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Teaching aim: Problem oriented overview over the German machine-building industry, its historic development and future challenges.
Keywords: Diversification, market niches, concentration patterns, size structure of firms, reorganisation of production processes, development of sales |
Analysts view the machinery industry (mechanical engineering) as one of the driving forces behind the post-war economic boom, the "Wirtschaftswunder", in Germany. Mechanical engineering is a fundamental key sector of the German economy and its products are associated with supposedly German characteristics such as high precision, quality and reliability. The sector produces a large variety of equipment and machines (i.e. capital goods) to be used in the production processes of other industries. Some of the most important branches of mechanical engineering are machine tools (including manufacturing systems), printing and paper machines, power transmission engineering, equipment for air handling, refrigeration and air pollution control, vacuum and compressor technologies and food processing and packaging machines. These branches account for half of the total production value of the German machinery industry. The machinery industry can be split up into 40 different branches which indicates that this is a highly diversified industrial sector [1]. German machines are well-known for their high degree of specialization and customization. They are typically produced in small batches whereas Japanese producers concentrate on multi-purpose, standardized machines which can be produced in larger production runs.
Consumers rarely have direct contact with the products of the machinery industry and are, thus, often not aware of the significance of this sector. Within German manufacturing, only the automobile and electronics industries compare favorably with the machinery industry in terms of sales and employment. According to the industry association VDMA [2], the mechanical engineering sector had the largest labor force of all industries in 1997 (926,000 people) and accounted for sales of DM 246.8 billion. About 64,000 people were employed in the machine tool industry which is the most important branch in this sector. The Germany machinery industry has a long tradition of exporting its products to other countries. The important producers are often among the world leaders in their field. Even medium-sized firms have sometimes gained international market leadership due to their high degree of specialization. An example of such a firm is Pfeiffer Vacuum Technology [3] (with 750 employees in 1997), a producer of highly sophisticated vacuum pumps in the Giessen-Wetzlar region of Hesse. Pfeiffer was one of the first German firms whose stocks were traded at the New York stock exchange. Another firm in the same region, i.e. Rovema (with about 800 employees in 1998), is one of the world leaders in the production of packaging machines to be used in the food processing industry. Of the 6,500 German machinery firms, many more could be included in this list due to their importance within small, specialized market niches. Overall exports of the machinery industry accounted for 47.2% of total sales in 1997. German producers had the largest share of the world total of machinery exports (with 20% in 1996). Only Japan and the U.S. came close to this with a share of 16.0% and 15.7%, respectively. In some branches of the industry, German exports amounted to a third of the world total (e.g. equipment for metallurgical plants and rolling mills, paper and printing machines, woodworking machinery). Export activities of German machinery producers constantly increased during the post-war period. The dominance of this industry in international markets had, however, already developed in the pre-war period when many firms gained technological leadership at this time.
Despite their significance in international markets, most firms in mechanical engineering are small and medium-sized. Over 60% of the firms employ less than 100 and over 90% less than 500 people. Only a small proportion of the firms (3%) have more than 1,000 employees. They account for a large share of total sales and employment (more than 40%). Examples of large international market leaders in different branches of the industry are Bosch [4], a producer of packaging machines and automation technology with 7,000 employees in its machinery division in 1997, Gildemeister [5], a producer of sophisticated machine tools with 2,300 employees, Heidelberger Druckmaschinen [6], a producer of printing and paper machinery with 17,000 employees, and Mannesmann Demag [7], a diversified producer in plant engineering and machine tool production with a total of 55,000 employees. Large firms in the machinery industry are, however, less dominant than in many other industries (e.g. the chemical industry).
The machinery industry is characterized by a particular location and concentration pattern which has been shaped by the industry’s historical development. According to the number of employees and firms by Länder, the major locations of mechanical engineering are Baden-Wurttemberg (with 264,000 employees in 1997) and North Rhine-Westphalia (with 238,000 employees). In terms of employment, Saxony has the most important agglomeration in eastern Germany (with 31,000 of a total of 66,000 employees). German machinery firms gained technological leadership early on because of their capability to provide customized equipment designed for the particular needs of individual users in high-end markets. This was achieved through close interaction between the producers and users of machinery and a continuous exchange of ideas. Historically, machine tool producers benefited from close proximity to their customers which allowed for frequent personal meetings and product and process adjustments. This has, in turn, stimulated learning processes and has resulted in incremental product improvements and innovations. Sometimes, the resulting equipment was even more advanced and complex than what was demanded by the users. The spatial distribution of machine tool producers by county shows that a number of agglomerations developed over time where producers and users were located close to one another. Important clusters of machine tool producers developed in regions with near-by centers of the textile, metal-working and automobile industry such as Märkisches Land, Bergisches Land, Siegerland and parts of Wurttemberg such as the Neckar-Alb region. The Neckar-Alb region [8] south of Stuttgart provides a good example of such a setting. Since the late 1800s, machinery firms were established in this region and induced an agglomeration process. The growth of mechanical engineering was especially based on linkages with near-by customers from various sectors, the ‘protestant work ethic’ and a variety of institutions such as local industry associations, policy programs, technical schools and colleges. This provided a stimulus for regional technology transfers. Over time, a network of formal and informal interactions and cooperations developed between machinery producers, their suppliers and customers in the Neckar-Alb region and the Stuttgart area. Such linkages still exist today even though they have seemingly declined in importance. This is partially due to the dominance of large customers, the development of hierarchical supplier linkages and increased competition.
Already in the 1970s, German machine tool producers were challenged by new Japanese competitors which offered inexpensive, multi-purpose machinery with a high degree of technological sophistication and flexibility (i.e. numerically controlled (NC) machines). German firms still concentrated on specialized, single-purpose machine tools which were especially well-suited for users in mass production industries. As a result of increasing competition and the effects of oil crises, the growth rates of sales and employment were lower than in the immediate post-war period. Throughout the 1980s, the German machinery industry was characterized by stagnation in employment. From 1980 to 1992, the number of employees in western Germany remained relatively constant in the range of 1,000,000. In 1992, 1,040,000 and 240,000 people were employed in the machinery industry in western and eastern Germany, respectively. Of these, the machine tool makers employed about 100,000 people. After 1992, the number of employees in mechanical engineering dropped sharply by almost 300,000 within three years. This was only partially due to cut-backs and closures in the new Länder, a process which affected all industries in eastern Germany. In the first place, these job losses were the consequences of a deep structural crisis of the industry which began to unravel much earlier. Especially those Länder that had previously made up the core of mechanical engineering suffered most from regional job losses. Another indicator for this crisis was the sharp decline in capacity utilization (i.e. the percentage of production capacity which is actually used) from about 90% in the late 1980s to 75% in 1993. This meant that German machinery producers had to dramatically restructure their production in order to retain market shares against foreign competitors from countries such as Japan and Italy. The reasons for this structural crisis were manifold.
The effects of the crisis became most apparent when the temporary growth effects of the German unification diminished and Germany was hit by a strong downswing in the global business cycle. The origins of the crisis were, however, much deeper than that. Industry analysts often argue that production costs in Germany had constantly increased throughout the 1980s and had finally reached a point where firms were not able to compete successfully on a price basis against foreign competitors. Especially high wages, social security costs and low productivity increases are frequently criticized. The high evaluation of the German Mark in international currency markets proved to be another burden for machinery producers. This created a price advantage for foreign competitors (e.g. Italian producers). In addition, the lower-end markets in eastern Europe fell apart; markets which had generated substantial profits in the past. At the same time, the global economic settings in the machinery industry changed. Competitors from other countries increasingly entered the markets. Due to new production concepts (such as lean production) and the use of automated production technologies, these firms were able to cut costs to a minimum and even enter the higher-end markets for customized machinery. In comparison with their German counterparts, Japanese machinery producers were faster in integrating microelectronics applications into their products (i.e. computerized NC machines (CNC), robots).
Another structural problem was that related to the export-based concept of German machinery producers. Most firms evolved around their traditional locations within Germany and exported their products to foreign customers. As a result, workplace practices and traditions and training conditions which were particular to the German system heavily influenced the design of German machinery; practices and traditions which are quite different in other countries. German machinery operators are generally highly-skilled workers with a formal training of several years who have usually substantial workplace experience behind them. They are trained to carry-out independent trouble-shooting and acquire specialized knowledge to optimize the use of machinery. In the U.S., for instance, firms have often run into problems using the same machinery because operators do not have the training and work experience necessary to handle this machinery. It is often not part of their job to do independent problem-solving. They also do not acquire as much knowledge through experience since they change their job more often than do their German counterparts. This might have encouraged foreign firms to use less sophisticated, less expensive Japanese machinery which is easier to handle and to maintain.
In response to this crisis, German machinery producers have reorganized their production programs and processes and reduced their labor force in order to cut costs and increase efficiency in production. Firms have also increasingly invested into computerized production technologies and increased their internal and external flexibility in production (e.g. through systematic subcontracting of parts production). A number of machinery firms have started to extend their networks of international production and service locations to provide closer producer-user linkages, guarantee quick response and improve the communication with customers in other countries. Other producers have been subject to plant closures and acquisitions. This has weakened the traditional German centers of machinery production. Overall, the restructuring activities have resulted in a recovery of the industry in the late 1990s which is reflected by recent trends in sales, capacity utilization and employment. Sales and exports have experienced further growth since 1995 and capacity utilization has almost reached the levels of the late 1980s (88% in 1997). Employment, however, continued to decline albeit at a slower pace. From 1995 to 1997, the number of employees of the German machinery industry decreased by another 65,000 people. Overall, a large number of German producers are still among the world leaders. They have developed technological leadership and produce a mix of high-end and low-end machinery. Meanwhile, they are characterized by a flexible organizational structure which will allow them to adjust to future changes in the economic settings more easily than in the past. It is unlikely, however, that the German machinery industry will fully regain its economic strength and create additional jobs in the future because markets will remain highly volatile and unpredictable. This is exemplified by insufficient profitability and competitiveness of some of the most important firms in the industry. The highly diversified Mannesmann group is, for instance, in the process of reducing their activities in plant engineering and machine tool production through the separation of parts of this division and their integration into joint ventures with other firms (i.e. SMS Demag).
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Questions that may be asked:
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[1/2]
http://www.vdma.com/vdma_root/WWW_VDMA_DE/
[3]
http://www.pfeiffer-vacuum.com
[4]
http://www.bosch.de/start/en/start/index.htm
[5]
http://www.gildemeister.com/
[6]
http://www.heidelberg.com/hq/eng/default.asp
[7]
http://www.mdkm.com/english/
[8]
http://www.stgt.com/stuttgart/umgebpld.htm
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