Monthly Report - DossierMarta Noguer
The German exporting engine: from beetle to CayenneThe German exporting engine: from beetle to CayenneThe German exporting engine: from beetle to Cayenne

In theory, the relative weight of exports in GDP tends to be lower the larger the economy in question. The explanation is simple: international trade helps to expand the market in order to make the most of comparative advantage, economies of scale or the international division of labour. However, the larger a country is, the less it needs to exploit these advantages beyond its own borders. Germany would be the exception that proves the rule: its relative weight of exports is much higher than that of other similar-sized economies. Far from diminishing, this exceptional weight of German exports has increased over the last decade to more than 52% of GDP; a figure that is much higher than the 14% of the USA, 15% of Japan, 28% of France, 30% of Italy and 32% of Spain. How has it achieved this?

German exporters have been able to successfully combine three key ingredients: (1) product differentiation, (2) a presence in buoyant markets and (3) cost competitiveness. Undoubtedly one of Germany's competitive edges lies in the fact that its manufacturing firms specialize in high value added products, mostly capital goods or durables. Unlike the USA, France or Singapore whose export sectors are more high-tech oriented,(1) German exports are concentrated in medium-high tech industries: vehicles, other transport material, machinery and chemical products account for 65% of its goods exports.(2) However, German companies compete in the higher segment of this range of sectors, offering excellent technical engineering, highly specialized and with guaranteed quality and durability.

This specialization in capital goods and premium segments, which are usually less price sensitive, has not only helped German firms to secure bigger operating margins but has also given them a clear advantage when attempt to gain market share in emerging economies. Most of these, and China in particular, have based their economic growth on a model that is clearly biased towards investment and exports of manufactured consumer goods, produced with imported machinery and foreign technology. The paradigm would be a Chinese firm that produces manufactured goods with Chinese workers, German machines and US high tech. Thanks to these complementarities, exports from Germany have achieved the greatest exposure, among European countries, to the BRIC (Brazil, Russia, India and China): 35% of the EU's exports (goods) to these markets come from German factories. Nevertheless, this is more a growth story than a relevance story. In other words: the relative weight of BRIC exports out of all Germany's exports is still small (around 12%) compared with its 58% of exports to the EU. However, their dynamism gives Germany an advantage, particularly when its main market is going through a double dip recession.

Another strength of German exports lies, of course, in their cost competitiveness. Extraordinary cost containment in production has made German firms super-competitive in spite of being located in a country and specializing in products that are relatively expensive. At the beginning of 2008, Germany's unit labour costs had fallen by 1% compared with their level in 2000. In Spain, however, these had increased by 32%; in the United Kingdom, by 20%; in France, by 19%; and in the USA by 11%. This containment is the result both of improvements in productivity and efficiency and also of wage moderation. Between 2000 and 2007, German productivity increased at an average annual rate of 1.8% while wages rose by a more contained 1.2% annually. Although this pattern has been altered by the crisis (since 2008 productivity has increased by a mere 0.3% while wages have risen by 2.6%, reflecting a labour market that is very close to full employment), some of the gains in competitiveness garnered before the crisis are still in place.

So the immediate determining factors in Germany's export success are differentiation through quality, dynamic demand, and competitiveness. But how has it reached this situation? In addition to an ideal geographic location for trade (with navigable rivers, global ports and a privileged position to exploit the fragmentation of Europe's value chain with direct access to both the old and new Europe) and a relatively cheap euro, most analysts agree on three key factors: its dual educational system, its particular business fabric, and a significant number of structural reforms.

An efficient, good quality educational system in all its aspects but especially in professional training and learning has boosted specialization in sectors that require a large number of technically skilled workers. The importance of vocational training forms part of the DNA of the Mittelstand, Germany's industrial model par excellence, which accounts for more than 70% of private employment. This network of medium-sized and not so medium-sized firms (in around five hundred cases these are true global champions) has played a large part in the story of Germany's success. Typically they are mostly family firms, highly dynamic and competitive (constantly innovating to adapt to a changing environment but without losing that advantage) and highly specialized in not very glamorous niches (tools, parts and components) which are practically imperceptible to the average consumer but very profitable. They are clearly export-oriented, aimed at achieving economies of scale that allow them to take advantage of their extreme specialization, and they tend to develop extensive but close-knit networks of production, distribution and related services to become as agile as possible. One particular advantage this model yields is the stability and long-term strategy inherent in them being family firms, as well as the flexibility, agility and innovative drive resulting from their focus on market niches. Their goal is to do just one thing — but to excel at it.

The structural reforms, in particular those of the labour market, implemented in 2003 and encouraged by the biggest German crisis since the Second World War, provided that plus of competitiveness that is so valuable in securing a foothold in high value added segments with relatively costly production factors. Although starting with high salaries, German firms have managed to limit wage growth by reaching agreements with the different groups involved, aware that their economic strength depends crucially on preserving this competitive edge. The reforms also introduced flexibility, essential in order to triumph in the era of globalization and, according to recent studies, also key to gaining a competitive edge in sectors whose demand is more volatile. Curiously, several types of machinery are included in such sectors: specialized industrial machinery, electrical equipment and electronic components.(3)

In short, when a few months ago a renowned analyst encouraged Spain to become the new Germany, he was referring to the possibility of reproducing Germany's successful export model. The question is not to imitate the model in detail although, like Germany, Spain could take advantage of the opportunity offered by a historical crisis to make its structures more flexible; or could prioritize a long-term view, recurring innovation and investment in training. But it is particularly a matter of exploiting, efficiently and as much as possible, its own comparative advantages, pursuing excellence as a strategy for differentiation. Spain must not aspire to be the new Germany but a new Spain: more flexible, more efficient, more solid, more long-term, more competitive, more global.



Marta Noguer

International Unit, Research Department, "la Caixa"

(1) According to the World Bank's figures, 18%, 24% and 45% of their manufactured exports, respectively, compared with 15% of Germany, are in sectors deemed to be of high tech content. These sectors include aeronautics, computing, pharmaceutical products, scientific instruments and electrical machinery.

(2) Exports of goods account for 84% of all exports. The remaining 16% are services.

(3) See Cuñat, A. and Melitz, M. (2007). «Volatility, labor market flexibility, and the pattern of comparative advantage», NBER WP#13062.