Why industry has a future in Germany

• "System head Germany plus", joint study by the BDI, vbw, IW and Roland Berger, on the future of value creation in Germany
• Study highlights key functions for corporate success
• Good news for Germany as a place to do business

For the first time ever, Germany exported industrial goods to the tune of around one trillion euros in 2007. Around nine million people work in the export industry in Germany today, and in 2007, Germany was once again the country with the most exports. But value chains are increasingly being carved up into their individual links and reorganized as worldwide production networks – and only certain links in these chains have a lasting future in Germany.

This is the conclusion of the recent study entitled "System head Germany plus – Why industry has a future". The Federation of German Industries (BDI), the Bavarian Business Association (vbw), the German Business Institute Cologne (IW Köln) and Roland Berger Strategy Consultants are presenting the study at a joint conference in Berlin today. Companies that are successful in Germany have many features in common. They concentrate largely on planning and high-value activities such as research and development, design, marketing, production scheduling or sales management. All of these fields demand a great deal of know-how and highly qualified staff. These key functions, referred to as system head functions in this study, play an important role in setting a company apart from the competition.

BDI President Jürgen Thumann explains: "For Germany's economic future, it is essential that we convince as many of these companies as possible to settle in Germany and stay here. Companies have optimized their value chains on a global scale, but they keep their key functions here. That's good news for Germany as a business location." From an economic policy point of view, the key question is: "Will we succeed in keeping and increasing the number of system head functions in Germany?" As the BDI President sees it: "The central conclusion from our study is that economic policy has to focus on and actively support what we termed 'system head companies' that represent the key functions of their business system." Because, he says, although the key functions do tend to stay in one place, companies are open to all options in the face of global competition. It is therefore the task of economic policy to reduce competitive disadvantages and build on competitive advantages. Furthermore, the government has to make it more clear to the general public that Germany profits from globalization overall.

"System head companies are an entrepreneurial avant-garde," says IW Director Michael Hüther. This is underlined by the results of the IW Future Panel, which surveys between 2,500 and 6,000 companies from the fields of industry, logistics and industrial services at regular intervals. The results speak for themselves, Hüther says: "System head companies are more successful on average. They are well ahead in terms of sales, employment and returns. System head companies are also highly innovative: Around 62% of them did research on new products and processes in 2006, and as many as 82% had innovations on the market. Two-thirds of the system head companies are at home on the global market and generate almost 27% of their sales abroad. In other sectors this figure is only 23%." Another special feature of system head functions, says Hüther, is that they are heavily integrated into networks: "22% of the system head companies work closely together with suppliers, service providers and customers in their home regions. Only 15% of other companies do so."

Randolf Rodenstock, President of the Bavarian Business Association, points out that because of the tough demands they face, system head companies can be successful only if they have enough well-educated and qualified employees. In view of the obvious deficits in the German education system, education policy should be right at the top of the political agenda here. "Simply tweaking our education system is not enough. We need a fundamental reorganization, a veritable educational revolution." Rodenstock goes on to emphasize the additional necessity of keeping less-qualified jobs in Germany. "We also have to give less-qualified people and those who have been without a job for a long time the chance to find work in Germany. That can only succeed if we install a true low-wage sector that ensures a better balance of demand and supply for less-qualified work." And this, he says, can only be achieved if wages return to being oriented toward the productivity of each individual job, and if international competitiveness is taken into account. What's more, we all have to learn to appreciate the more simple jobs.

"Employees in Germany are afraid of globalization and are losing faith in the economic and political leaders. If we want to change that, we have to provide credible answers to the question of how qualified work can be retained in Germany in the future. Our study 'System head Germany plus' shows that Germany can increase its growth and employment levels in times of globalization, and how it can do so," explains Dr. Burkhard Schwenker, CEO of Roland Berger Strategy Consultants.

System head functions are all of those capabilities that give a company an edge on the international market. One such key function in Germany is its excellent production sector. That is why, Schwenker says, it is important that we also improve non-academic training in the future: "Scandinavia is often taken as the benchmark for educating young people. 77% of its pupils graduate high school and 38% get a degree. But I think it would be wrong to concentrate solely on these figures. In order to retain our competitive advantage in excellent production, we still require well-trained non-academic specialists. This is the responsibility of companies that take on trainees, state schools and all of us: people who learn a trade or become skilled workers make an important contribution to Germany's competitiveness – we cannot allow them to be shortchanged by the education system."