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Potential lessons from "Made in Germany"

Potential lessons from "Made in Germany"

Portrait of Wilfried Aulbur
Senior Partner, Member of Supervisory Board
Chicago Office, North America
+1-312-662-5551
February 23, 2017

"Mr. Schroop" as he was known to the British, was a nice and entertaining man, well regarded in British business circles. He pretended to be on private business and to have a general interest in steel fabrication. His real intention was simple: understand how Britain produces steel, steal the concepts, apply them in his own factory and compete with his hosts going forward. Mr. Schroop, it turns out, was none other than Alfred Krupp, one of the key founding figures of the German steel industry.

Krupp was not alone – not by a long shot. In the first half of the 19th century, many German companies sent their trusted confidants to Great Britain for a "study tour", a nice way to describe what was essentially industrial espionage.

Companies that were trying to penetrate markets for machines, metal wares or other mass fabricated products, however, did not succeed at first. Germans were hampered by lack of technical knowledge and capital to buy relevant production machinery. Quality levels that were global standards at the time were out of reach. After all, Germany was a latecomer to the industrial revolution. In the early part of the 19th century, Germany's exports to Great Britain consisted of sugar, potatoes, wheat, musical instruments, cuckoo clocks from the Black Forest area and other handmade products.

Nevertheless, German companies copied English products relentlessly and dumped their wares onto the world market at attractively low prices. Extremely low labor cost and unregulated, long working hours were the key reasons for Germany’s cost advantage.

Despite these initial sales successes, there was one problem, however. The quality of German products was shoddy at best. Franz Reuleaux, a German professor of Engineering from Berlin and a regular judge at World Exhibitions, stated during the World Exhibition in Philadelphia in 1876 that "German products are bad and cheap." This comment was widely picked up in the global press and the Germans had to deal with a major country-of-origin malus.

In 1887, Great Britain instituted a new version of the "Merchandise Marks Act of 1862" under the protest of German merchants. All products imported into Great Britain needed to have a label stating where they were manufactured. The government wanted to warn consumers of cheap products and rip-offs from countries such as Germany and hoped that patriotic feelings would drive sales of local goods.

However, British intentions backfired. Franz Reuleaux's comment on "bad and cheap" German products and the media backlash that German industry subsequently faced was taken as a grievous, personal insult in German business circles. His advice to German industry from Philadelphia was to compete on quality. This advice was taken seriously and over a period of just ten years, a quality revolution was launched in Germany. German industrialists hired English workers, studied the production methods of their British counterparts, leveraged scientific knowledge to improve products and production processes, invested in better machines and in the training and education of their workforce.

Quote
"The story of 'Made in Germany' is not unique. It has been replicated in Japan, Korea, China - and with a time delay in India."
Portrait of Wilfried Aulbur
Wilfried Aulbur
Senior Partner, Member of Supervisory Board
Chicago Office, North America

By the time the "Merchandise Marks Act" went into effect, German companies were exporting increasingly high-value industrial products rather than cheap rip-offs. Not only did British families suddenly realize how many wares actually originated from Germany – tools, servant jackets, toys, utensils, pencils, water pipes, etc. – German product performance was adequate, often on par with British wares, while prices were cheaper.

German products drove a "bottom-of-the-pyramid" revolution of their own. Mass production of high-quality products at attractive prices, attractive commercial conditions and well-trained sales personnel increased the range of many products beyond the middle class.

Today, "Made in Germany" and related connotations around concepts such as innovation, quality, precision, punctuality, dedication and focus, have morphed into a "corporate identity of a nation".

The story of "Made in Germany" is by no means unique. It has been replicated in a different cultural context in Japan and Korea, again in an impressively short amount of time. It is in the process of being turned into reality in China and with a potential time delay in India. Other nations are sure to follow.

While each country's background and situation is different, some rules of thumb that have played a critical role in Germany's success may be of general relevance. In my view, these are the following:

  1. Be peeved – Trying to show the world that you are better than they think can be a powerful incentive.
  2. Build capability aggressively – Leapfrogging technology developments is a must.
  3. Leverage factor cost advantages aggressively (e.g., labor cost, hours/week, etc.).
  4. Face the facts – Accept critics like Reuleaux and attack the problem, not the messenger.
  5. Align across industries – Building a national brand requires all companies to perform across all relevant industries.
  6. Align between industry and government – Government has a major role to play to create a level playing field that allows companies to compete
  7. Cooperate within the political system.
  8. Build institutional frameworks (patents, training, certifications, etc.).
  9. Invest in education, training and science – Your workers are the ones that will make change happen, take them seriously.
  10. Dream big.
  11. Persevere – a national brand like any other brand requires constant renewal and constant "deposits in the brand equity account".