The German economy is doing surprisingly well. A number of macroeconomic reasons can be used to explain this phenomenon. But the most important explanation is the consequent focus of German industry on high-value, complex systems engineering.
More than 40 percent of the German GDP is created by industrial exports, and this share is showing strong growth tendencies. The German automotive industry–VW, Daimler, BMW – celebrates unseen commercial growth and gross margins but while the demand for German cars is of fairy tale proportions, supply is lagging behind. For example, customers must wait at least twelve months to take delivery of a Q5, Audi’s successful SUV model. German automakers blame this on a worsening shortage of skilled personnel.
Only a few years ago, Germany was occasionally called the ‘sick man of Europe’. These days seem over – at least for now. There are a number of reasons that have led to this improvement, most of them macro-economic in nature: the structure of the Euro currency, stagnating wages in the German industrial sector, etc. However, one important aspect is that the German industry offers attractive products to the international audience, and it is complex systems – those products that combine mechanical, electronic, and software components – that are most successful. The most obvious example is, of course, the car.
A modern car is barely comparable to its relatively primitive ancestor of a century ago. These days, a car is equipped with dozens of processors, controllers, memory chips, and data buses, all run by sophisticated software. In ABS systems, active steering, or the entertainment system electronics and software go hand in hand. With attractive exterior and interior designs–which appear to be one of the strongest selling points of German cars–an automobile becomes a product that can capitalize on its market potential for a long time.
Apart from the design nuances which may influence the success of a product in the short term, the long-lasting strength of the German export market is not a coincidence. Rather, it is a result of a long-term economic strategy focusing on building complex systems combining one or all of the three disciplines: mechanics, electronics, and software.
Electronic and mechanical products – for example, computer memory chips or various mechanical devices – can be manufactured cheaply in Asia. Such products have little future in high-cost locations such as Europe or North America. The example of consumer electronics proved that decades ago.
Software, on the other hand, is intrinsically easy to replicate and difficult to be protected as intellectual property (especially in Europe), and software development is also far cheaper in Asia. Long-term successful software-only companies like Microsoft, Oracle, or SAP do exist, but in general, the software is traditionally a very risky bet.
Germany is, of course, not the only place where attractive complex systems are created and successfully brought to market. A prime example is the iPhone. The iPhone is so popular that some Apple fans are apparently willing to sell their body parts to afford it. I have never heard of someone willing to sell his kidneys for a copy of Microsoft Windows. Apple’s products are typical complex, well-designed systems that inextricably interweave the mechanics-hardware-software combination. The individual components alone are unspectacular, but their clever combination appears irresistible to Apple’s rapidly growing customer base.
However, Apple’s example seems to be an exception to the US economy. US managers have forced outsourcing of the systems industry to cheaper countries, thus giving away know-how and sacrificing the quality of their products, while in Germany most of the systems manufacturers still design and produce at least a large part of their products in their German homeland. The traditionally successful medium-sized businesses have still kept their famous German engineering skills, focusing on the development of more expensive but high-quality, durable, and attractive products.
The often sneered-at inability of German manufacturers to successfully outsource to cheap Asian suppliers turns out to be a lucky break. As a result, Germany still excels at producing ‘real’ products.
It is still possible to achieve quick successes in single-discipline markets; for example, working in the software industry can be very rewarding. Still, success stories like the acquisition of a seventeen-man project named Instagram by Facebook for no less than $1bn are rare exceptions. It applies to an even larger degree to mechanical products. It is obvious that macroeconomics and strategic potential is highest when all three disciplines are cleverly combined.
The future belongs to systems engineering. The countries where complex systems are designed, built, and exported are likely to thrive, while others will gradually decline in the world market. In most developed countries, for example, most of Europe or North America, the industrial leadership will depend on the ability to export highly sophisticated, high-quality systems. Such countries will be well-prepared to survive the impact of global megatrends such as climate change and demographic challenges. They will lead the way as long as they build ‘real’ tangible products.