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Germany’s economic miracle: New lessons await for old Japan

by Jochen Legewie

The economies of Japan and Germany, similar in many respects, are often compared. Not only did both rise from the ashes of World War II to become the leading economies in their regions, but they also formed strong manufacturing bases, large numbers of successful midsize companies and enjoyed extreme success in the global export market.

Their current situations and business environments, however, could not be more different. While the mood in Japan is one of doom, the world is marveling at Germany’s economic miracle. In February, the Economist even described German Chancellor Angela Merkel as “Angela in Wunderland.”

Germany has been the star performer of the G7 over the past decade and grew an astonishing 3.6 percent in 2010. The general mood of its population is more optimistic than it’s been in a decade.

Unemployment is at its lowest since 1992, contrasting starkly with Japan, where university graduates are struggling to find their first job. According to the Ifo Institute, German business confidence soared in February to its highest in 40 years.

In Japan, however, the business mood is stubbornly low. The Bank of Japan’s latest tankan survey said that only 16 percent of companies view the current climate as favorable or neutral. Five years ago the ratio was over 50 percent.

The reasons for this are manifest and too numerous to list here. One often neglected reason, however, is the long-term effect German reunification has had on the mindset of the people.

After the first celebratory months, Germans both east and west came to face the harsh reality of rebuilding the eastern half, which took much more time and money than originally anticipated. This lowered morale and business confidence in Germany for many years, but it also prepared the country for the economic crisis that followed the Lehman shock.

While the world turned pessimistic and economic activity plummeted nearly everywhere but China, Germany managed the situation well, simply judging it to be much less of a hardship than the reconstruction of East Germany had been a decade earlier.

The second underpinning of Germany’s resurgence was provided by the macroeconomic environment and recent reforms. The switch from the deutsch mark to the euro has practically worked as a currency devaluation for Germany, raising its export competitiveness within Europe. The so-called Hartz reforms have made labor markets much more flexible, and the loosening of banks’ cross-shareholdings has effectively terminated Germany Inc.

Another difference with Japan is Germany’s handling of the corporate tax ratio, which has already been lowered significantly, and its ability to raise the consumption tax at the same time without triggering a public uproar.

These reforms gave a direct boost to factor three, which is the strength of individual German firms, which boast many world champions. A recent study published by the ICCP-Harvard Business School shows that German firms are either dominating or among the top three in more than half of all global industries.

U.S. and Chinese firms are ranked No. 2 and 3 with the world champions in about 40 percent of all industries, while Japan is a distant No. 4, with just 20 percent of all industries dominated by Japanese firms.

The study identifies four reasons for Germany fielding more world champions than any other country:

1) Early international expansion: Companies such as BASF or Siemens began international operations more than 100 years ago and within a few years of being established.

2) Long-term orientation: Family-owned Otto Bock, the world’s leading producer of arm and leg prosthetics, is just one example. It has only had three bosses over the past 90 years.

3) Customized products: The modularization of products and services customized to different countries and needs has helped firms such as Schueco and Allianz to become world leaders, one in solar power and window solutions and the other in materials insurance.

4) Technological leadership: Most German world-beaters invest much more in R&D than their peers. The ratio for Bosch, for example, is near 10 percent in the area of automotive technology.

This list reveals a striking fact. All of the success factors, with the partial exception of early international expansion, also apply to Japanese firms. Actually, most Japanese manufacturers have exactly the same characteristics as their German peers.

So why are their economic situations so different now?

Here we must return to the macro environment. While Germany has successfully taken the path of reform, changes are still crawling along at a snail’s pace in Japan. Politics remains at a standstill, and even simple tax reforms are a struggle to achieve.

Japanese companies clearly have strong potential to keep their economy and country among the world’s leaders. Some lessons on how to do so can be found in Germany. So why not take a closer look at a country that is celebrating 150 years of diplomatic relations with Japan this year? That’s certainly be more productive than re-emphasizing U.S. ties or lamenting a loss in prestige to China.

Jochen Legewie is president of German communications consultancy CNC Japan K.K.