Executive Briefings

News Flash: Heartbeat Detected in Europe's Industrial Base

It was exactly the kind of announcement that you would expect to hear from an industrialized Western country. NN, Inc., a U.S.-based manufacturer of precision components for the automotive and heavy equipment sectors, said at the beginning of this year that it was ceasing operations at a plant in Germany. The owner of the facility, a local company called Kugelfertigung Eltmann GmbH, had just filed for bankruptcy. One of the prime reasons cited for its demise was the high cost of manufacturing NN's products in that country. The news came as anything but a surprise, given the virtual stampede of western manufacturers to China over the past decade. Western Europe and the U.S. simply can't compete with cheap Chinese labor.

Or can they? Turns out German manufacturing isn't doing so bad these days in the international labor market. Not only is Germany the dominant economy in Europe by far, it's managing to hold on to a substantial amount of production capacity despite challenges from China, Eastern Europe and other low-cost countries.

Thorsten Blecker, professor at the Technical University of Hamburg-Harburg, laid it all out earlier this month at the 6th International Conference for Maritime Logistics, which was part of the giant biennial Transport Logistic trade show in Munich, Germany. He sees the return of manufacturing from China to Germany, reversing a 20-year trend. By the late 1990s, he said, up to 25 percent of German companies had relocated production to China; now at least some of that activity is coming back.

There are several reasons for the shift. Wages in China are on the rise, growing by 15-20 percent a year. Evidently Chinese workers want to reap some of the benefits of their labors, and become members of an emerging, high-consuming middle class. Then there's the big increase in transportation costs, driven mostly by the soaring price of oil, but also the need for companies to resort to expedited delivery when they encounter snags in their lengthy supply chains. (And don't forget the growing reliance by ocean carriers on slow-steaming, a practice that has stretched order-cycle times while jacking up inventory costs.) In addition, consumers are voicing serious concerns about product quality, in particular the large number of tainted goods coming from China. Now add in the impact of environmental disasters, carbon footprint calculations, maritime piracy and political instability, and you have a compelling argument for rethinking conventional wisdom on global sourcing.

Blecker said the trend is pretty much across the board, involving textiles, plastics, machine construction and other industrial goods - just the kind of items that would seem natural targets for Asia's low-cost manufacturing prowess. Nevertheless, he said, there's a concerted effort among many German companies to source parts closer to production. Even in Asia, automakers are less likely to turn out complete knock-down (CKD) parts kits for final assembly in the West, in favor of full production of vehicles on site.

As always, the human factor is key. Detlief Kerber, European region president with APL, said the issue of product quality extends to questions about the reliability of Asian workers. It's estimated that between 30 and 40 percent of migrant workers in China's Pearl River Delta area don't return to their factory jobs after the Lunar New Year. Meanwhile, there are huge numbers of highly skilled, unemployed workers virtually on Germany's doorstep, in Greece, Spain and Portugal. The situation argues strongly for a sourcing network placed much closer to home. "I believe in the renaissance of the European worker," Kerber said.

A similar trend is taking shape in North America, where companies are looking to relocate production to Mexico and other parts of Latin America, and even back to the U.S. in some cases. But Germany might have an easier time than the U.S. adjusting to a surge in domestic production. While it, too, has seen huge layoffs following the global recession of 2008, Germany has made a greater effort to retain skilled workers in key industries. Detthold Aden, president and chief executive officer of BLG Logistics Group AG, said his company has had to cut loose only subcontracted labor. Wages were frozen, of course, but BLG still has most of the workforce it needs to handle the boost in business driven by economic recovery and shifting patterns of sourcing.

The trend is no passing fad, said Jorg Mosolf, chief executive officer of Horst Mosolf GmbH & Co. KG, a logistics and technical services provider. "Germany is the growth engine in Europe," he said. The country has a reputation for quality that can offset its traditionally high cost of production. In fact, said Mosolf, most of Germany's major freight and logistics companies have returned to the level of sales that they enjoyed prior to the last economic crisis.

Germany's good news shouldn't be overstated. Many companies have yet to recover fully from the recession, profits are still lagging, and China remains a manufacturing powerhouse for the world. Michael Korn, vice president of the management board for airfreight, sea freight and special transport with Schenker Deutschland AG, said it could take 10 to 15 years for the re-balancing of manufacturing capacity between Asia and Europe to play itself out. All the same, the trend calls for a reassessment of those gloomy predictions about the fate of the industrialized West. Maybe the world's richest and most powerful democracies have some life left in them after all.

Next: More from Munich: Challenges to German Supply Chains

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It was exactly the kind of announcement that you would expect to hear from an industrialized Western country. NN, Inc., a U.S.-based manufacturer of precision components for the automotive and heavy equipment sectors, said at the beginning of this year that it was ceasing operations at a plant in Germany. The owner of the facility, a local company called Kugelfertigung Eltmann GmbH, had just filed for bankruptcy. One of the prime reasons cited for its demise was the high cost of manufacturing NN's products in that country. The news came as anything but a surprise, given the virtual stampede of western manufacturers to China over the past decade. Western Europe and the U.S. simply can't compete with cheap Chinese labor.

Or can they? Turns out German manufacturing isn't doing so bad these days in the international labor market. Not only is Germany the dominant economy in Europe by far, it's managing to hold on to a substantial amount of production capacity despite challenges from China, Eastern Europe and other low-cost countries.

Thorsten Blecker, professor at the Technical University of Hamburg-Harburg, laid it all out earlier this month at the 6th International Conference for Maritime Logistics, which was part of the giant biennial Transport Logistic trade show in Munich, Germany. He sees the return of manufacturing from China to Germany, reversing a 20-year trend. By the late 1990s, he said, up to 25 percent of German companies had relocated production to China; now at least some of that activity is coming back.

There are several reasons for the shift. Wages in China are on the rise, growing by 15-20 percent a year. Evidently Chinese workers want to reap some of the benefits of their labors, and become members of an emerging, high-consuming middle class. Then there's the big increase in transportation costs, driven mostly by the soaring price of oil, but also the need for companies to resort to expedited delivery when they encounter snags in their lengthy supply chains. (And don't forget the growing reliance by ocean carriers on slow-steaming, a practice that has stretched order-cycle times while jacking up inventory costs.) In addition, consumers are voicing serious concerns about product quality, in particular the large number of tainted goods coming from China. Now add in the impact of environmental disasters, carbon footprint calculations, maritime piracy and political instability, and you have a compelling argument for rethinking conventional wisdom on global sourcing.

Blecker said the trend is pretty much across the board, involving textiles, plastics, machine construction and other industrial goods - just the kind of items that would seem natural targets for Asia's low-cost manufacturing prowess. Nevertheless, he said, there's a concerted effort among many German companies to source parts closer to production. Even in Asia, automakers are less likely to turn out complete knock-down (CKD) parts kits for final assembly in the West, in favor of full production of vehicles on site.

As always, the human factor is key. Detlief Kerber, European region president with APL, said the issue of product quality extends to questions about the reliability of Asian workers. It's estimated that between 30 and 40 percent of migrant workers in China's Pearl River Delta area don't return to their factory jobs after the Lunar New Year. Meanwhile, there are huge numbers of highly skilled, unemployed workers virtually on Germany's doorstep, in Greece, Spain and Portugal. The situation argues strongly for a sourcing network placed much closer to home. "I believe in the renaissance of the European worker," Kerber said.

A similar trend is taking shape in North America, where companies are looking to relocate production to Mexico and other parts of Latin America, and even back to the U.S. in some cases. But Germany might have an easier time than the U.S. adjusting to a surge in domestic production. While it, too, has seen huge layoffs following the global recession of 2008, Germany has made a greater effort to retain skilled workers in key industries. Detthold Aden, president and chief executive officer of BLG Logistics Group AG, said his company has had to cut loose only subcontracted labor. Wages were frozen, of course, but BLG still has most of the workforce it needs to handle the boost in business driven by economic recovery and shifting patterns of sourcing.

The trend is no passing fad, said Jorg Mosolf, chief executive officer of Horst Mosolf GmbH & Co. KG, a logistics and technical services provider. "Germany is the growth engine in Europe," he said. The country has a reputation for quality that can offset its traditionally high cost of production. In fact, said Mosolf, most of Germany's major freight and logistics companies have returned to the level of sales that they enjoyed prior to the last economic crisis.

Germany's good news shouldn't be overstated. Many companies have yet to recover fully from the recession, profits are still lagging, and China remains a manufacturing powerhouse for the world. Michael Korn, vice president of the management board for airfreight, sea freight and special transport with Schenker Deutschland AG, said it could take 10 to 15 years for the re-balancing of manufacturing capacity between Asia and Europe to play itself out. All the same, the trend calls for a reassessment of those gloomy predictions about the fate of the industrialized West. Maybe the world's richest and most powerful democracies have some life left in them after all.

Next: More from Munich: Challenges to German Supply Chains

Comment on This Article