this belies the idea that globalization was supposed to make life near impossible for an Old Economy, high-wage country like Germany. The future was to belong to high tech and services, not old-fashioned manufacturing. But this conventional wisdom is being upended by the Germans, who may offer something of a model for other developed economies.

As neighbors watched in some wonder, German companies regained the competitiveness they lost in the early 1990s. Smart deals with unions, for example, helped big exporters such as BMW and Siemens lower wage costs by about 15 percent relative to competitors in other major exporting countries like France. While Germany's labor market remains ossified by overregulation, the legalization of temporary workers in the 1990s also helped companies become more flexible.