German Business Essay, Research Paper
NDUSTRY IN GERMANY Country Issues Country issues related to Germany are
addressed in four contexts. The areas of consideration are (1) cultural, social, and
demographic trends and concerns, (2) political/governmental concerns, (3) exchange rate
issues, and (4) macroeconomic issues. Cultural, Social, and Demographic Trends and
Concerns Germany is the slightly larger then the combined size of Ohio, Pennsylvania, and
New York. (137,691 square miles.) Germany is a nation of 81.5 million people (Hunter,
1997). The rate of population growth in Germany approximates one-percent per year. The
head of the government is Chancellor Gerhard Schroder (elected on October 27,1998). The
official language is German. The principal religions are Protestant (Evangelical Lutheran) and
Roman Catholic-Christianity. German workers are among the best educated, best trained,
and most productive to be found anywhere in the world. Germany’s modest population
growth tends to produce market stability, as opposed to market growth. Thus, automobile
manufacturers in Germany tend to look to exports for sales growth. Germany’s chief
commercial exports include machinery, automobiles (Volkswagen, Mercedes-Benz, Audi),
chemicals, iron, and steel. Political/Government Concerns Germany is a parliamentary
democracy. A proportional representation system assures that smaller parties are represented
in the Bundestag. The governing conservative coalition, the Christian Democratic Union (all
states other than Bavaria) and the Christian Social Union (in Bavaria where the Christian
Democratic Union does not stand), has held power since 1982 (Hunter, 1997). The
reunification of East Germany and West Germany into a single state has produced economic,
political, and social problems. While not all of these problems have been completely solved,
they do not represent a source of instability in the country. Exchange Rate Issues The
currency in Germany is called Deutsche Mark. The economy in Germany is the strongest in
Western Europe and is an important member of the European Union. The principals of the
social market economy guide its economic activity. Germany has pursued a monetary policy
of that emphasized the control of inflation, relatively high interest rates, and a strong mark,
often to the complete dismay of the country’s European Community partners. Monetary
policy emphasizes interest rates and money supply management. Germany is a key player in
the drive toward European Monetary Union. The mark remains strong at DM1.84/US$1 and
DM3.07/61 (”Financial Indicators”,1998). Germany will qualify for monetary union and the
single European currency as of 1 January 1999 (”Maastricht Follies”,1998). Taxation in
Germany The federal government and its States (lands) try to coordinate their policies
through such advisory bodies as the economic council and the finance planning council. But
the central government cannot order the States (lands) to follow its policy, largely because it
has no monopoly on taxing power. In, all the central government receives around 55 percent
of all taxes but makes then 45 percent of all expenses. On the other hand the States, spend
more then they receive and the federal government makes up the difference. Macroeconomic
Issues Per capita gross national product is US $28,760, gross domestic product is US $2.1
trillion (Hunter, 1997). Germany’s GDP growth in 1997 was 2.4 percent Economic
Indicators, 1998). Foreign Trade remains the essential pillar of Germany’s prosperity. It is
one of the world’s leading export accounts for over half of it manufacturing jobs. Germany is
very sensitive to world economic climates because, its GDP is made 38 percent of exports.
Germany’s international trade balance is traditionally in the black (Hunter, 1997). Exports
typically exceed imports by approximately five-percent. Germany’s international trade
balance is compared with that of Japan and the United States in Table 1. Table 1
International Trade Balance Comparison: Germany, Japan, and the United States [billions of
US$] ________________________________________________________________
Country January-March 1998 April 1997-March 1998 Germany + 4.62 + 70.5 Japan
+8.79 + 103.8 United States -18.80 – 199.4 [Source: "Financial Indicators", 1998]
________________________________________________________________
Germany’s exports 46.4 percent of total exports to members of the European Union, these
include top two: France at 11.2 percentage and the United Kingdom 8.7 percentage. The
United States receives 9.2 percentage of Germany’s exports. Germany’s imports the most
from France 11.2 percentage of total imports and then followed by the Netherlands at 8.4
percentage. The United States imports 8.1 percentage of the total imports of Germany.
German monetary and fiscal policy emphasizes the control of inflationary pressures.
Consumer prices in Germany have risen by an average of approximately 1.5 percent over the
past five years (World Bank, 1997). Industrial activity employs 43 percent of Germany’s
workforce; while 54 percent are employed in the service sector of the nation’s economy, and
the remaining three-percent are employed in agriculture. Taxes in Germany are unified
(Hunter, 1997). Taxes are collected by a central authority, and then are distributed to the
federal government, the lander (state) governments, and the local authorities. Taxes are levied
on personal income, corporate income, capital gain, turnover and trade (value added), and
insurance and accounts. Additionally, excise taxes are levied on most products. German
governments (federal, state, and local) do not engage in deficit financing. Market and Industry
Issues Market and industry issues are addressed in four contexts. The areas of concerned
addressed are (1) demand conditions, (2) the competitive structure of the German
automobile industry, (3) production costs in the automobile industry, and automobile-specific
tariffs and trade restrictions. Germany is a part of the European Union. The EU is a union of
fifteen independent states based on the European Communities and founded to enhance
political, economic, and social co-operation. Members include: Austria, Belgium, Denmark,
Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal,
Spain, Sweden, and United Kingdom. Germany is among the largest and technologically
advanced produces of iron, steel, coal, cement, chemicals, machinery, vehicles, and machine
tools. Demand Conditions Germany’s infrastructure is among the most highly developed
among the nations of the world (Roby, 1994). Infrastructure development varies, however,
by region. No infrastructure major problems exist in the old West German states; however,
some problems continue to exist in the old East German states. Germany’s distribution system
is among the most highly developed among the nations of the world (Hunter, 1997). The
Western European automobile market increased to 12.7 million passenger cars in 1997,
maintaining its position as the largest new automobile market in the world (”Upper Segment
Cars in Western Europe: A Market Under Siege,” 1997). Competitive Situation Competition
in the automobile manufacturing industry in Germany is not limited to Germany automobile
manufacturers. Because Germany is a member of the European Union, all automobile
manufacturers within the Union compete on an equal footing within Germany (Short-Term
Prospects for the German Motor Industry and market, 1997). Mercedes-Benz has recently
experienced sales difficulties for the company’s passenger car line in the United States. One
action taken by the company to reverse this sales decline is the introduction of a new, smaller,
and less costly passenger car line in the United States (Martin, 1997).. Volkswagen,
Germany (market share: 15.4 percent), Fiat, Italy (market share: 14.2 percent), and Peugeot,
France (market share: 12.9 percent) hold the first three places in the European automobile
market (Phelan & Feast, 1997). General Motors is the fourth largest seller of automobiles in
Europe (market share: 11.8 percent), while Ford in number five (market share: 11.6
percent). Unlike the United States, where Japanese automobile manufacturers hold 27
percent of the market, the Japanese manufacturers have a market share of only 11.6 percent
in Europe (Woodruff, 1997). Industry Production Costs A major labor-related problem for
industries moving into Germany is the fact that Germans by and large are unwilling to accept
jobs in industries where the wages are relatively low and the working conditions poor by
German standards. Unemployment, however, is high in relation to traditional post-war
German standards. Therefore, labor wage rate increases have been moderate. Labor stability
is higher in Germany than in the United States. The turnover rate in German manufacturing
firms is quite low (Feast, 1996). For years, Germany had a shortage of labor and even
brought in guest workers from Southern Europe and Turkey. Germany has on of the shortest
workweeks at 35 hours per week. The average America worker works longer hours and
receives twelve days of paid vacation verses six weeks and 13 to 16 days of vacation
(holiday) for Germans. Strong industrial unionization and legislation in Germany create job
protection and security for German industrial workers. As a consequence, both strikes and
unauthorized absenteeism among most German workers is low in relation to most other
industrial countries (Feast, 1997). German employers are encountering difficulties in effecting
changes among the German workforce. The tradition of strong worker social services and
strong labor unions in Germany strengthens the will of employees to resist such changes
suggested by management (Feast, 1997). Growth in manufacturing labor productivity in
Germany and the United States are compared. Relevant data are presented in Table 2, which
may be found on the following page. For both Germany and the United States, manufacturing
multifactor productivity (MFP) is a more important explanatory factor than capital-for-labor
substitution in explaining labor productivity growth. The differences in labor productivity
growth between the two countries is another question (Lysko, 1995). The contributions to
manufacturing output growth in Germany and the United States by labor, capital, and MFP
are compared. Relevant data are presented in Table 3, which may be found on page 8. While
hours worked were declining in German manufacturing at the rate of 0.6 percent per year,
hours worked in the United States increased at the rate of 0.8 percent per year. “The net
result was that, although the use of combined factor inputs increased more in Germany than in
the United States (an annual rise of 2.4 percent versus 1.6 percent), German multifactor
productivity grew marginally faster over this 17-year period; the average difference was 0.4
percentage points per year” (Lysko, 1995, p. 52). Table 2 Sources of Manufacturing Labor
Productivity Growth, 1956-93
(Percent)_______________________________________________________________
Output Per Capital-Labor multifactor Country Hour Substitution Productivity United States:
1956-90 3.0 1.0 2.1 1956-93 3.1 1.0 2.1 1956-73 3.8 0.8 2.9 1973-90 2.3 1.1 1.2
1973-79 .8 1.1 -.2 1979-90 3.1 1.1 2.0 1990-93 4.0 1.1 2.8 Germany: 1956-90 4.7 2.0
2.6 1956-93 4.4 2.0 2.3 1956-73 6.5 3.1 3.4 1973-90 2.9 1.1 1.8 1973-79 4.3 1.7 2.6
1979-90 2.1 .8 1.3 1990-93 1.2 1.7 -.4 [source: Lysko, 1995]
_______________________________________________________________ Table 3
Contribution of Labor, Capital and MFP to Manufacturing Output Growth, United States
Versus Germany, 1956-93 (Percent Annual Change)
_______________________________________________________________
Manufacturing Labor/Capital MFP Growth Period Output Growth Input Growth
__________ 1956-1990: Germany 3.6 1.0 2.6 United States 3.3 1.2 2.1 Difference .3 – .2
.5 1956-1993: Germany 3.1 .8 2.3 United States 3.2 1.1 2.1 Difference – .1 – .3 .2
1973-1990: Germany 1.4 – .4 1.8 United States 2.0 .8 1.2 Difference – .6 – 1.1 .5
1990-1993: Germany – 2.2 – 1.8 – .4 United States 2.6 – .2 _ 2.8 Difference – 4.8 – 1.6 -
3.2 [source: Lysko, 1995]
_______________________________________________________________ The
competitive position of the Germany automobile manufacturing industry has suffered in the
decade of the 1990s, as German unemployment has increased by German standards (Feast,
1996). High labor rates in the German automobile industry also have hurt the industry, as
German manufactured automobiles increasingly are unable to compete within the context of
price (”Short-Term Prospects for the German Motor Industry and Market,” 1996). The
pricing problem has hurt the industry in the domestic German market, the wider European
market, and the global automobile market. Automobile Industry-Specific Tariffs and Trade
Restrictions No tariffs or trade restrictions apply to automobiles manufactured within the
European Union, regardless of the country in which the manufacturing plant is located and
regardless of where the headquarters of the plant owner is located. Thus, General Motors
and Ford based in the United States have subsidiaries in Europe, including those located in
Germany, which compete on equal terms with European-based automobile manufacturers.
One Japanese automobile manufacturer has a plant located in Spain. The output of this plant
competes on an equal footing with European-based automobile manufacturers. Automobiles
manufactured in Japan, as well as those manufactured in the United States, and then shipped
to the European Union members, however, are subject to both tariffs and trade restrictions in
the form of import quotas.
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