The Factory Of Factories

The German boom appears surprisingly resilient. Last week figures for November industrial orders surprised economists expecting a slowdown, showing a year-on-year gain of 13.6 percent. So far, neither the superstrong euro nor the subprime debacle seems to have dented German industrial prowess. Surging exports account for 80 percent of German GDP growth since 2000, helping the country outgrow neighbors such as France (2.5 vs. 1.8 percent in 2007, 2.9 vs. 2.0 in 2006). Now that export successes are feeding into the larger economy via rising employment and wage hikes, economists say rising domestic consumption could help buffer a potential global slowdown in 2008.

Outsourcing to cheaper locations such as Eastern Europe has come to a halt, says Matthes, and some companies are returning production home. Fraunhofer has identified 3,500 firms in the machine and chemical industries that have returned offshored production since 2000, often citing quality problems, logistical costs or disruptive employee-turnover rates in places like China. "We don't outsource, we in-source," explains Bernd Hoffmann, chairman of Schmitz Cargobull.

Neighbors like France are watching closely. In France, President Nicolas Sarkozy is embroiled in a debate over how to gain back the competitiveness the French economy has lost in recent years. "The gap between France and Germany has grown," says Frédérique Sachwald, an economist at the French Ministry of Research. "French companies have been slower to control costs and innovate." Because of past protectionism, she says, they have been less exposed than their German rivals to the competitive pressures of global trade. The competing model for creating growth, a U.S.-style focus on high-tech innovation and entrepreneurial "creative destruction" would require large-scale changes as well. Whether countries like France look for Germany or America as a model, however, the present focus of French government planners—protecting national champions—is exactly the wrong policy, concludes a November report by Bruegel, a Brussels think tank, comparing the French and German export industries.

That's not to say that Germany's gung-ho export model is a cure-all, even at home. While the manufacturing dominance of the German economy is growing, total manufacturing jobs have only lately registered a small uptick. Because of a dramatic weeding out of uncompetitive companies and products, the share of factory labor shrank from 40 percent of the work force in 1990 to 20 percent today. The new mean, lean, tech-heavy factories need not hordes of low-skilled laborers, but highly skilled specialists and engineers who are in short supply, which is already cutting into growth at many exporters.

Government policy could make matters worse. After decades of fruitless debate over migration policy, the country remains all but shut off to skilled immigrants. Lately, Angela Merkel's leftward-leaping ruling coalition has been discussing plans to crack down on temporary employment, which would strip German companies of some of the flexibility that's helped them regain competitiveness in recent years.

The biggest danger, of course, is the possibility of continued financial turmoil—or a recession in the United States putting a brake on global growth. Already, inflationary pressures that are part and parcel of this trouble are making German consumers (always hypersensitive to inflation) more tightfisted. But even as they pinch pennies, German companies are struggling to keep up with a surge in orders. There's no doubt that a sustained downturn in the United States (their No. 2 export market) could change that two-track picture, pulling overall German growth down much farther. Yet, as long as China and other key emerging markets can balance things out, Germany's re-energized Old Economy may stay one of globalization's biggest winners for a long time to come.

© 2008