Innovation in Production

Many Germans look back to the 1970s as a highpoint in their nation’s industrial development. The hallmark “Made in Germany” then signaled not only well-made products, but also a highly efficient industrial system. German industry was recognized internationally as a model of high achievement; the country’s engineering, automotive and chemical industries were at the forefront of technology; and German products had an international reputation for quality and performance. At the time, customer demand for German products was so high that many manufacturers faced labor shortages as they tried to obtain workers to meet their order books.

In the past, German industry was synonymous with high-performance products, high quality, success in international markets, and consistent growth. Today, the matter is more complex: while some German companies are very profitable and have improved their export market positions, other German firms have fared less well. The German media has reported many cases where industrial workers have been laid off, long-established companies have collapsed, or production has been transferred abroad. German enterprises can no longer count on the stable business conditions found in earlier periods. Instead, market and production conditions have today become more dynamic and increasingly unforeseeable. This “turbulent environment” is characterized as follows (Lay and Mies 1997):

In the mid-1990s, the economic situation of the German investment goods sector was problematic. Macroeconomic indicators showed that incoming order levels were weak, while major concerns had arisen over the sector’s international competitiveness and the loss of industrial employment. The self-assessments of investment goods firms confirmed this discouraging picture. In the Fraunhofer ISI’s Manufacturing Innovation Survey (see appendix), one fifth of manufacturing respondents stated that they would not be able to continue to survive if their profitability remained at the present level. One third of the establishments in the survey considered their present profit level as being only sufficient to keep the business alive. Just two fifths of the respondents stated that their present profit level was satisfactory (figure 3-1).

The tapping of new markets with growth possibilities is often said to require the development and commercialization of innovative products (Utterback 1994, Freeman and Soete 1997). A strategy of innovation and technology leadership appears to be the most promising way, especially for manufacturers in high-wage Germany, to not only maintain, but also to expand their sales performance and market positions. In turn, the ability to innovate to ensure continued success in sales and markets is closely linked to the preservation of manufacturing jobs in Germany.

With more than 4 million people out of work and an unemployment rate of over 11 percent in Germany, the creation of new jobs is now a major concern. One approach that is often suggested to lower unemployment is the use of new production concepts in industry (European Commission 1997). The aim is to improve the competitiveness of manufacturers, and thus their sales, through such methods as employee teamwork, decentralized decision-making, orientating production towards customer requirements, and combining previously fragmented tasks. It is hoped that the increase in turnover generated by these methods will enable new employees to be hired, thus helping to reduce joblessness (Blechinger et al. 1997, p.74).

The involvement of workers in corporate supervision and management — through procedures for “codetermination” — is a well known, and much discussed, feature of the German industrial system. The German model of management-worker relationships is institutionalized in the “Betriebsverfassungsgesetz” (business constitution law) and the “Mitbestimmungsgesetze” (laws for codetermination). In addition to these legal requirements, employee participation is also viewed as an instrument of management. The direct participation of workers in management decisions aims to promote increased acceptance by employees of organizational and technological changes and to mobilize the knowledge and abilities of employees in the interests of the company (Ritter 1992).

Germany has an extensive array of rules and norms that regulate employee working hours and business operating times, including when during the week and weekends that manufacturers are permitted to operate. These limitations on working times are often highlighted in discussions about the barriers that constrain German industrial competitiveness. Indeed, the organization of working hours in industry can be viewed as a major indicator of rigidity or flexibility in the German manufacturing system and of the adaptation by German enterprises and workers to broader economic and societal changes. Fundamental changes in working hours in Germany involve negotiation processes on at least four levels: legal regulations, industrywide collective bargaining agreements between trade unions and employers’ associations, plant agreements and individual job contracts (Bullinger 1995).

An intense debate is now underway about the advantages — and especially the disadvantages — of Germany as a location for industry. In particular, criticism is leveled at Germany’s unfavorable framework conditions such as high taxation, excessive bureaucracy, numerous regulations, and high wages and wage-related costs. At the same time, German enterprises increasingly seek to expand their sales by opening up new international markets and fields of business close to foreign customers. Thus, whether to lower costs or to serve international markets, many German firms have relocated — or are considering the relocation of — parts of their production abroad.

Goods made in Germany can not compete primarily through low prices. German production input costs, particularly the expense of labor, are too high for that. Over the last few decades, German manufacturers have successfully compensated for their disadvantages in production costs by focusing on advanced technology, high quality, and specialized products tailored to customer needs. However, recently an additional strategy has been added to this portfolio — to package together manufactured goods and complementary services (Reichwald and Möslein 1995, Ganz and Stanke 1996, Homburg and Garbe 1996). The basic idea is that the complementary services add value to the goods and distinguish them in the market, raising the package above the intense global price pressures that would otherwise apply (Simon 1993). If enterprises succeed in melding goods and services into a combination which customers can order like a service, disadvantages based solely on manufacturing costs do not become so relevant.

Environmental conservation has an important position in public discussion in Germany and has great significant in German politics, legislation, and regulation. Environmental laws and state funding incentives induce — or force — businesses in Germany, to pay attention to environmental conservation in manufacturing. In addition, environmental conservation in industry is also promoted by voluntary codes of compliance.

After the economic and monetary union between East and West Germany in 1990, industrial firms in the former German Democratic Republic (GDR) were abruptly exposed to the production and trade requirements of a market economy. These new requirements were radically different from the business conditions that had been established under economic planning. In addition to changes in markets, ownership, and control, industrial enterprises in the former GDR had to fundamentally restructure manufacturing strategies and practices. It was necessary to improve marketing as a prerequisite for selling their output under the new conditions and to increase the intensity of research and development as a precondition for making competitive products. In addition, these enterprises had to modernize facilities, equipment and operations as a means for competitive manufacturing of products.

Following the reunification of Germany in 1990, companies in the new Länder of the former East Germany suddenly had to confront the cold waters of the market economy and the full convertibility of the old East German currency to the West German Deutschmark (DM). Despite many measures to promote necessary adaptation processes — including active privatization through the Treuhand privatization management agency, tax-based investment incentives, and direct subsidies — the new Länder continue to face major structural economic difficulties. East Germany’s immersion in cold market waters has not yet resulted in a garden lake surrounded by a blooming economic landscape. In particular, the region’s manufacturing industry has struggled. Since 1990, the new Länder experienced dramatic declines in their industrial bases. The number of workplaces in manufacturing dropped to less than one third. An initial surge in the overall growth rate, backed by transfers from West Germany, promised the eventual converging of living standards across Germany. But, this trend has recently reversed. Growth in East Germany again lags behind the West.

In recent years, the process of innovation has moved very much to the forefront of concern in understanding and promoting industrial competitiveness, business performance, and economic growth and development. Nonetheless, as the economist J.M. Keynes observed more than fifty years ago: “The difficulty lies, not in the new ideas, but in escaping from the old ones…” (Keynes 1936). This tension between innovation and convention has certainly been evident in the analyses presented in this book. The contributions to the book have examined in detail trends in the diffusion of new production concepts, taking into account such differences as underlying industrial structure, product mix, establishment size, and location factors to explain variations in adoption rates. The context has been that of the German investment goods sector, which is now challenged to change traditional structures of production and innovation under pressures of global competition and domestic restructuring.