CEO Policy Recommendations for Developed Economy Nations
Strength in the Midst of Economic Crisis
Germany’s history for manufacturing excellence is renowned. From some of the world’s most luxurious automotive brands to the country’s continued dominance in the field of “mechatronics”, the premium brand often associated with the moniker “made in Germany” has resulted in the country being recognized as one of the most competitive developed nations in the world.
Unlike emerging economies, however, Germany has taken a different approach in sustaining its global manufacturing prowess and is today in a position of strength while most of the Eurozone navigates the turbulent economic storm that engulfed the continent throughout 2012 and will continue to do so in 2013.
Germany’s path to prosperity over the past decade has focused on the development of new technologies and its ability to drive innovation leveraging a highly skilled workforce that demands higher labour rates, resulting in economic benefits for the nation’s economy, its citizens and companies operating in the market.
One specific example is Germany’s leadership in mechatronics – a multidisciplinary field of science and engineering that merges mechanics, electronics, control theory and computer science to improve and optimize product design and manufacturing.21 Through this focus, and the technological advancements that result, Germany has created sustainable demand for its products from both developed and emerging markets around the world. In fact, Germany is the world’s largest manufacturing exporter behind China.22
Yet, challenges may loom for Germany in its ability to maintain its competitive advantage. There is no question that the country is a leader in its ability to innovate and develop a skilled workforce that is enabled by strong infrastructure, quality healthcare and other factors that contribute to a nation’s ability to compete globally. However, executives who were interviewed for this report or participated in the working sessions consistently noted a number of challenges – particularly in the areas of energy and rising labour and material costs – that may undermine Germany’s competitive advantage in the long term.
To address these challenges, executives offered the following recommendations.
Develop a realistic approach towards energy transition and lengthen the transition period over several decades
Germany’s energy and CO2 emission policies were a key area of concern for a majority of the interviewees. Many of the executives participating in the discussions consider the energy transition in Germany to be an impediment for investments and expect it to lead to price increases.
They emphasized the importance of a cost-competitive energy policy and carbon emission standard that is consistent with the rest of the world. They also almost unanimously expressed concern with the risk of chasing industries out of Germany as companies seek manufacturing locations with lower energy costs. Some executives speculated that new production sites with high energy costs (e.g. foundries) may be built somewhere else, and believed that emerging markets may be viable sites not only because of cost advantages but also because of local sales in those regions.
To address these concerns, executives noted the following recommendations.
- Urge policy-makers to develop a realistic approach towards energy transition and lengthen transition period to 20 years in order to reduce risk to the manufacturing industry.
- Develop competitive energy policies that are cost competitive and ensure stable supply.
Invest in the education system and develop programmes that increase the number of qualified engineers, scientists and mathematicians
There were mixed views in terms of the German education system. Some executives said that the country’s engineering tradition and strength in basic research are models for other countries to emulate. Others recommended a change in all elements of the education system (primary school, secondary school, university) and the formation of elite universities, as other countries such as the US have done. They mentioned that the German system results in a good general education, but that there are weaknesses at the top.
A number of executives also expressed concern that although the total number of university students has increased over the past few years, there is an increasing shortage of highly qualified German graduates in science and mathematics disciplines, such as engineering, natural science and informatics. One executive noted that the reform that introduced Master’s and Bachelor’s degrees in Germany was considered a setback for the engineering disciplines since the traditional German degree – Dipl. Ing. – was a worldwide hallmark of excellence.
Executives generally said this growing lack of qualified workers would not only limit Germany’s ability to innovate, but also negatively influence the competitiveness of Germany as a manufacturing location.
To address these challenges, executives offered the following recommendations:
- Maintain current education standards and provide more resources for education and qualification that focus on nurturing talented students and allow for the formation of elite institutions.
- Develop programmes that promote science and ensure a sustainable pipeline of qualified graduates with degrees in engineering, natural science, mathematics and informatics.
- Increase government support of basic scientific research to enable more cooperation between companies, universities and research institutions.
Focus on innovation and differentiation in the area of high technology
Executives almost unanimously considered innovation as crucial to the future of German manufacturing. Furthermore, executives said that in order to continue differentiating itself, Germany must focus on becoming a global leader in advanced manufacturing – particularly in the area of high technology.
Executives consistently noted Germany’s current competitive advantage with respect to the country’s well-established technological networks that allow for the efficient exchange of knowledge and expertise. Executives also applauded the efforts of institutes such as Fraunhofer and the Max Planck Society. However, interviewees recommended the following measures to encourage innovation:
- Invest in R&D programmes that support manufacturing, including funding for the infrastructure necessary to develop new technologies.
- Provide appropriate incentives to consumers so that they adopt new technology (e.g. electric vehicles).
- Establish demand-side innovation policies that result in business certainty and, as a result, create incentive for investment.
- Foster more regional growth clusters where private companies collaborate closely with the public sector, thus providing platforms for the development of innovation.
Develop a long-term strategy to ensure Germany continues to have access to a supply of raw materials
Executives participating in the discussions expressed concern over German manufacturers’ ability to access raw materials, and said that conflicts over rare earth materials could signal additional challenges on the horizon. The absence of a long-term concept for the supply of raw materials and energy for Europe may, according to executives, also limit the German economy’s ability to stay ahead of the competition. Executives noted that while various nations take account of the fact that access to raw materials is becoming increasingly important, Germany remains largely inactive in securing direct access to raw materials and rare natural resources.
Address the rigidity of German labour laws to encourage continued investment in Germany’s manufacturing sector
Almost all of the executives cited the strict German labour market regulation as a strong factor in limiting the competitive advantage of their country’s manufacturing industry. The strength of the labour unions and the inflexibility of the wage determination, according to executives, make it difficult for manufacturers to react quickly to market changes and maintain a competitive edge in the global market.
Executives consistently mentioned the need to retain industrial competitiveness by liberalizing the labour market and reforming social policy.
Take an international leadership role in developing and standardizing intellectual property laws
To maintain an innovative environment, executives broadly said there is a need to have a clear understanding of how intellectual property rights work across borders. Executives said that taking a leadership role in ensuring intellectual property rights in Germany and other countries is a key driver for the success of German companies, the Germany economy (as a leading export nation) and, ultimately, the global economy.
Executives consistently noted concerns with the ease at which cost-intensive innovations can often be copied in foreign countries without legal consequence, and said that private companies may invest significantly in research and development if they are granted exclusive rights on their inventions in various global markets.
To overcome these challenges, executives recommended to following activities:
- Advocate strongly for the development of cross-border intellectual property protection policies and the enforcement of consequences stemming from legal violations.
- Collaborate with policy-makers to develop a clear view of intellectual property rights in universities and other research and development partnerships to establish a foundation for companies, universities and technology clusters.
Additional Challenges Impacting Germany’s Manufacturing Competitiveness
In addition to the recommendations previously outlined, executives frequently touched upon a number of other challenges and broad recommendations on how to ensure Germany’s long-term competitiveness. They include:
- Limit regulation that is burdensome to entrepreneurial liberty and actionability.
- Adopt a simple tax plan that lowers corporate tax rates as well as individual tax rates.
- Ensure a stable democracy and build on Germany’s strong social consensus of working together towards a common goal.