Thomas White Global Investing
Germany Stamp
April 15, 2011
A Postcard from Europe
Germany: Engineering Success

The annual Hanover trade fair is a hot destination for engineering executives worldwide

The Hanover trade fair has become a hot spot for engineering executives and manufacturing companies worldwide.

The history of Hannover Messe, or The Hanover Industry Trade Fair, which dates back to 1947, stands as a symbol of Germany’s phoenix-like emergence from the ruins of World War II to its transformation into an industrial powerhouse. The showcase event, which got under way last week, and attended by about 6,500 exhibitors from all over the world, serves as a global platform for engineering executives to build business relationships and clinch deals. It is no coincidence that France, a close trading ally, has been named the official partner country for the latest edition of the world’s biggest trade show.

Today, the growth engine of the EU nurtures many European economies under its wings. And the annual Hanover exhibition is just the place where Germany can burnish its famed industrial prowess. Beneath the glitz and glamour unfolds the tale of a remarkable recovery in the country’s manufacturing sector. Wide-eyed patriotic politicians and a euphoric national media harp on encouraging business confidence surveys, which capture the mood of the nation. While some developed European economies such as Portugal are preoccupied with talks of a bailout and rating downgrades, on the sidelines of the trade event, German managers worry about the shortage of skilled engineers and capacity constraints.

The resurgence in the country’s industrial production can be gauged from the projections of a German engineering body, which expects its members to ramp up production by 14% in 2011, up from a 10% forecasted earlier. Though production volumes are yet to reach the levels seen in 2008, the country’s recovery from the recent financial crisis has been swifter than the rebound in the 1990s. The resurgence in manufacturing was reflected in Germany’s GDP numbers for 2010, which showed a growth of 3.6% for the year. Moreover, the German government has forecasted a growth rate of 2.3% in 2011, with the jobless rate seen to fall to 7% this year. Though extreme cold weather and snow played havoc with the construction and industrial activity in the country toward the end of last year, the dawn of the New Year witnessed a return to growth in both the sectors. One significant aspect of Germany’s recovery is that it has had a cascading effect, benefiting many of the country’s trading partners in Europe such as France and Belgium. The former Soviet satellites of Poland, the Czech Republic, and Hungary are large suppliers of automobile parts and accessories to big German companies, to such an extent that the biggest economy in Europe serves as somewhat of a mother hen to these emerging economies.

So what makes Germany tick? Mention German engineering and the likes of BMW and Siemens come to mind. Far from that, more than 3 million small and medium-sized family-run enterprises, known as the Mittelstand, employ more than 70% of the German workforce and contribute to about half of the nation’s GDP. When massive job cuts were the norm in much of the recession-struck developed world, these niche firms managed to keep employees by making use of government subsidies, which encouraged people to work shorter hours. By retaining these skilled workers, these companies had positioned themselves well to roll out production in full scale when global trade picked up. Interestingly, some of the products manufactured by Mittelstand companies touch our lives in more ways than one would imagine. For instance, few would have guessed that a little-known Mittelstand company called Micon provided the precision tool which helped rescue the Chilean miners trapped in a copper mine last year. And size does not seem to matter much for export-oriented firms such as Lunor AG, which has just six employees on its payroll. The maker of high-end eyewear counts Madonna, Tom Cruise, and Steve Jobs among its clients. Apart from lower operating costs, what tilts the balance in favor of the Mittelstand companies is Germany’s tradition of apprenticeship, a legacy which dates back to the Middle Ages. According to a Businessweek article, the system trains young men under the supervision of the more experienced, much like an assembly line production, ensuring a steady supply of skilled workers for these companies. What is remarkable about the arrangement is that it works to the advantage of both the parties involved.

However, the time-tested business model which forms the backbone of the German economy faces challenges from China and South Korea as they are catching up fast with their German counterparts in developing technological skills. The aftermath of Japan’s earthquake could also disrupt the supply chain, albeit temporarily.

The Hanover Fair and the Mittelstand companies trace their origins to the period which marked Germany’s resurgence after the World War II. Both the great show and this unique business model have had their share of birth pangs, triumphs, and failures over the years, yet have few parallels in history. Today, post-recession, they look set to once again hold the flag of German engineering aloft, in the years to come.


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