Today, there are similar whispers in Germany. In my recent rounds of meetings with a wide range of German business managers, the verdict was nearly unanimous–a powerful restructuring is now bearing fruit. Like the case in Japan a few years earlier, this could well be the start of a reawakening in the world’s third largest economy.
Productivity growth is the ultimate arbiter of the success or failure of corporate restructuring. And German productivity is now on the mend, rising at a 1.7 percent average annual rate over the five quarters ending in mid-2006. By U.S. standards, where the productivity rebound peaked at about 4 percent, Germany’s accomplishments look modest. By German standards, however, the recent improvement represents more than a doubling from the anemic 0.7 percent trend from 1998 to 2004. Such an acceleration is a big deal for any economy.
Three major forces appear to be driving this Wirtschaftswunder –or “economic miracle”–improved labor efficiency, breakthroughs in capital efficiency and new organizational efficiencies in corporate Germany. While each of these developments is impressive, it is the combination that makes the real difference.
The high-cost German labor market is still rigid–but less and less so. This reflects a shift to part-time and temporary labor, which now make up more than 40 percent of total employment. Meanwhile, German unions have become more compliant and retreated from misguided efforts to shorten the workweek.
Germany’s capital stock has always been a model of efficiency, but it has long been lacking in new information technologies–the elixir of the Anglo-Saxon productivity revival of the late 1990s. That is now changing. Germany’s IT share of business capital-spending budgets is on the rise and, according to OECD statistics, now exceeds that in France, the United Kingdom and even Japan.
Corporate Germany is also moving aggressively to get leaner. Industrial behemoths such as Siemens, Bayer and E.ON are unlocking efficiencies by spinning off subsidiaries. With German mergers-and-acquisitions activity likely to top $160 billion per year in 2005-06–double the pace of the three preceding years–more breakthroughs in organizational efficiency could lie ahead.
Of these three forces, I suspect that the belated move to deploy IT may be Germany’s most important new breakthrough. That’s not to deny the significance of improved labor and corporate flexibility. But those developments have been ongoing over the past decade, with little discernible payback at the macro level. IT provides the glue that knits efficiency breakthroughs together. It enhances the logistics and cost breakthroughs of supply-chain management and it facilitates the connectivity of Germany’s more flexible work force.
Germany started late and missed the early stages of the IT revolution. But late movers need not be penalized. They may in fact benefit by acquiring more powerful and ever-cheaper vintages of new technologies, rather than being burdened with the legacy costs of first-generation IT platforms.
An IT-enabled Germany Inc. can only enhance this nation’s impressive global competitive prowess. While Germany’s overall competitive position slipped from No. 6 to No. 8 in the latest Global Competitiveness Index published by the World Economic Forum, the erosion was mainly traceable to macro finances (i.e., big budget deficits) and persistent labor-market rigidities. By contrast, Germany was ranked No. 2 in business competitiveness behind the United States and No. 1 in terms of business sophistication.
Alas, Germany still suffers from a major image problem. Budget deficits, high wages for full-time workers, a costly social contract and glacial political progress on reform give a false impression of a stodgy and stagnant economy. If Germany can sustain its productivity revival, its image will change in due course.
I spend the better part of my life traveling the world. I have seen the German paradox up close. China’s factories are loaded with state-of-the-art German machinery. The showcase of Shanghai infrastructure is the German-made maglev train from the Pudong International Airport. Yet for years, we road warriors couldn’t connect our computers while traveling in Germany. As the Internet revolution swept the globe, the world’s third largest economy was on the outside looking in. Today wireless connectivity is as ubiquitous in Germany as anywhere else. That’s emblematic of how far it has come. The whispers tell me Germany’s transformation has only just begun–just as it did in Japan not all that long ago.
