Europe's largest economy fights for its future | Business Beyond

Summary of German Industry in Transition

Key Concepts: De-industrialization, manufacturing share of GDP, energy-intensive industries, global competition, trade war, investment climate, labor market regulation, wage premium, system relevance, decarbonization, capital markets union.

1. The State of German Manufacturing

• Germany's Industrial Prowess: Despite being smaller than the US and China, Germany remains a top manufacturer by value added. Its manufacturing share of GDP is proportionally higher than most wealthy nations.
• Employment: Manufacturing employs roughly 1 in 5 German workers, significantly more than in the US (less than 1 in 13).
• Recent Challenges: German companies are facing difficulties with orders and revenue due to soaring energy costs (resulting from the war in Ukraine), struggling key markets (China, Europe), and increased competition, especially from China.
• Competition: Chinese companies are increasingly competing with German firms in both domestic and third-party markets, challenging Germany's traditional advantage in superior quality.
• Investment Climate: The case for investing in Germany has worsened due to higher energy costs, wages, bureaucracy, and regulation.

2. Impact on Businesses and Employment

• Company Responses: Companies are either waiting to invest, cutting back, or moving production overseas. A 2024 EY survey revealed that only 13% of German manufacturers plan to expand in Germany, while almost half are planning new locations overseas.
• Job Losses: Over 100,000 manufacturing jobs disappeared in Germany between fall 2023 and the end of 2024 (1.5% of total manufacturing employment), contributing to rising unemployment.
• Unemployment Forecasts: Unemployment is expected to remain near pandemic-era highs (over 6%) through 2026.
• Volkswagen Example: Volkswagen aims to shed 35,000 positions by 2030, and its network of auto suppliers is already making deep cuts.

3. De-industrialization Trends

• Long-Term Trend: Germany has been de-industrializing for some time, similar to other advanced economies. Over the past 15 years, total employment in Germany grew by 26%, while manufacturing employment grew by only 6%.
• Historical Context: 70 years ago, over 40% of German workers were in production.
• Driving Forces: Technological advancements (increased productivity), globalization (cheaper labor elsewhere), and the rise of the service sector have contributed to de-industrialization.

4. Germany's Relative Resilience

• Adam Posen's Perspective: Germany's ability to hold onto more industrial jobs proportionally than the US was due to its specialization in goods that China heavily demanded in the late 1990s and early 2000s (bulk chemicals, automobiles, large engines, turbines, trains). This was a period of "luck" that is now fading.

5. The Political and Social Dimensions

• Manufacturing's Political Resonance: Manufacturing jobs have strong political resonance, particularly in the US, where there's a perception that they offer good-paying jobs for those without college degrees.
• Wage Premium Decline: The wage premium once enjoyed by manufacturing jobs in the US has declined.
• Populist Sentiments: Fears over industry's future are visible in Germany, exemplified by parties like the Alternative for Germany (AFD).
• Posen's Critique: Posen argues that the obsession with traditional manufacturing jobs is misguided and ignores the reality that most people work in services.

6. Case Study: SKW Piesteritz Fertilizer Plant

• Company Overview: SKW Piesteritz, a fertilizer plant in northern Germany with over 100 years of history, recorded a loss in 2024 and is producing at lower capacity.
• Challenges: The plant faces high energy costs, decarbonization pressures, and competition from cheaper suppliers (e.g., Russian). Natural gas accounts for 80% of the company's costs.
• System Relevance Argument: SKW argues that it is "system relevant" for Germany, emphasizing its role in fertilizer production and the jobs it provides.
• Government Intervention Debate: The case raises the question of how far the government should go to support struggling industries.

7. Government Policy and Future Investments

• Previous Government's Approach: The previous German government refused to intervene in cases like struggling flying taxi companies and domestic solar cell producers.
• New Government's Plans: The new coalition government plans to support industries like the car industry and carbon-heavy industries like SKW through tax measures, reduced energy prices, and support for carbon capture projects.
• Future Industries: The government also aims to invest in future industries like AI and robotics.
• Capital Markets Union: Manfred Kof, former head of Commerzbank, advocates for a European capital markets union to attract investment and compete with the US and China.

8. Conclusion

German industry is at a critical juncture, facing challenges from high energy costs, global competition, and the need to decarbonize. While government spending may alleviate some of the pressure, the overall trend of de-industrialization is likely to continue. Germany needs to become more competitive in advanced technologies and could benefit from a stronger European capital market to attract investment. While Germany is better positioned than the US to handle de-industrialization, the situation still presents significant risks.