The Factory Of Factories

How does Dorma beat out dozens of cheaper rivals? The €700 million-a-year firm is one of Germany's top-50 patent holders and one of the very few firms capable of installing the complex security systems to go with its door hardware for über-projects such as the 160-floor Burj Dubai. This isn't just about making the best locks, but about having the top security software, and the best project managers.

Similarly, Würth has turned distributing screws, bolts and construction hardware into a €7 billion-a-year global empire growing at a China-like rate of 12 percent for more than a decade. The product may be low-tech and replicable, says CEO Robert Friedmann, but no competitor can handle 24/7 product queries in 86 countries.

These seemingly old-fashioned yet secretly innovative midsize companies, as well as larger manufacturers like Siemens and Daimler, are at the heart of something like a New Knowledge Economy. Automakers like BMW and car-component specialists like Bosch churn out an estimated two thirds of the global auto industry's innovations, according to data from Oliver Wyman, a consultancy specializing in manufacturing. Germany may not be at the forefront of university-based research, says Jürgen Matthes, an economist at the Institute of the German Economy in Cologne. "But our machinery and auto industries take the IT others have developed and find innovative ways to embed it in our products."

A recent study by Germany's Fraunhofer Institute shows German manufacturers (which represent 90 percent of the nation's R&D spending) are introducing new products at a rate we usually expect from the IT sector.

Machinery makers, for example, make one third of their revenue from products on the market for fewer than three years. "What these companies specialize in might not be high-tech in the conventional sense, but they're among the most complex things you can imagine," says Thomas Kautzsch, machine-industry consultant at Oliver Wyman in Munich. As a result, says Kautzsch, there are dozens of niche sectors where German companies have innovated their competitors right out of the market. Case in point: Herrenknecht, a one-man engineering business in the 1960s, now practically owns the global market for the complex heavy machinery used to dig tunnels. It's using its digging expertise to expand into geothermal energy—another rapidly expanding sector.

Coupling their wares with high-tech products and services is another clever way many German manufacturers are successfully removing themselves from low-wage competition. Claas delivers the farm-management software to go with its harvesters and offers consulting in biofuels. Schmitz Cargobull, Europe's leading manufacturer of trailers, has added a financing unit, lifetime service contracts and GPS cargo monitoring, all of which are providing an increasing share of revenues. Factory builders like Voith, the world's biggest builder of paper-production plants, or Dürr, which supplies the painting units to many of the world's car plants, also plan construction, train workers, service equipment and supply upgrades—usually with a global service network that minimizes costly shutdowns. The result is also a package no Chinese upstart supplier can match without investing billions, Simon says. Economists call it an "entry barrier." For companies like Voith and Dürr, it secures profits and jobs.