Unit 8: High versus medium technologies and the significance of electrical engineering

(Harald Bathelt, Clare Wiseman, Guido Zakrzewski)

The high competitiveness of the German economy is often attributed to its medium technologies, such as automobiles, mechanical engineering and chemicals. The role of high technology industries in the post-war economic boom in Germany is usually viewed as being less significant. There are good reasons for this since. Unlike the U.S. and Japan, countries which created radically new technological developments in the microelectronics industry, Germany has not been among the leading producers of new technology in the world. Technological innovations in such countries as the U.S. and Japan have, however, had strong impacts on the German economy. The radio and TV equipment industry, for instance, experienced a dramatic downswing. This occurred because well-established producers continued to produce high-quality products based on conventional technologies. They underestimated the market opportunities for digital technologies and did not incorporate such technologies into their products. Record players were, for example, still being produced by German firms when it was already clear that CD players could offer a considerably better sound quality for the same price. When computerized radio and TV equipment gained market leadership, it was much too late to adapt these technologies into the production programs. Especially Japanese producers such as Sony had already reached technological leadership and benefited from cumulative learning effects in how to master the new technologies. The effect was that most German producers of radio and TV equipment have since gone out of business or were acquired by foreign firms. Unlike the producers of automobiles and chemicals, many firms in electrical engineering were not able to remain competitive based on well-established competencies. A good example of this is the firm Grundig [1]. This firm, which was established after World War II by Max Grundig, became a leading European producer of radio and TV equipment in the 1960s. Like most German firms in this industry, Grundig was, however, too slow in integrating microelectronics applications into its products. As a consequence, the firm had severe problems to remain competitive in the 1980s and was acquired by the Dutch producer Philips in 1984. In the following years, Grundig focused on the production of high-quality, technologically advanced TVs but has not been able to regain its former strength. As a consequence, Philips has terminated its involvement in Grundig’s activities in the mid 1990s. The number of employees decreased from a maximum of 37,500 people in 1978 to 5,700 in 1998. Recent restructuring activities have been quite successful in that the firm was able to report a profit for the financial year 1998 after a long period of operational losses.

Despite such failure, the high technology sector has developed into an important segment in German manufacturing. This becomes apparent if one accepts proposed definitions of high technology industries as being those industries which spend more than 3.5% of their sales on research and development. According to this broad definition, the German high technology sector consisted of more than 50,000 establishments, with a total employment of over 3 million people, in the late 1980s and early 1990s. This is equivalent to more than 35% of total employment in manufacturing. The spatial distribution of high technology establishments by county indicates that major concentrations with more than 1,500 establishments have developed in large metropolitan areas, such as the Munich, Stuttgart, Rhine-Ruhr, Hamburg and Berlin regions. Especially the high technology agglomerations around Stuttgart and Munich are among the most successful and innovative ones in Germany.

Within the German high technology sector, the electronics industry (electrical engineering) is the most important industry group. In 1997, the industry had a total employment of 856,000 people in 5,000 establishments and sales of DM 242.3 billion. In terms of sales and employment, electrical engineering is also one of the largest industry groups within German manufacturing overall, along with the automobile and machinery industries. The electrical engineering industry consists of a rather heterogeneous mix of product branches [2] such as electric drives, electric wiring equipment, communication and information technology, measuring and automation technology, consumer electronics, household appliances and electric lighting equipment. This list of branches displays that some product groups in electrical engineering have evolved from traditional medium technologies, which still form an important part of the industry, while others have emerged in new high technology segments. Microelectronics components and controls are among the most important products of the industry because they are in high demand by many other industries for integration into their products. These components increase the performance, reliability and competitiveness of the such products and are thus of strategic importance in these industries. Despite the growing significance of electrical engineering within the German economy, some studies claim that German firms are still less sophisticated and innovative than their American and Japanese counterparts. The latter firms are the dominant technological leaders in the semiconductor and computer industry.

In terms of its spatial structure, the industry’s major concentrations are located in the southern parts of Germany. According to the number of employees by Länder, the largest agglomerations of electrical engineering are in Bavaria and Baden-Württemberg with 214,000 and 199,000 employees in 1997, respectively. The most important locations of electrical engineering in Eastern Germany are in Saxony (with 24,000 employees in 1997) and Thuringia (18,000 employees). Electronics firms in eastern Germany are not (yet) a decisive factor in the overall development of the industry. They have been forced to undergo dramatic restructuring after the unification. In 1997, only 65,000 people were still employed by 700 firms in eastern Germany. They accounted for 7.5% of total employment and 6.3% of total sales in the German electronics industry. Even firms like Robotron, which had developed into a leading electronics producer in eastern Europe in the post-war period, did not have sufficient innovative, technological and financial capacities to survive on their own.

According to the industry association ZVEI [3], employment within the electronics industry of western Germany has remained relatively constant around 0.9-1.1 million people throughout the 1970s and 1980s. Processes, such as changes in the international production and consumption patterns, which have instigated restructuring in other industries have also affected the electronics industry. Due to rationalization and reorganization activities, the number of employees has declined to a low of 791,000 and less than 65,000 in 1997 in western and eastern Germany, respectively. Between 1995 and 1997, the labor force in electrical engineering decreased by another 80,000. Overall productivity increased by 20% during this period, however; an increase which was among the highest in the post-war period. This indicates that the industry’s restructuring processes have been successful in that they have strengthened the competitiveness and profitability of the industry. Recent trends in sales, capacity utilization, export and employment from 1996 and 1997 support this view. Between 1985 and 1990, exports of the German electronics industry accounted for 45-47% of total sales. This share increased to 51-57% in the 1995-1997 period. The 10 most important destinations of German electronics exports are Great Britain, France, the U.S. and 7 other western European countries. Exports are primarily directed towards customers in highly industrialized countries. Such exports are typically high-quality, high-precision goods that are often well-established in their markets, such as electric drives, switchgear and control systems, household appliances, radio engineering products, automation technologies, electronic components and other specialized electronics products. Imports of electronic products have even increased at a faster pace than exports. Their share of total sales grew from 40% in 1989/90 to 50% in 1996/97. Among the most important products imported to Germany are consumer electronics, electronics components and communication and information technologies. International trade data indicates that two major groups of imported products and their corresponding countries of origin can be distinguished. First, there are goods with a high degree of technological sophistication. These products are primarily imported from the U.S., Japan and a number of western European countries. Second, there is a group of standardized goods which are imported from low-cost countries such as China, Taiwan and Singapore.

The electrical engineering sector in Germany is dominated by a small number of large firms, such as Siemens [4], Bosch [5] and IBM Germany. Within the German electronics industry, Siemens is the largest and most sophisticated and internationalized firm. In 1996/97, Siemens employed 386,000 people in its worldwide operations, 197,000 of which are in Germany. More than one fifth of the German labor force in electrical engineering are employed by Siemens. In 1996/97, the firm had worldwide sales of DM 106.9 billion and spent DM 8.1 billion on research and development. In the post-war period, Siemens developed into a global player in the electronics industry with specialties in areas such as automation technologies, communication networks, information technology, semiconductors and computers, as well as a number of medium technologies such as electric wiring and lighting. Siemens was founded during the early stages of electrical engineering in 1847 in Berlin by Werner Siemens and Johann Georg Halske. Due to the increasing demand for power generators, cables and transformers, Siemens grew rapidly into a large industrial producer in this new industry. Already before 1900, the firm employed more than 25,000 people. Berlin provided a good location for Siemens because it had a large concentration of customers and a large pool of labor skills in this new industry. After the war, Siemens relocated its headquarters and its major production and research facilities to Bavaria. Nürnberg-Erlangen and Munich developed into the most important locations of the firm. From there, the firm established a network of production facilities throughout western Germany. Unlike many other German electronics firms, Siemens invested into the growing microelectronics markets. The firm compensated for the initial competitive advantages of U.S. and Japanese competitors by expanding in areas such as semiconductors, computers and telecommunications. Siemens was able to develop technology leadership in the new information and communication industries and established a worldwide network of research, production and sales facilities.

Along with the growth of Siemens, Munich developed into a leading center of the German high technology industry. According to the definition used previously, the Munich high technology industry consisted of 1,350 firms with more than 125,000 employees in the late 1980s. Munich has become an important location for production and research facilities of large multinational electronics firms. In 1992, Siemens employed about 45,000 people in Munich, 12,000 of which were employed in research and development. Another area of high technology specialization in Munich is the aerospace industry. The largest German aerospace firms MBB, Dornier and MTU Munich (Motoren- und Turbinen-Union München) [6], are located within the region. They account for 70% of overall employment and sales in this industry. In addition, many electrical engineering firms and suppliers from other industries were able to benefit from close input-output linkages with large electronics and aerospace firms. This growth, in turn, created additional demand for electronic components and related products. This proved to be an incentive for further start-up decisions of new firms and stimulated growth in the regional economy. Due to its amenities, Munich has attracted highly-skilled employees and technology-oriented firms from outside. In its post-war development, the city has also benefited from strong governmental support. This includes the role of the American occupation authorities, the presence of a large number of governmental or state-sponsored research facilities, a particular technology policy and the activities of influential politicians. Due to these reasons, the region has obtained a large proportion of the federal research and defense budgets and has developed into the leading center of the German electronics industry

[1] http://www.grundig.com
[2] http://www.zvei.org/englisch/start_fr.htm
[3] http://www.zvei.de/mk/daten_und_fakten/start.htm
[4] http://www.siemens.com
[5] http://www.bosch.de/index_e.htm
[6] http://www.eads-nv.com/eads/en/index.htm?/xml/intl/press/archiv/dasa2000/20000608_mtumuc.xml&press

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