System head Germany plus
While headlines would make you believe that European production is losing out in favor of low-cost countries, a new study finds that harnessing globalization by creating worldwide production networks can spell sustainable growth.
The last year was a good one for Germany: for the first time ever, it exported industrial goods that valued EUR 1 trillion. It retained its coveted status as the global export champion, with around nine million people working in the industry. 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.
System head Germany plus – Why industry has a future
This is the conclusion of the recent study entitled "System head Germany plus – Why industry has a future." The study, compiled by The Federation of German Industries (BDI), the Bavarian Business Association (vbw), the German Business Institute Cologne (IW Köln) and Roland Berger Strategy Consultants, highlights the commonalities of successful German companies. 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 delivering competitive advantage.
"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 key functions remain in the country. That's good news for Germany as a business location," BDI President Jürgen Thuman noted at the study's presentation in Berlin on 21 January. 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?" According to Thuman, economic policy has to focus on and actively support so-called 'system head companies' – essentially the cogs of any business system. Thuman highlighted the role for politics: "Economic policy must work towards reducing competitive advantages." Better communication was also key: "The government has to explain to the general public that Germany profits from globalization overall".
"System head companies are an entrepreneurial avant-garde," added IW Director Michael Hüther. 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 supported this view. 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."
Deficits in the German education system
Randolf Rodenstock, President of the Bavarian Business Association, pointed 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, reforming education policy should be the first item on the political agenda. "Simply tweaking our education system is not enough. We need a fundamental reorganization, a veritable educational revolution." Rodenstock went 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 said, could only be achieved if wages returned to individual productiveness, and if international competitiveness was taken into account.
"Germany can increase its growth and employment levels in a globalized world"
"Employees in Germany are afraid of globalization and are losing faith in their economic and political leaders. If we want this to change, we have to provide credible answers to the question of how qualified work can be retained in Germany in the future. Our study shows that Germany can increase its growth and employment levels in a globalized world," explains Dr. Burkhard Schwenker, CEO of Roland Berger Strategy Consultants.
System head functions are comprise all areas 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 from high school and 38% get an advanced 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."