
Why Germany Still Has So Many Middle-Class Manufacturing Jobs - jfaucett
https://flipboard.com/@HBR/-why-germany-still-has-so-many-middle-cl/f-d472ddd580%2Fhbr.org
======
polmuz
> Tax advantages are another reason. The high taxes on assets in France and
> the inheritance tax in the U.S. prevent the accumulation of capital
> necessary for the formation of a strong mid-sized sector.

Really? How?

~~~
mbid
I've heard the argument that, with high inheritance taxes, the heir of a
family-owned company has to sell parts or all of the business in order to pay
the tax. I don't know enough about the issue to say whether there is some
truth to it.

~~~
ChefDenominator
The one direct exposure I have had to the issue of inheritance tax was with a
small Midwest-based distributor. The owner was very old and wanted to pass the
company to his daughters, who had actually been running the business for
decades (and when I came along, his granddaughters were working the office).

His issue was that what the government decided his business to be worth could
only be paid with more cash than his business generated in 5 years. This meant
that his heirs would have to mortgage their shares to cover the inheritance
tax, which places ownership into a different category of investment.

~~~
dmckeon
The owner could have gifted a small interest in the company to each daughter,
grand-daughter, and perhaps their spouses in each year of those decades,
letting subsequent value growth and inflation accrue to the surviving family
members.

And also, perhaps transformed the company ownership structure into a limited
partnership as well, claiming a lower market value for the shares owned by
limited partners.

tl;dr: First rule of US estate planning: Die broke.

~~~
ChefDenominator
I asked the same question, and his response was, "do you really think the
government hasn't thought of that already?"

~~~
dmckeon
Well, the government has thought of it, and, at this point, appears to think
it is legal.

Look up "family limited partnership" or see:

[http://scholarship.law.marquette.edu/cgi/viewcontent.cgi?art...](http://scholarship.law.marquette.edu/cgi/viewcontent.cgi?article=1104&context=elders)

[https://www.forbes.com/sites/brianluster/2014/03/18/why-
form...](https://www.forbes.com/sites/brianluster/2014/03/18/why-forming-a-
family-limited-partnership-means-less-stress-at-tax-time/#8658aa8658aa)

Note especially the discount from fair market value for shares of interest in
an FLP.

[usual disclaimers - not a lawyer, not legal advice, see a qualified
professional in your jurisdiction, etc.]

The problem with tax/estate planning is the same problem as insurance \- the
time when you really want to have done it is often the time when it is too
late to get it. (e.g., founder/owner is dying, building is flooding or on
fire, etc.).

------
crdoconnor
He missed the main reason: currency suppression.

Germany has managed to suppress the value of its currency over the years to
make its exports artificially cheap, which encouraged growth, creating
manufacturing jobs.

It did this firstly through reunification (dragging down the value of the DM)
and subsequently by joining the Euro (Southern Europe had the value of their
currencies pegged higher than their 'natural' value, Germany's was pegged
lower).

Germany's export boom after joining the Euro would have been short lived if
they reverted back to the DM as the value of their currency would have risen
in value, pushing up the cost of exports, ending the boom. Instead it
continued unabated.

China also achieved the same thing largely by buying foreign debt (mostly US
treasuries). As did Singapore, Taiwan, Hong Kong and Japan, all of which
achieved similar results. There's no magic sauce, it's just a question of
whether industry takes political precedence over banking (which likes an
overvalued currency).

~~~
pm90
I don't understand why this comment is being down voted. While "currency
suppression/ currency manipulation" is usually spoken about in association
with fraud, this is most certainly one of the reasons that has allowed German
manufacturing to remain competitive despite having higher labor costs.
Excellent comment.

e.g. see this article on Politico which basically says the same thing:
[http://www.politico.com/agenda/story/2017/05/26/trump-
right-...](http://www.politico.com/agenda/story/2017/05/26/trump-right-about-
germany-trade-000445). The reunification part though: I had not thought about
that, and is an interesting revelation.

~~~
pluma
I think the reason this is downvoted is that the situation in Germany is
relatively unchanged since before the Euro was introduced. Saying German
success is mostly based on the Euro is a great narrative but completely
ignores the reality that Germany's economy was already strong and getting
stronger in the decades before that.

That's not saying Germany doesn't benefit from the Euro today or that it
wouldn't be profoundly stupid for Germany to abandon the Eurozone but it's not
an explanation, just a contributing factor.

~~~
crdoconnor
"Saying German success is mostly based on the Euro is a great narrative but
completely ignores the reality that Germany's economy was already strong and
getting stronger in the decades before that."

Which part of "it wasn't just the Euro, reunification had the same effect" was
I unclear about?

~~~
lispm
> Which part of "it wasn't just the Euro, reunification had the same effect"
> was I unclear about?

West Germany was before the Euro and before the reunification economically
strong.

It was the world's largest exporter in 1986, 1987, 1988 and 1990. Around 1960
Germany was already second largest exporter in the world.

Reunification was in October 1990.

~~~
crdoconnor
As far as I was aware it happened in the early-mid 90s:

[http://savingusmanufacturing.com/blog/general/how-did-
german...](http://savingusmanufacturing.com/blog/general/how-did-germany-keep-
position-as-the-world%E2%80%99s-top-exporter-for-so-long/)

"Germany surpassed the United States to become the world’s leading exporter in
1992, around the time that Germany joined the European Union as a founding
member."

~~~
lispm
As I said Germany was already the world's second largest exporter in 1960.
Behind the US, which has 4 times the population.

Germany then became the largest exporter in 86, 87, 88, 90, 2003, 2004, 2005,
2006, 2007, 2008.

In 2016 Germany is the third largest exporter after China and the US. The
account surplus (goods, services and investments) was the largest, next is
China.

~~~
crdoconnor
Where is this data?

~~~
lispm
For example:
[https://de.wikipedia.org/wiki/Exportweltmeister](https://de.wikipedia.org/wiki/Exportweltmeister)

[https://unstats.un.org/unsd/trade/imts/Historical%20data%201...](https://unstats.un.org/unsd/trade/imts/Historical%20data%201900-1960.pdf)

Percentage of world exports in 1960:

United States 16%

West Germany 9%

UK 7.8%

France 5.4%

[https://www.wto.org/english/res_e/booksp_e/wtr13-2b_e.pdf](https://www.wto.org/english/res_e/booksp_e/wtr13-2b_e.pdf)

Percentage of world merchandize exports in 1980:

USA 11%

West Germany 9.5%

Japan 6.4%

China 0.9%

Thus the claim that Germany is a leading exporter because of Euro currency
manipulation fails to explain why Germany was one of the leading exporters in
the 60s, 70s, 80s, 90s, 2000s and 2010s. In all those years it was in the top
three.

------
samfisher83
I think this is a big contributor:

A further pillar of the Hidden Champions’ competitive strength is the unique
German dual system of apprenticeship, which combines practical and theoretical
training in non-academic trades. The Hidden Champions invest 50% more in
vocational training than the average German company.

I think a 4 year college degree does not make sense for a lot of jobs. It just
puts students with more debt, and sometimes skills that don't lead to a job.

~~~
dejv
We have similar educational system here in Czech Republic. There are numerous
pros and cons. Basically at the age of 15 you have to choose what you want to
do with your life as changing careers are not that simple. And lets be honest,
most of 15 years old kids have no idea what they want to spend rest of their
life doing.

I did take this technical route (focusing on electronics, computer networking
and programming) and it give me some edge when I started my CS degree, but
further study of medicine, law or even art is out of question as I don't had
any theoretical basics for those majors. All I study during my high school was
mathematics, physics and specialised subjects.

~~~
samfisher83
In america you are required to take english, math, physics, chemistry etc. in
high school. I am just talking about the post high school years.

~~~
dejv
Well, it is different system here and in Germany. Vocational study or
technical high school is limiting your choices of uni and career paths.

Post high school you either go work (you already spent few years on the job
during school) or uni.

There are tons of jobs that are closed to you when you choose wrong path at
the age of 14 or 15 and it is really hard to change the tracks.

It is good system for manufacturing companies and economy, but not that great
for some people.

~~~
SkyMarshal
What makes it really hard to change tracks? I imagine if there were enough
political will, that's a solvable problem.

~~~
rawfan
It's not true. At least for Germany. Take a friend of mine for example: He
went to Hauptschule (Germany has a 3-tier school system where children are
split up after primary school, Hauptschule is for the least skilled children).
He left Hauptschule a year early with very bad grades to start an
apprenticeship with a carpenter. After three years of school and practival
training he graduated to journeyman with honors (i.e. all grades: A). This
gives you a scholarship for master school or college (if you want). He chose
master school and earned the master craftsman degree. He finished that with
honors, too and got another scholarship. Now he actually went to university to
get a bachelor in something called wood-technology.

In many academic traits it's actually beneficial to go for an apprenticeship
first. Architects often become carpenters of masons before studying
architecture, a friend of mine who's a nurse got her Dr. med. last week. The
list could go on for a while.

~~~
dejv
But thats one track. Say you went carpenter route when you were 15 and now you
want to study medicine or electronics or CS. You are going to lack basic
background: even with master school it is really going to be tough to learn
all the chemistry, mathematics, biology or physics that is required for those
majors.

------
kevmo
This article grinds too many axes to be as insightful as it could be. E.g.,
"[T]he inheritance tax in the U.S. prevent the accumulation of capital
necessary for the formation of a strong mid-sized sector." is just casually
tossed in there.

------
baxtr
Germany is a highly decentralized country. Maybe go and study in one of the
metropolitan areas but then return to their beloved villages far away from the
maddening crowds. In fact many of these hidden champions are in the "middle of
nowhere" with often sub-par logistics (e.g. no immediate Autobahn or major
train connection).

------
IdontRememberIt
I think the most important factor has been missed: planned luck. All the
countries (in Europe) who are having success today are the ones who had a
crisis (each for a different reason) in the '90s and made structural reforms.
During the crisis in the 2000s and 2010s, these countries (Sweden,
Switzerland, Germany, etc.) were leaner, more flexible than their
"competitors". Fun fact, most of these countries are protestant. It would be
interesting to have an explanation for this correlation.

~~~
thesumofall
Max Weber has you covered:
[https://en.m.wikipedia.org/wiki/The_Protestant_Ethic_and_the...](https://en.m.wikipedia.org/wiki/The_Protestant_Ethic_and_the_Spirit_of_Capitalism)

However, the German economic powerhouses are the Southern states - all of
which are predominantly Catholic

~~~
mbid
In Baden-Württemberg (the South Western state), 37% are catholic and 33% are
part of the official evangelical church, with likely a few in smaller
protestant groups. Likewise for franconia, which is mostly within the state of
Bavaria.

~~~
thesumofall
I'm not the one in this thread claiming causation but if there is correlation
it is in Germany almost certainly between Catholicism and economic output
rather than Protestantism: [https://de.m.wikipedia.org/wiki/Römisch-
katholische_Kirche_i...](https://de.m.wikipedia.org/wiki/Römisch-
katholische_Kirche_in_Deutschland#/media/Datei%3AKatholisch_Zensus_2011.png)

~~~
mbid
I doubt the effect of denomination would be very big, so not taking into
account much stronger factors (e.g. West vs East), this map doesn't say
anything.

------
buro9
Wow, that's a pretty appalling article.

Seems to avoid even mentioning the desire of most of Europe to try and learn
from what went wrong after the Great War. In 1918-1930 Germany was left so
weakened by peace treaties that the seeds were sown for WW2.

Post-WW2 the allies felt that a Germany crippled would only bring future wars,
and a huge co-ordinated effort to build a sustainable industry and economic
growth was put into motion. Germany and the people of Germany should profit
from peace. Part of this was the Marshall Plan, part the European Recovery
Program.

This positioned Germany to have a couple of advantages, namely that the
Victorian era mass production methods that had been pioneered could be
discarded (but remained in place in a lot of the other European developed
countries). In Germany these were fully replaced by WW2 era production methods
as most of Germany's industrial capability had been destroyed or damaged.

Additional processes to limit industrial capabilities (the key method of which
was limiting steel output of the Ruhr Valley, which acted to restrain all
industry) meant that industry was incentivised to find a larger profit per
unit rather than slimmer margins from more units.

Combined with not being able to maintain a military, Germany was able to
invest in skilled manufacturing like no-one else were able to.

Over a course of 50 years this resulted in not just a modern manufacturing
capability to be put in place, but for that to be at the very highly skilled
end of manufacturing.

The reason so many of the mid-sized market leaders come from Germany can be
traced back to post-WW2 policies to ensure that Europe could be at peace. Some
of these policies were undoubtedly exploitative in the short term, but long
term have achieved their goal.

~~~
izacus
> (most of Germany's industrial capability had been destroyed or damaged)

Tony Judt in Post War
([https://www.goodreads.com/book/show/29658.Postwar](https://www.goodreads.com/book/show/29658.Postwar))
actually claims that this is patently false. That Germany actually came out of
WW2 with most of its industry intact (it was away from the most bombed cities
and majority of fighting actually happened in France/Poland/USSR) and was in
significantly better shape than Frace and UK industry-wise. As an added bonus,
the industrial lines were freshly retooled, significantly more modern than the
ones in France and UK and its wartime focus could be rather rapidly converted
into highly profitable peacetime industries that were highly sought after in
20th century economic boom (chemistry, car manufacturing, electronics, etc.)

The fact that BRD didn't have to support and invest into standing army also
funneled investment into emerging industries - investment that was way slower
to come in destroyed France and exausted UK.

Was he wrong? Are there any sources contradicting his research?

~~~
HillaryBriss
if Germany had more intact pre-WWII industrial sites than is commonly
portrayed, that makes the original question even more interesting. how did
German industry become, and remain, so competitive in the first place?

the US also had intact industrial sites after WWII, but its middle class job
base has not been so well preserved in the face of recent global competition.

~~~
prodmerc
May have something to do with taxes and maybe more effective use of public
funds? Germans are taxed at higher rates (and more importantly, lower
thresholds for higher rates) compared to the US or UK, so the distribution
seems more even, allowing a larger middle class.

------
11thEarlOfMar
I'd be interested in knowing what percentage of the Hidden Champions are
publicly traded companies. Companies of that size are very likely to be
acquired in the US. Consolidation is a constant activity by many public firms
and probably (I am speculating) tends to reduce the proportion of mid-tier
companies relative to Germany.

Once acquired, these companies have an additional set of factors weighing on
them in that the founding team is likely to leave, budgets are controlled by,
and, profits are sent to an external firm. Those three factors will reduce the
company's ability to determine it's own fate.

~~~
qznc
A significant part of the Mittelklasse is certainly part of the car industry.
Maybe BMW, Audi, etc are not that keen on acquiring?

~~~
bluedino
In the US, the big three automakers generally don't acquire small companies. A
lot of work in the industry is done by companies like Delphi (who also have
sites in Germany)

~~~
qznc
Is the car industry a significant factor? How does Detroit compare to Germany?

------
strict9
>Germany is far ahead of other large countries with regard to mental
internationalization. This includes language competencies, international
experience from student exchanges, and university studies. Countries such as
France, Italy, Japan, and Korea lag far behind in these respects.

Don't know much about France or Italy, but know enough about Korea and to a
lesser extent Japan about how important language and international studies are
for an already overly rigorous education system.

That along with the bombshell assertion without evidence that the inheritance
tax is the greatest burdens companies face today removes any credibility from
the rest of the article.

~~~
skue
> That along with the bombshell assertion without evidence that the
> inheritance tax is the greatest burdens companies face today removes any
> credibility from the rest of the article.

You disagree with one point [1] and question another, so for that reason you
discount the entire article? If you can't align new information with your
existing mental model, then the new information must be completely wrong?

This attitude has become so pervasive and so pernicious. Somehow even
information has become partisan.

[1] BTW, do _you_ have enough familiarity with Germany to make this
comparison, or are you holding the author to a higher standard than yourself?

~~~
strict9
There is at least one enormous falsehood in the article, and in another, a
large political assertion made as though everyone agrees with it.

Of course I'm holding the author to a higher standard. Mine is a comment on
HN, the other is an article by a purported expert on a specific topic.

Information isn't partisan, but it inevitably ends up used for partisan
purposes.

------
tehabe
What people overlook, also this linked pieces is, that Germany also has the
banking system for this. You can say, there are three types of banks, private,
state and co-op banks. And while there are huge private banks, most state and
co-op banks are organised locally. Almost every district has its own Sparkasse
und many towns still have a Volksbank or Reifeisenbank.

This is an important feature of the economics in Germany I think. Yes, many of
these banks might be too small today and many merge into bigger banks but they
are still the most trusted banks in the country.

------
Boothroid
Perhaps this means Germany could suffer disproportionately as a result of
automation. It's also worth pointing out that Germany is not immune to global
trends that may erode the ability to sell based on quality - I recently bought
a 2001 BMW E39, thought by many to be the best BMW ever made. In fixing up the
E39 I've come across the same opinion over and over again: BMWs/German cars in
general are not as well made as they used to be.

Edit: I'm not saying _my_ E39 is thought to be the best BMW ever made of
course :D

~~~
marenkay
If anything Germany will suffer from the consequences of not investing in
education for the past four decades as we are already seeing the lack of
capable, well-trained, high skilled workers.

German education basically has been focussed on producing low level work
forces and ignoring the rest, you can see that clearly while hiring.

~~~
rtfs
This is not correct. We are quite over educated here in the high skilled
workforce - nowadays much more students, meister and techniker everywhere, and
sure we have created a low wage sector recently as well, but this is another
story and represents a much smaller share of the entire workforce.

~~~
marenkay
Have you tried checking out some of these students these days? Have you missed
the shortage notes about classical Meister, etc. roles given out the past
decade?

Also low wage sector is a few million people (last official numbers are about
8 million people). Compare that to high skilled workers.

------
sparkling
Related:
[https://www.youtube.com/watch?v=eUjqQZLbKgA](https://www.youtube.com/watch?v=eUjqQZLbKgA)

------
ChefDenominator
One thing not listed in the article is that German tax policy is very export-
friendly.

------
LeanderK
I think our education system is pretty solid and well equipped to deal with
tomorrows challenges and create competent employees (this is just briefly
addressed in the article). While our education system is pointlessly
complicated, a typical product of german bureaucracy, it's surprisingly
flexible. If you want a job in Germany, you have do get some form of a degree.
Especially "hidden champions" don't hire unskilled labourers, ever. There are
essentially 3 options:

1\. the apprenticeship: Still popular it is the most practical of the three.
It takes a few years where you learn to master all the basics, even if its in
practice handled by a machine, but also all the necessary theoretic
backgrounds so that you know what you are doing. All the practical skills are
taught at the company and there are (mostly) special schools for the theoretic
parts. Also important: The apprentice already earns something during his
apprenticeship! For some, depending on the individual circumstances, this is
very important. Also you apply your skills as soon as possible, since the
company already pays you, it tries to get you productive as soon as possible.
Apprenticeship are no joke, they produce hard working, competent and practical
employees. There are A LOT of companies looking for apprentices right now and
not enough applicants.

2\. the "dual study system"(direct translation): This is getting more and more
popular and for many it is the right choice. It's a mix between apprenticeship
and a university study. Half of your time you spend at your company, the other
half you study at special "applied university"-like institutions(legally, they
are not universities in Germany). I think especially for CS, most would be in
good hands in these programs. They don't focus on super-theoretical stuff,
they are very practical while providing your with a valid bachelor-degree in
the end. For some subjects, the dual is the better option. The applied
universities are not super focused on research and staffed with professors
coming from the industry. They will teach you real-world, relevant stuff
without neglecting the theoretical basics. After the bachelor, you have the
choice to delve deeper into research with a master, either at this institution
or switching to a traditional university. Also, you get paid during your
study.

3\. the university study: Well, this is essentially the same compared to your
universities beside that it's free ;) They are often way more theoretical then
the dual-study system. You have to be motivated by your material, since it's
not immediately useful. Also in germany as an university student you are very
independent, nobody pushes you to go to your lectures, take the tests or do
your weekly problem set. Many get too relaxed and perform better in a more
controlled environment. But if you're interested in the theoretical side of
your subject and you want get a more academically demanding degree, the
university is the right choice.

As a CS-student in germany, automation and digitalisation of factories
(industry 4.0, as we call it) is the buzzword heard everywhere and i think
this system is equipped to handle the challenge. Don't underestimate the
apprentices, they know their stuff. 2-3,5 years of training are separating him
from unskilled labor.

------
tiatia
Germany's real secret is that they don't pay their engineers.

An engineer, even with a PhD from a world class university, makes around 55k.
Even in cities like Munich they will laugh about you if you request 60k.

Sure, if you have tons of experience, industry contacts etc., maybe more
SOMETIMES. But let's get back to the 55k. A short internet search
(www.nettolohn.de) tells us this is approximately 2600 Euro net pay per month.
And this is for a full time job that is likely very stressful and comes with
tons of responsibility. An English teacher in China (Shanghai, Beijing) can
make 3000 Euro net a month.

Even if you claim my numbers are a bit off. It gives you an idea.

~~~
quonn
First of all, you have to adjust this for the cost of living and the fact that
employers have to pay about half of the health insurance and retirement
savings cost on top of the salary as well as three or four weeks of payed
holidays etc. 55k Euros in Munich is easily worth more than $100k in the US.

Second, a CS graduate can certainly get 60k in Munich and a PhD will likely
have 70k or more. At BMW this may be 80k or more.

------
skookumchuck
Rarely mentioned is the fact that post-war Germany turned to free markets,
hence the "German Miracle". This persisted until 1970 or so, when the German
economy turned significantly towards socialism and big government.

~~~
Roboprog
It seems they did well both before and after 1970. So???

~~~
skookumchuck
The growth rate flattened out after 1970.

