Forget China - or the United States, for that matter. Germany is now the biggest exporter of goods in the world, making them “Exportweltmeister” (export world champion). Bertrand Benoit and Richard Milne explain in today's Financial Times how Germany’s exporters are beating the world. But although German companies have benefited hugely from globalisation, the domestic workforce has not.
Germany, like most other industrial nations, is anguished about the dangers of globalisation. Heated global competition is being blamed for high unemployment and sluggish growth. Calls for state intervention to protect Germany’s industry, its jobs and its way of life are rife.
Ask Captain Peter Köhler, though, and he will tell you a different story. For the 65-year-old retired seafarer and port manager, globalisation is the best thing to have happened to his country in a long time. “Look at that power,” he marvels, standing between the red buttresses of an 80m-high container bridge as it lifts a 40ft metal box through the air with an effortlessness that belies its cathedral-like scale.
The Eurogate terminal is one of Hamburg’s four – soon to be five – container ports and it is among the thriving city’s biggest success stories of recent times. Since 2000, cargo traffic in Europe’s second largest commercial harbour has doubled thanks to booming international trade. By 2015, it will have doubled again.
Everything here is getting bigger: the containers (from 20 to 40 and now to 45ft); the ships (from Panmax – the maximum size able to pass through the Panama Canal – to Post-Panmax and to Super-Post-Panmax); and, of course, the Chinese-made container bridges. The port is in permanent expansion. “If I go for two weeks, I can’t find my way around,” jokes Capt Köhler.
Angela Merkel’s first trip to China as chancellor, which begins on Sunday, is shaping up as more than an important diplomatic event. The gathering of politicians and business representatives will bring together arguably the two biggest winners of globalisation.
It is a well-guarded secret. But in spite of Germany’s unexceptional macroeconomic data, no other industrial nation has so successfully harnessed the opportunities offered by an interconnected global economy. This mid-sized country of 80m, often painted as angst-ridden, risk-averse and allergic to change, has been the world’s largest exporter of goods every year since it overtook the US in 2003.
In 2004 ..German companies exported just under $1,000bn (£530bn, €780bn) worth of products, nearly as much as the UK, France and the Netherlands combined. Its trade surplus was six times that of China.
Exports have become the main driver of German growth. Today, 9m jobs depend directly on them and they generate 40 per cent of gross domestic product. “Every second job here is for exports – Germany would be a lousy economy without exports,” says Klaus Kleinfeld, chief executive of Siemens, the engineering group.
Yet exports tell only half the story. At €1.2bn, the sales of German companies’ foreign subsidiaries now exceed exports. Members of the Frankfurt stock exchange’s Dax-30 index make three-quarters of their turnover abroad. In 2004, German businesses invested €584bn and were employing 4m people outside Germany.
“Germany is now more integrated in the international division of labour than any other comparable economy,” says a senior civil servant and international trade expert in the Berlin economics ministry.
Festo, a maker of motors for automation technology, is a good example of this trend. It makes most of its components in Germany but assembles them all locally at its 55 foreign subsidiaries. “The growth is abroad but through it jobs are guaranteed in Germany. Our company lives from globalisation,” says Eberhard Veit, chief executive. At Flender, a gear maker owned by Siemens, 80-85 per cent of products end up outside Germany and the company has production facilities dotted around the world.
...Global success of this magnitude raises questions. What has led to it? How durable is it? Does it benefit the German economy as a whole? And, in a country where many are uncomfortable with globalisation, what is the impact on society if Germans feel excluded from the benefits.
One explanation lies in the nature of the global economic boom. As Elga Bartsch, an economist at Morgan Stanley, puts it, “German companies have benefited over-proportionally from what is primarily a capital- expenditure upswing.” Because engineering accounts for a bigger share of gross domestic product in Germany than in comparable economies, the country has benefited more from investment-driven global growth.
...The windfall has not been confined to large companies. The main German winners of globalisation have been small and mid-sized industrial players – the so-called Mittelstand. Though tiny, the most successful of them are highly specialised and often command overwhelming shares of niche markets. As Mr Kleinfeld of Siemens says: “In no other country in the world are there so many specialists as in Germany.”
The world’s largest excavator, for instance, to be used in the drilling of two giant road tunnels under the Yangtze River, is now being assembled in Shanghai by Herrenknecht. Based in the Black Forest, the company has fewer than 1,500 employees and sales of €384m, of which 92 per cent are generated abroad.
Decades of accumulated know-how have made such companies, often referred to as “hidden champions”, into formidable opponents for new entrants. Because they are so specialised, the only way for them to generate economies of scale is to act globally.
A survey by the Bonn-based IfM institute for Mittelstand research shows 98 per cent of small and mid-sized German companies now have exposure to international markets, a 15 per cent rise in 10 years. As Manfred Wittenstein, deputy head of the VDMA engineering association and head of the eponymous gear maker, puts it, “Globalisation is helping Germany find out what it is good at.”
Another factor in German companies’ success is their regained competitiveness. Thanks to wage moderation, longer working hours and the selective offshoring of low value-added tasks, unit labour costs in Germany have stagnated since 2000. In the eurozone as a whole, they rose by almost 6 per cent.
This has allowed German companies to expand their market shares in spite of the euro’s relative strength. The federal statistical office’s export performance index, which shows the share of German goods in other countries’ imports, fell from 1995 to 2000 but has risen every year since. “I meet Italian and French colleagues and they tell me we have become so competitive that we are literally killing them,” says a senior German government official.
Continental, the car parts supplier, has achieved such a turnaround. At the beginning of this decade it was a takeover target labouring under high costs compared with Asian rivals. Since then, much production has moved to low-cost countries and profits have soared. The share price has risen six-fold in the last three years alone.
Being “Exportweltmeister” (export world champion), however, does not come without risks for Germany. “Our success is entirely predicated on well-functioning markets,” says Gunter Schall, director of the international affairs at the BDI federation of German industry. “The slightest distortion can have devastating effects.”
Failure to reach an agreement on the Doha round of trade talks; exclusive bilateral trade agreements of the kinds now proliferating in Asia; soaring energy and raw material prices; trade policies that distort raw material prices; bottlenecks in international transport routes; mounting protectionism; the lack of international standards for the protection of intellectual property; or a slowdown in the global economic cycle; all are existing or potential threats.
The biggest threat of all, however, lies in the decoupling of a successful corporate Germany and the broader German economy. Even in the current recovery, economic growth remains slow by US or UK standards. While corporate profits are soaring, unemployment remains high at above 9 per cent. Among the low-skilled, long-term joblessness has reached endemic proportions.
“You could put this dialectically,” says Michael Hüther, head of the business-sponsored DIW institute. “We are world champions in exports of goods, and we are European unemployment champions when it comes to low-qualified workers. These are the two sides of the restructuring medal.”
The services sector has not managed to create jobs as fast as industry has shed them. Flat consumer spending and sluggish construction activity have weighed on growth and acted as a break on the European economy.
Although corporate investment has rebounded since 2000, surveys show investment priorities still lie abroad rather than at home. “Globalisation has been good for German companies; but it has not been for the economy at large,” says Roland Berger, founder of the eponymous consultants.
On the plus side, recent labour market reforms, and the proliferation of flexible wage and working time agreements between business and trade unions, have made German labour more attractive to producers. When Linde, an industrial gas and forklift truck producer, threatened to move production abroad, for instance, German workers offered compromises and so saved their jobs.
Yet the number of workers employed in industry has been declining steadily for more than a decade and high-profile companies such as Volkswagen, Siemens and DaimlerChrysler are laying off employees at home.
Globalisation has freed industry from the shackles of domestic conditions. While they lobby the government for more flexible labour laws or lower taxes, managers are now freer to shop around for cheaper labour, easier funding, wealthier consumers and lighter legal frameworks.
Hermut Kormann, chief executive of Voith, an engineering group, says: “Companies are close to having their best years ever. But nobody is hiring anybody. Everything to do with the domestic economy is going badly. But German industry does well when the world economy performs well.”
...Lacklustre domestic demand has itself become an incentive for German companies – including consumer goods producers and retail groups – to seek their fortunes abroad.
Perhaps the biggest challenge for Germany’s leaders is to ensure that the fruits of globalisation are more equally shared while taking care not to undermine companies’ abilities to reap the benefits.
Failure to do so would not only harm the current economic recovery, it could also lead to a breakdown in social cohesion – with far-reaching political implications. Surveys already show that fear of unemployment and declining income are Germans’ top concerns. The trend is fuelling a gradual erosion of support for Germany’s large, established parties and benefiting the extremes. With nearly 5m jobseekers and only 26m people (out of a population of 80m) in jobs that carry full social security entitlements, the pool of the anti-globalisation discontent is large and growing...
For Mr Schall, the dilemma is clear: “The opportunity for society to participate in the success of companies has decreased, which explains the backlash against globalisation. The key problem for politicians now is that this development can no longer be countered through power or pressure [from government], only through incentives.”
What happens when you take exports to European countries out of the numbers? The European common market has no doubt facilitated the movement of goods between European companies, and weakened trade barriers that might have prevented German companies from gaining share in other EU countries.
No doubt the strong dollar and weak Euro in the period from 1997 to 2003 helped them gain share in various industries. Those gains will likely fade away with time if the Euro remains strong.
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