Manufacturing has been generating very positive headlines recently with the dawning realisation of politicians of all parties that the UK needs a vibrant and growing manufacturing sector as part of a balanced economy that can deliver export lead growth. With manufacturing now languishing at around 13% of UK GDP it is sometimes difficult to believe that the UK was a manufacturing superpower from the time of industrial revolution through to the 1960s – and then began its long and seemingly unstoppable decline. But at the same time as UK manufacturing started to lose its edge, Germany started to develop a powerhouse manufacturing sector that is still delivering massive benefits to the German economy today. 

Germany is the world's fourth largest economy, fourth largest manufacturer (manufacturing still accounts for around 20% of GDP and is approximately twice the size of UK manufacturing GDP) and second largest exporter. Many of its companies, products and brands are world leaders and it has a reputation for quality that helps build the "made in Germany" brand and obtain a premium price for its products. Germany also manages to be successful as a manufacturing economy despite its high labour and infrastructure costs, its high levels of unionisation, the required involvement of workforce representatives in management strategy and decisions in larger companies and its high levels of regulation. Finally it has developed a "mittelstand" of medium sized manufacturing companies which provide a huge drive to the manufacturing sector and the economy as a whole.

Germany is also managing to maintain its success in the light of competition from China and the other emerging economies. According to UN Data, manufacturing output (by value) increased by 57% in the UK between 1990 and 2008 but in Germany it increased by 75%. Even with China's astronomical rise as a global manufacturer, Germany's share of output amongst the world's leading manufacturers has still remained above 10% - the UK has slumped to just 4.3%. It has to be said that many of the fundamental issues faced by Germany in the last 50 years around costs and global competition are the same or very similar to the issues faced by the UK.

So, why has the manufacturing sector in Germany performed so much better than the manufacturing sector UK?

Clearly there are many factors that influenced the decline of manufacturing in the UK and the growth of manufacturing in Germany and this short article cannot cover all the complexities and issues.  However, we summarise below five, often inter-related, factors that seemed to have been fundamental in the building and maintaining of a vibrant manufacturing sector in Germany.

1. Strong national commitment to manufacturing:
Successive German governments have been clear on and consistent in their support for the manufacturing sector and this has helped build the framework that has provided both national champions with a global footprint and the mittelstand. As part of this support the German government has provided or facilitated incentives and subsidies for manufacturing with a focus on the development of key sectors. The obvious example being the massive growth of the automotive sector and world leading vehicle brands in Germany compared to the relative decline of automotive in the UK. To support the sector there are strong connections between industry and Universities and this has helped manufacturers develop world leading processes and products. The German system of research institutes stems back to the Kaiser Wilhelm institutes of the 19th century and continues today. Perhaps because of the success of the sector engineering is recognised as one of the leading career options and company CEOs tend to be engineers rather than finance trained people. 

2. Focus on advanced engineering:
As noted above, there are long standing connections to the education system that provides research and innovation to the sector and also provides a consistent pool of highly qualified engineers as well as an involved and committed workforce. Germany has a superb reputation in engineering and is renowned worldwide for the quality of its products. This has been supported by the fact that savings are disproportionately channelled (via Germany's bank-dominated system of long term capital) into supporting advanced manufacturing. Over the last half century, each succeeding recession has left many US and UK manufacturers more financially exposed and needing to reduce costs, labour and investment. Whilst the same conditions have applied in Germany the longer term view has enabled German manufacturers to better maintain their levels of investment and they have consistently increased their market share in advanced manufacturing.

3. Availability of bank funding:
The stock market and private equity is not as important in Germany as it has been in the US and the UK and a large element of the corporate funding required in Germany is delivered through the banking system. This funding, particularly to the mittelstand, is often provided through the Hausbank system where companies have a long-standing, largely exclusive banking arrangements with one-main bank that is often locally based and understands and supports the local market and economy. The banking system in Germany has been more understanding and supportive of the long term nature of the sector and the requirement for longer term funding. One of the differences in the German economic model seems to be the use of debit cards rather than credit cards which gives a better profile for bank funding and savings – giving the banks the ability to invest. Finally as manufacturing is a much more highly regarded sector in Germany banks (and other funders) have been more inclined to be supportive of what is a key sector in the economy.

4. Employee "voice" and loyalty:
German employees enjoy a high rate of pay and a high level of job security which seems to be part of the national culture. In times of stress German companies will try to use work-sharing (kuzarbeit) rather than making significant job cuts which in turn helps maintain loyalty and all important skills within the workforce. Union influence is still significant within the private sector in Germany and in larger companies half of all seats on supervisory boards are reserved for employee representatives - and through this the workforce enjoys considerable veto power. However, the workforce appears to exercise their power responsibly and have been a key part of the success of the sector.

5. More effective manufacturing processes:
As noted manufacturing (engineering in particular) is regarded as a valued occupation and helps drive the education system at school and university level. German manufacturing companies tend to be lead by engineers, and combined with the strong connections to Universities, there is an inbuilt understanding of how to make manufacturing processes deliver quality and efficiency. The support from the banking system has enabled a high investment in machinery and technology which has helped offset the higher cost of labour and infrastructure. In addition German manufacturers were early users of low cost economies to help them maintain their competitive edge. In recent years German companies have become significant global players and were early investors in China. For example Volkswagen established operations in China more than 25 years ago and became very successful very quickly. It is still the largest foreign car assembler in China with something like an 18% market share.

Lessons to be learned?

Clearly the German manufacturing sector is not perfect and has had its share of problems and difficulties. But it has to be said that it has proved to be impressive and resilient - and has given a major foundation to the success of Germany as an economic superpower. There is also no doubt that the German government is committed to ensuring the continued success of its manufacturing sector.

It is no wonder that the current UK government (and to be fair the last government) has concluded that having a strong manufacturing sector is a good idea. The manufacturing framework concept gave the Government a great opportunity to clearly establish its support for the sector and give guidance on how it would provide the framework to help support the long term success of UK manufacturing. Therefore the delay and cancellation of the manufacturing framework was a disappointment.

Developing the UK manufacturing sector in future years will not be easy and many commentators consider that the damage of the last 50 years has been too deep to reverse, particularly in the face of ever increasing competition. Unfortunately this may be true. But we must be able to build on the excellent companies and skills that we have in UK manufacturing to maintain a vibrant sector that has a key role in the UK economy and what might end up being a niche place in the world manufacturing economy. In my view this will mean that government understands that it does have an important role to play in establishing a framework for the success of manufacturing in the UK.

Perhaps we should learn from and adapt the factors that have made German manufacturing a success over the past 50 plus years?

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