Can Germany Provide Lessons for Bolstering U.S. Manufacturing?

April 14, 2015
Some thoughts on how the industrial, economic and educational practices surrounding German manufacturing might be of benefit to the U.S.

It’s April and that means I must be at Hannover Fair in Germany – and I am. My nearly annual sojourn at this massive industrial trade fair always highlights for me the cultural, governmental and economic differences between Germany and the U.S. when it comes to manufacturing. Make no mistake, I am not kicking the U.S. manufacturing market, but few would argue that we, as a country, have consistently acted in the industry’s best interests over the last several decades.

The revitalization of manufacturing in the U.S. in the past few years has put a spotlight on how we interact with this industry that has proven to be so important to the economic well-being of us all—whether we are directly involved in the industry or not. With this new U.S. industrial revolution underway, it seems that suddenly everything from government R&D credits to regulations to education and training and unionization have become the center of numerous economic discussions. As these conversations have swirled about recently, I’ve often wondered why these issues are so difficult for the U.S. to confront when the benefits of coming up with cohesive policies to address them are so apparent. Of course, the obvious reasons range from partisan politics to the U.S.’s free-market system.

But I think those points have increasingly become easy factors to point out to end a discussion rather than dig deeper into it. Certainly the U.S. system of government and economy means that our solutions will have to be unique, but it doesn't mean there aren’t best practices in existence elsewhere that we can learn from.

A recent report from the Brookings Institution suggests that, despite our cultural, political and economic differences, there are key lessons we can learn from Germany’s manufacturing success, including regional collaboration between public, private, and civic actors; targeted institutional intermediaries that address market and coordination failures; and incentive-based investments to
 support small to mid-sized businesses. For detailed explanations of each, I suggest downloading the report from Brookings.

In addition to outlining these clear areas for action in the U.S., the Brookings report highlights numerous practices that Germany uses to bolster its manufacturing base and, therefore, its economy.

One of the practices the U.S. should consider adopting is Germany’s better support for basic scientific research. As stated in the Brookings report: Support for such research in Germany is “similar to the institutional structure in the United States. Where Germany’s system differs is in its network of applied research institutes, such as the Fraunhofer Society, which helps translate basic research and developing technologies into commercial products.”

The Brookings report notes that Fraunhofer has 67 institutes and 23,000 employees 
in Germany as well as an international presence that includes seven U.S.-based centers. “Each institute has a distinct specialization (e.g., applied polymer research, electric nanosystems, etc.), which falls under broader industries such as microelectronics, materials and components, production, surface technology and photonics, life sciences, information technology, and defense. Scientists at Fraunhofer can interpret complicated experimental findings and their consequences in ways that lead
 to practical applications for the private sector. Fraunhofer undertakes anywhere between 6,000 and 8,000 industry projects per year, including famous inventions like the MP3. The size of these projects varies ranges from less than €1,000 to several million euros. Approximately 70 percent of Fraunhofer’s revenue is generated by contracts with industry and public institutions; state and federal governments contribute the remaining 30 percent.”

A more difficult practice, in my opinion, for the U.S. to adopt from Germany is how that country “organizes basic research, applied research, and firm-level incentives around a concerted federalist strategy that sets general policies and research guidelines, establishes funding levels, decentralizes administrative tasks, and defines priority technologies, regions and clusters,” notes Brookings. “Germany’s federalist strategy begins with its national innovation policy, the High-Tech Strategy 2020, which provides incentives to increase collaboration between science and industry and,
 in doing so, sets the framework for basic and applied research. The strategy provides €15 billion for research related to cross-cutting technologies that have broad applicability across multiple manufacturing industries, dispensing the funding 
in a competitive process that requires collaboration among public, private, and civic institutions.”

From my review of the Brookings report, the aspect of Germany’s manufacturing success that the U.S. is least likely to adopt in the near-term is its education and training system, which Brookings notes “has been particularly adept at preparing its manufacturing workforce to complement new technology.” The key to Germany’s system here is what’s available to kids once they complete the equivalent of high school. According to the Brookings report, about 45 percent
 of students enter what is known as the dual 
system, 15 percent pursue full-time 
vocational education and 
training, and 30 percent 
continue advanced education en route to
 a university.

In the dual system, which most kids follow, students “obtain field-specific
 workplace skills in one of more than 300 occupations that cover all aspects of the economy. Training occurs mainly through a two- to three-year apprenticeship at a firm, where students train three or four days a week. Students spend the remaining one or two days per week at a part-time vocational school where they receive more theoretical training. From the very beginning of the journey from school to work, dual system participants establish close relationships with employers. Companies sign contracts with young people under private law and provide them an hourly wage just below that of an entry-level worker. On-the-job training typically comprises two-thirds of the curriculum in the dual system and the contents of the curriculum as well as supervision are the responsibility of the hiring company, with active monitoring by the industrial chambers of commerce and state government
 to ensure training is in accordance with national occupational standards. Firms also contribute about two-thirds of the overall costs of the dual system through on-the-job training (states cover the remaining costs).”

There are no easy answers when it comes to ensuring the U.S. manufacturing sector’s success moving forward, but the evidence provided by Germany—in terms of how its manufacturing sector remains vital and ready to bounce back from the inevitable economic swings—certainly provides some lessons worth considering.

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