Germany's Unexpected Economic Crisis
Summary
TLDRGermany built a strong manufacturing industry known for high quality and skilled labor, giving it a comparative advantage. However, high costs, an aging workforce, catching-up competition, and the energy crisis now threaten this dominance. Its companies could leverage reputations and offshore production, freeing up Germans for more productive service roles. However, this major economic shift risks undermining worker relations and support systems. It could also reduce jobs and standards if not carefully managed, costing Germany its premium brand status.
Takeaways
- π Germany became the 3rd largest economy by overtaking Japan, largely due to its manufacturing prowess
- π·ββοΈ Highly skilled German workforce and access to cheap energy gave it an advantage in high-end industrial goods
- π Rising energy costs and an aging workforce are now challenging German industry
- π China has caught up in advanced manufacturing, further pressuring Germany
- π΅ Germany struggles to attract skilled migrants compared to English-speaking countries
- π§ Job vacancies in core German industries continue to go unfilled
- π Germany could leverage reputation for quality goods without needing domestic production
- β Shift away from local manufacturing risks undermining Germany's egalitarian economy
- πΈ German companies offshoring operations may lose premium consumers pay for 'German' goods
- π Installing car engines in Germany may not be as valuable as training teams abroad
Q & A
Why is Germany famous today?
-Germany is famous today for its engineering prowess, beer, sausages, checkered history, and being the third largest economy in the world.
What has driven Germany's economic success recently?
-Germany's ability to produce extremely high-end manufactured goods like cars, aircraft, medical devices, and centrifuges has driven its recent economic success.
Why are economists predicting the end of Germany's industrial dominance?
-An aging and retiring workforce, shortage of skilled labor, rising energy costs, and China catching up in advanced manufacturing are putting pressure on German industry.
What gave Germany a comparative advantage in manufacturing?
-A highly skilled workforce, decent geographic position in Europe, access to cheap energy from Russia and Norway, and a reputation for quality gave Germany comparative advantages.
How could a decline in domestic manufacturing actually benefit Germany?
-German companies could leverage their reputation to charge a premium while offshoring actual production. The workforce could also shift to more productive service roles.
What are the risks if Germany shifts away from domestic manufacturing?
-It could undermine Germany's egalitarian economic model, lead to fewer jobs without better replacement jobs, and erode Germany's manufacturing reputation if quality declines.
Why has Germany relied more on domestic manufacturing than similar economies?
-Germany has about 50% more people working in industry than comparable advanced economies. Other countries have shifted more operations overseas.
How has Germany maintained high wages in manufacturing?
-By using advanced machines and automation to make workers extremely productive rather than relying on cheap labor.
Why is China now a threat to German manufacturing?
-China has caught up and can now genuinely rival Germany in producing advanced machinery and high-end goods like cars and batteries.
What is an advantage German companies could still leverage?
-German companies are perceived as high-quality, so they can charge a premium for goods even if they shift production out of Germany.
Outlines
π Germany's Engineering Prowess and Manufacturing Dominance
Paragraph 1 discusses how Germany has become an economic powerhouse and world leader in high-end manufactured goods across sectors like automotives, aircraft, medical devices etc. It attributes this to the country's engineering prowess, skilled workforce, industrial capabilities and access to cheap energy. However, it notes that Germany now faces internal and external pressures threatening this industrial dominance.
π Factors Underpinning Germany's Manufacturing Comparative Advantage
Paragraph 2 explains how Germany has maintained a comparative advantage in manufacturing despite having some of the highest paid workers globally. It discusses how German industry relies on advanced machines and highly valuable niche products where labor cost differences are negligible. It also highlights Germany's reputation for quality as a key factor.
π Challenges Leading to Predictions of Germany's Industrial Decline
Paragraph 3 discusses various challenges like dependence on increasingly expensive Russian fossil fuels, an aging workforce, bureaucracy hindering skilled migrant intake, and catching up of Chinese manufacturing standards. It suggests that this predicted industrial decline represents Germany taking its next step, allowing German companies to offshore operations while retaining reputational advantage.
Mindmap
Keywords
π‘comparative advantage
π‘high-end manufacturing
π‘aging workforce
π‘offshoring
π‘reputation
π‘labor unions
π‘service economy
π‘industrial decline
π‘automation
π‘economic consequences
Highlights
Germany has become a world leader in a vast array of engineered goods from aircraft and medical devices to centrifuges used in nuclear energy.
China has a comparative advantage in producing basic manufactured goods, and Singapore has a comparative advantage in producing financial services and operating as a glorified servo for the world.
Highly specialized roles in modern economies are one of the biggest reasons that the world is so wealthy today.
Germany has a highly skilled workforce, especially in engineering and manufacturing disciplines, a decent geographic position within Europe and has over the past few decades had access to very cheap energy.
German car factories use a lot of automated machines, with just a few highly skilled workers using those machines to make 100 times as many cars per worker as they could with basic hand tools.
The high cost of German workers isn't really a problem because the advantage came from having the machines and the experience to use them, rather than having the workers that would work for the lowest possible price.
Germany is desperately short on manpower, with over 750,000 job vacancies in some of the country's core industries going unfilled.
Today Chinese manufacturing is not nearly as far behind German manufacturing as it once was. China is building cars, batteries, aircraft and advanced machinery that is genuinely rivaling the stuff coming out of Germany.
If the predictions of German industrial decline are correct then what the country could do is leverage its advantage of having a fantastic reputation for producing goods that are worth paying a premium for, without any of the disadvantages of actually having to produce them in Germany.
Compared to other advanced economies, even those that have their own large domestic automakers and high-end manufacturers, Germany has about 50% more of its people working in industrial jobs.
Theoretically, the workforce could move into more productive and value-adding service roles that make the country even wealthier.
Once a foreign team has been trained on how to do a German's job, they don't really need the German worker anymore.
The USA is the largest economy in the world today, in large part because it is home to companies that do most of their operations overseas, but still bring in the wealth generated from these activities back on shore.
If German companies don't maintain their standards while setting up international operations, they will very quickly lose the large group of consumers who are willing to pay a premium for a good that is at least theoretically German.
Workers across Germany are already protesting government changes to energy subsidies and tax rules, and while this is mostly directed towards agriculture and transport for now, it's a symptom of the shift in the way that business has been done in the country.
Transcripts
Germany is as famous today for its incredible engineering prowess as it is for big jugs of
beer, sausages and checkered history. Germany has recently become the third largest economy
in the world behind China and the USA after overtaking a stagnant Japan.
It's also clearly the most powerful and influential economy within the European Union
and a large driver of that economic success has been the country's ability to produce
extremely high-end manufactured goods. Of course there are the country's cars,
but that only makes up a surprisingly small share of the country's total manufacturing output and
an even smaller share of its exports. Germany really does live up to its reputation because
it has become a world leader in a vast array of different engineered goods from aircraft
and medical devices to centrifuges used in nuclear energy. Basically if there's something
that really needs to be made right there's probably a German factory making it, or at least
there was. A long list of internal and external challenges have put significant pressure on German
industry to the point where a lot of economists and commentators are predicting that the country
could lose its industrial dominance entirely. That is a big claim that would represent a
significant shift in national, regional and frankly global trade. But even if it does come true it may
not be as bad as it sounds for the world's third largest economy and to find out why we must as
always answer a few important questions. So why are economists predicting the end of Germany's
industrial dominance? Why is this happening now? And finally why could this actually be a good
thing for Germany?
While workers are on strike across much of Europe it's easy to sympathise with their
struggle because inflation has effectively lowered their salaries. To avoid the guaranteed
value loss of currency it's best not to just keep your money as cash in a bag under your pillow,
and we partnered up with the investing platform trading212 to help you put your money somewhere
where it can grow rather than lose value to inflation. Even just holding your euros in a
trading212 account gives you 4.2% interest. Since I get paid in euros but I live in Australia I
love that trading212 has multi-currency accounts and gives you the same fantastic exchange rate
banks offer each other. Their exchange fee is also never more than 0.15% which is the lowest I could
find in the industry. So I can just keep my money in euros if it's not a good currency exchange to
Australian dollars right now. You can use trading212's pies to spread out your investments
into multiple companies that you can choose, and if you're not sure which companies to invest in
you can look through other popular investors pies and either copy their entire spread or
take bits and pieces and adjust it however you'd like. You don't need to be some kind of minute
to minute high-risk trader to still take advantage of these incredible tools. So sign
up at trading212 and use the code EE, make a deposit and you'll get a random fractional
share worth up to 100 euros. The link's in the description or use the code EE to start investing
today. As the world has opened up to more global cooperation where goods and services are traded
more freely between countries across the world, there's been a general shift towards countries
doing what they do best. A country like China has an enormous and relatively industrially capable
population, a decent global position for trade, and a political system that has been very
accommodating of rapid expansion so it has become a global center of low-cost manufacturing.
Singapore has a tiny landmass and a relatively small population, but it has developed a very
robust political system and it's right in the middle of the world's busiest trade route so
it has become a highly competitive business and refueling destination.
These economic features lead to something called comparative advantage. No matter how hard
Singapore tries it just doesn't have enough landmass or manpower to compete with the industrial might
of China. Likewise, without radical changes in the way the country operates, no international
businesses will move their operations to China because it represents significant political risk.
So this means that China has a comparative advantage in producing basic manufactured goods
and Singapore has a comparative advantage in producing financial services and operating as
a glorified servo for the world. So long as these countries remain more or less cooperative with
one another these strengths and weaknesses are fine because Singapore can buy cheap consumer
goods from China and Chinese shipping companies can use Singapore as a gas stop or a place to
manage international finances. On an individual level in our own economies we have grown wealthier
by specializing in roles that we do really well and letting other people do the same and then just
trading with one another. Most people don't know how to do surgery on themselves but that's okay
because they can pay doctors to do it with the money they've made from their own specialized job.
Free trade and taking advantage of comparative advantage lets entire national economies
effectively do the same thing, which theoretically should be great. Highly specialized roles in
modern economies are one of the biggest reasons that the world is so wealthy today,
but there can be issues at a national scale. On a personal level within economies, especially
advanced and politically stable economies, there are authorities and institutions in place to
settle disagreements. On a global level there really isn't the same thing. There are mediators
like the world trade organization and the UN, but if a country decides to cut another country
off from trade then short of declaring war on them there really isn't much that can be done.
This whole issue with holding a valuable place in global trade while not being overly reliant
on it is especially important in Germany because of its unique advantages.
Germany has a highly skilled workforce, especially in engineering and manufacturing disciplines,
a decent geographic position within Europe and has over the past few decades had access to very
cheap energy. This gave it a strong comparative advantage in producing high-end industrial goods.
Normally when people think of gaining an economic advantage in manufacturing,
they think first to lower the cost of the labor force so factories have to pay their
workers less so they can make things cheaper overall. This is why places like China produce
so much of the world's stuff, but as wages in China have increased, global manufacturers are
looking for cheaper alternatives in countries like India. Now Germany is home to some of the
highest-paid workers in the world, so on the surface it doesn't make sense how it remains
competitive with cheaper global centers. But depending on the type of manufacturing,
labor costs are not as important as one might expect.
Most German industry relies heavily on either highly advanced machines and tools to assist
with production, or they are producing something so valuable the difference between paying someone
$2 an hour to make it versus $50 an hour effectively makes no difference to the end price.
German car factories use a lot of automated machines, with just a few highly skilled
workers using those machines to make 100 times as many cars per worker as they could with basic
hand tools. At that scale, paying highly skilled German workers more has been competitive because
the advantage came from having the machines and the experience to use them, rather than having
the workers that would work for the lowest possible price. If this is compared to the
type of products that countries like China typically produce, they tend to be put together
with more basic tools and a lot of hands-on assembly. There are of course German cars that
are also made by hand, but they tend to be extremely valuable, where the end consumer
is willing to pay a premium to have a car that was hand-built in Germany.
And that right there has actually been one of the biggest factors contributing to Germany's
comparative advantage in manufacturing, and that's its global reputation.
An even clearer example of this would be products made by a company like Siemens,
ok yes, terrible name to put in a youtube video, but still one of the country's largest manufacturers.
They produce things like nuclear centrifuges and everything that goes along with them.
These machines cost hundreds of millions of dollars to produce and install,
and it's the type of thing where not only would the reputation of German engineering go a long way,
it would be the kind of thing that only Germany and a handful of other countries
around the world would be allowed to produce without causing geopolitical tensions.
The labor costs of machines like this are barely a rounding error,
so the high cost of German workers isn't really a problem.
Other input costs, especially energy are more important for the highly mechanized
industry taking place in Germany. Now in the past this has actually been
one of the country's biggest strengths. Since the mid-1990s it has been able to
pump very cheap natural gas directly from Russia and Norway, which have some of the
largest reserves of this energy source in the world. Now clearly there have been troubles with
this in the last two years, and higher energy costs are having a bigger impact on German
manufacturing than higher wages ever really could. And that's only the first thing pushing
the shift away from Germany. The energy crisis hit a lot of German
businesses particularly hard because the country is still so dependent on cheap fossil fuels
to power factories that use an incredible amount of energy.
But German manufacturing has been in decline well before that already,
and this trend too can be explained by carefully exploring what contributed to
the country's comparative advantage to begin with.
It's incredibly talented and highly skilled workforce is aging, and thanks to generous
retirement benefits that are a key feature of the country's economic system, people are
leaving the workforce earlier than they might need to.
Of course on an individual level this is fantastic, people shouldn't sacrifice the
quality of their life for the sake of economic metrics, but businesses within Germany are
struggling with this. Now normally advanced economies can compensate for this by bringing
in skilled migrants from countries with lower standards of living, but Germany has struggled
with this too. Skilled workers just aren't as drawn to Germany as they are to places
like Australia, Canada, the UK and especially the USA.
Now part of this is just the language, English is a far more widely spoken first and second
language than German is, but there are other factors as well.
The high training standards that have contributed to Germany's strong manufacturing reputation
means that even workers that want to move into low-skilled roles often have to sort
through bureaucratic training certifications that can take years before they start working.
Whatever the root cause the results are the same, Germany is desperately short on manpower
with over 750,000 job vacancies in some of the country's core industries going unfilled.
Gaining a comparative advantage for the quality of its manufacturing has also meant that it
was only a matter of time until other countries caught up.
Today Chinese manufacturing is not nearly as far behind German manufacturing as it once
was. China is building cars, batteries, aircraft and advanced machinery that is
genuinely rivaling the stuff coming out of Germany.
Of course China still produces a lot of garbage products which is why it still has a bad reputation
for producing subpar goods, but it has demonstrated that it can genuinely compete in the advanced
manufacturing space as well.
Today there are more BMWs produced in China than there are produced in Germany,
and despite that metric perhaps being a bit of a national embarrassment,
it ironically enough highlights how one of Germany's greatest opportunities
is being hidden behind this seemingly bad news.
German companies can charge a premium over companies from other countries for their
manufactured goods because consumers perceive German-made goods as a high-quality alternative.
Whether that's true, well just ask anyone that's tried to maintain a Volkswagen.
But the reality doesn't matter, what also doesn't matter is where the goods are actually made.
People just see a German company and assume the goods were made in Germany.
If the predictions of German industrial decline are correct then what the country could do
is leverage its advantage of having a fantastic reputation for producing goods that are worth
paying a premium for, without any of the disadvantages of actually having to produce
them in Germany. Germany scaling back on its manufacturing is in many ways kind of overdue.
Compared to other advanced economies, even those that have their own large domestic
automakers and high-end manufacturers, Germany has about 50% more of its people
working in industrial jobs. These jobs can be made more productive by giving people working
them more advanced tools and technology to leverage how much work they are doing,
but there is an eventual limit.
A worker building a car by hand might take a month to put one unit together,
whereas a small team overseeing large industrial presses and robotic assembly arms could produce
a thousand a day, and since they produce more there is more room to pay them more,
which is why salaries in advanced economies are higher.
But eventually it becomes better for these workers to just move into service roles,
where instead of overseeing the manufacturing themselves, they spend their time setting up
infrastructure and training teams in other countries to do it for them.
The USA is the largest economy in the world today, in large part because it is home to
companies that do most of their operations overseas, but still bring in the wealth generated
from these activities back on shore. Germany has for the last three decades decided to do
stuff more in-house, but this shift away from domestic manufacturing is not so much a failure
of its industries as it is taking the next logical step for their advanced economy.
But that doesn't mean that there won't be major problems.
If this shift away from local manufacturing does continue,
it would represent a major shift in a major economy,
and any change that big is going to have consequences.
Workers across Germany are already protesting government changes to energy subsidies and
tax rules, and while this is mostly directed towards agriculture and transport for now,
it's a symptom of the shift in the way that business has been done in the country.
Germany has historically had very harmonious relations between workers and companies,
but that's because German workers are represented well by very powerful unions
and the economy itself is managed in such a way to protect workers rights.
This works while German companies need German workers, but if they can offshore a bulk of
their operations then it could undermine the highly egalitarian economic system that
modern Germany has been built on.
Even from the perspective of a purely cold-hearted macroeconomist,
only concerned with headline economic figures,
the shift away from domestic industry still could present risks.
Theoretically, the workforce could move into more productive and value-adding service roles
that make the country even wealthier.
But the move from a role where a worker is directly installing engines into a car,
to something like a role where they're training a foreign team to install an engine,
takes a different set of skills.
There's also no guarantee that this shift would directly lead to better jobs for Germans,
instead of just less jobs for Germans.
Installing engines may not be as valuable as training a new team to install engines,
but it does provide something to do so long as there are cars to be made.
Once a foreign team has been trained on how to do a German's job,
they don't really need the German worker anymore.
Beyond that, the reputation of a country is a lot like the reputation of a company,
individual, or anything really.
If German companies don't maintain their standards while setting up international operations,
they will very quickly lose the large group of consumers
who are willing to pay a premium for a good that is at least, theoretically, German.
Now, we did a comprehensive overview of all of the features of the German economy a few months ago,
so we wanted to just focus on the issue of shrinking industry in this video,
without repeating too much.
But if you haven't watched that more general overview,
you should be able to click to it on your screen now.
Thanks for watching mate, bye.
5.0 / 5 (0 votes)