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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