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Germany’s Recovery and American Manufacturing

06-29-2011 by Linda S. Carbonell

BASF plant in Germany

There is something jarring about calling up a story about the President’s visit to an Alcoa plant in Iowa and sitting next to it is an ad saying “4 Ways To Avoid Running Out Of Money During Retirement. If you have a $500,000 portfolio……” With almost 20% real unemployment, a shrinking middle class, 401(k) accounts decimated by the Wall Street crash, corporate profits at record-breaking levels, corporate executive salaries among the highest in the nation, is it really a good idea for a money manager to run an ad about inadequate half-million-dollar portfolios on Yahoo that will be viewed by people desperately seeking good news about the job market?

Factory jobs used to be the heart of the middle class. Really, they were. Back in the late 1960′s, the steel mills in Pittsburgh paid up to $11 an hour to high school students who swept the floors after school and on weekends. A full-time legal secretary made less than $100 a week. The big manufacturers – household appliances, automobiles, steel, airplanes – paid above median wages and had great benefits. Oddly enough, when Chrysler almost went belly up in the seventies, Lee Iacocca said the biggest problem was the health insurance and pensions, not the pay scales. He warned that unless America took health insurance and pensions out of the private sector, American manufacturing would decline. At the time, China wasn’t manufacturing for export and Toyota had barely broken into the American market. In short, he said “it’s not the $60,000 salaries, stupid, it’s the health insurance.”

“A prophet is without honor in his own country.” Where would we be if we had listened to Iacocca? American manufacturers could not do anything about the health insurance system, so they went after the salaries, moving their operations out of the country to reduce costs. Great for them, bad for the rest of us who have watched the middle class shrink to almost non-existence since then.

So, how is it that of all the industrialized Western countries, only Germany still has a healthy manufacturing sector? Other countries have nationalized health and pension systems. What makes Germany unique?

The German economy isn’t perfect. Middle class income has stagnated, in part because of concessions made by unions to help companies survive the recession. But, the unemployment rate is 6.9%, and that is an accurate number, not the fixed and manipulated number we use in America. As I understand it, the Germans count every person who could work, even the disabled who can hold limited jobs, and then counts the number who do have jobs. They do not figure unemployment on how many people are looking for work, as we do. They believe they have too many people in low-income jobs.

However, Germany’s exports are the highest in Europe and they claim their manufacturing creates jobs across Europe because of the suppliers and parts manufacturers they contract with. That’s their defense for the claims by other European countries that Germany is too successful. It mirrors a lot of the debate we had over NAFTA. Its opponents said it would damage everyone’s economy, its supporters claimed it would improve everyone’s economy by opening up markets and increasing manufacturing in Mexico and Canada to supply America.

Germany built its manufacturing base on two principles. First, they create products for niche markets. They are not interested in selling 100 million widgets for $2 each. They are interested in selling 100 chain saws for $2,300 each. If you had an unlimited budget, would you rather spend $2,300 for a chain saw that will last for over a decade or $300 for one that will wear out in a couple of years? Right. If money were no object, you would spend the money for something of quality. Second, they are very responsive to their customers at all stages of the manufacturing process. For example, about 20 years ago a company that makes ovens for restaurants polled hundreds of chefs in every part of the restaurant spectrum. Based on those surveys, they designed an oven. Then, they put that oven, for free, in a few dozen restaurants and let the chefs use them as they normally would. After a couple of months, they collected the feedback about what needed to be tweaked. They went back and tweaked the ovens to match the demands of their customers. Toyota used the same technique when they designed their first cars. That’s how they made such an impact on the American market. American companies on the other hand, use the Field of Dreams principle – “If we build it, they will come.” That attitude almost sank Hewlett Packard under Carly Fiorina. They kept building and not selling until they had warehouses full of unsold product. When manufacturers invent a product that really isn’t needed or which doesn’t really address the needs of their customers, they are going down the wrong street in high gear and doomed to hit the guard rails.

Here’s the myth – we can get our jobs back from Central America, China and India.

It will not happen, no matter how many tax breaks the Republicans hand out. We need to find new things to manufacture – things no one else is making, things that may not necessarily be bought by everyone in the world, things that meet a real need. We need to learn a new way of thinking about manufacturing. We cannot keep making kleenex. Anyone can make kleenex. We need companies that think like Amazon – we are not going to make huge profits in the first year, but will become profitable over time. It was an amazing concept when Amazon started. It’s a damned good way to run a business. They built their reputation, built their brand, and eventually, they started making a profit without cutting services or losing quality. The important thing about Amazon was the way in which Jeff Bezos found investors willing to take the risk. They are few and far between. Today’s investors, those people who are made billions on our foreclosed mortgages, those who are making billions pushing money around in financial instruments that eventually amounted to more money than exists in the world.

So, if we can’t count on billionaires to invest in our country, in those bright new ideas that could create jobs and reverse our economy, who can we count on for those investments? How about the government? It’s not a hand out. Investments are a loan, even private investments. I will give you money, invest in your company, and you will repay me. We invested in General Motors and Chrysler and they became profitable and paid us back. China, India and Germany invested in their manufacturers, and look where they are.

Always remember – the TARP bailout was President Bush’s baby. We got the money back, but we didn’t make a profit on those bailouts. Those bailed out banks are refusing to invest back in the country while their executives are getting themselves into the millionaire/billionaire club. Under President Obama, we invested in two auto manufacturers. We got the money back with interest and have lost very little of it in the companies’ restructuring. We also got thousands of jobs saved and restored, which creates tax revenue for the states and the country. Whose idea worked better?

 

 

 

 

 

 

 

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