Kraftwerk and the rise & fall of industries

The BBC had a programme on the other week charting the rise of German car makers at the same time as the UK’s car industry declined into obscurity. While the UK still makes cars, some 1.3 million of them in fact and there is a substantial industry in the UK that specialises in making individual components for cars (both home and abroad), this has to be compared to where the UK was a few decades ago. By contrast Germany produces 5.9 million vehicles while the Japanese churn out 9.9 million vehicles. Indeed the top selling VW Golf sells 430,000 per year (equivalent to a third of the UK’s entire car production) while Toyota churns out about 120,000 Prius hybrid cars per year (far more cars than any UK manufacturer).

This begs the question, why did the losers in WW2 succeed where the UK failed? How is it that the UK went from being the workshop of the world, to industrial wastelands now inhabited by chav’s and ned’s?

Anyway, in this programme Dominic Sandbrook attempts to answer the question. In part he puts it down to a difference in labour relations. UK car companies tended to be owned by upper class types how tended to have a fractious us v’s them relationship with the working class workers. By contrast in Germany, were union membership rates are higher (indeed in some industrial jobs in Germany union membership is actually compulsory), there is much greater co-operation between unions and the bosses. Both are required by law to meet and consult regularly and work together for the common good of company and workers.

Naturally this meant the Germans lost a lot less time to strikes. However I think Dominic Sandbrook vastly oversimplifies the situation, as it went beyond a few strike days to give the Germans (or the Japanese) the edge.

Part of the secret to the Japanese and Germans success was their willingness to embrace new ideas and technologies. For example one of the key developments in post war Japan was a management technique called Total Quality Management and later a principle called JIT (Just in Time) manufacturing. Both these techniques led Japanese products, which had been a by-word for poor quality and reliability, to become the very opposite (we now associate Japanese products with ultra-reliability and the latest technology). However it required a significant shift in how companies functioned, right from the board room down to the factory floor.

The Germans, once they learnt there was a way to make their factories & products even more efficient and reliable, quickly adopted TQM & JIT. However, the British and ironically the Americans (Edward Deming who had developed TQM was actually and American!) were very slow adopters. In part this was due to management resistance, who didn’t like the idea of an empowered workforce (a key element in TQM & JIT) nor the costs associated with reorganising factories. While the unions heard management say “efficiency” and interpreted it as “half of you’s are sacked” and fought tooth and nail against it.

In terms of technology, when robotic welding was developed (leading to faster and more reliable production as well as more lightweight yet safer vehicles) the Japanese and Germans were again very quick adopters, but the British were very slow, in part due to employee resistance, in part because employers were reluctant to pay the very high capital costs to buy the hardware.

Similarly when modular ship building was developed (rather than building a ship from the keel up, you instead build it modular pieces in a factory which is then assembled into a ship), the Japanese and German yards were quick to implement it while the UK yards were very slow adopters.

Furthermore there was a much greater willingness of German, or Japanese manufacturers to take risks and try out new ideas. For example, legend has it that the Sony Walkman was supposedly dreamt up by an executive at the company wondering if he could listen to music while he was playing golf. This led to a whole new class of portable consumer electronics.

When VW brought out the Golf they were taking a bit of gamble. As they were gambling that people would pay a bit more than the cost of a conventional economy car for something with a decent spec engine and a hatchback boot. As we now know, this gamble paid off and created an entire new market we call the hot hatch, of which the Golf is still one of the best selling examples.

Probably one of the biggest gambles in recent automotive history was the Toyota Prius. While people had talked about hybrid cars for decades and the US government had spent considerable sums on the concept, no manufacturer had taken the plunge. Toyota did and in a big way, spending many billions on the R&D to get the technology right.

Indeed when they first launched the Prius the crucial battery technology was arguably not quite at market level maturity, largely because nobody had ever tried to manufacture and deploy tens of thousands of these types of batteries before. Word around the camp fire is that Toyota lost money (to the tune of several thousand dollars) on every single Prius they sold for the first few years.

However, they capitalised on the knowledge gained and by the time the 2nd generation Prius rolled around they were selling at a substantial profit like hot cakes. And they now have almost every major manufacturer trying to copy them or go beyond the Prius towards fully electric cars.

Meanwhile the US automakers, who stuck with gas guzzlers and (according to some sources) tried to kill more fuel efficient vehicles, have gone bankrupt. Indeed Toyota is now not only the largest car maker in the world, but also the largest car maker within the US (in that they design, build and sell more cars in America for Americans that any other company). And the Germans and their subsidiaries aren’t far behind them.

Of course for every Prius and Walkman we have a Ford Pinto, Minidisc or Betamax. But the point is that German and Japanese companies were prepared to take calculated risks, while UK and American firms became increasingly risk averse, often because they feared the short term consequences of a product bombing and the effect that might have on share prices.

And speaking of share prices, one also has to point to financing as another key reason. German companies tended to develop very close long term relationships with banks and financial institutions. Often the shares in German manufacturing companies are owned by long term investors (such as pension funds) who are looking for steady long term growth. The Japanese tended to form these strange symbiotic relationships with banks and investors creating massive conglomerates, which naturally made sourcing finance for major projects very easy to accomplish. By contrast in the UK, Thatcher’s “Big Bang” led to banks and investors chasing get-rich-quick Ponzi schemes rather than investing in long term growth.

And of course the Euro and Yen currencies played their role. While if you read the Daily Mail, you’d be forgiven for thinking that the Euro was a disaster, the reality is it’s been generally a success (the current difficulties in the Eurozone are I would argue a lack of political leadership rather than a fundamental flaw with the single currency). Part of the reason why Germany is able to churn out so many cars is the relative strength of sterling v’s the euro. Indeed even Ireland, despite our difficulties, now has a higher rate of manufacturing (30% of GDP at present, although it was closer to 40% at the peak of the Celtic Tiger) compared to the UK (about 20% but as low as 15% before the 2007 crash).

And finally that brings us to government policy. The German and Japanese governments have never been ashamed to admit to their support for home industries. However its often a case of “tough love” were the state will provide bridging loans, or underwrite financial guarantees as well as academic research support (from research institutes or universities) but rarely will they provide outright subsidies and generally any support is at arm’s length (the German government has little interest in interfering in the day to day running of BMW). By contrast UK government support for the car industry has varied between treating them as a virtual welfare-to-work scheme under labour to outright contempt and economic sabotage under the Tories.

So there are very good reasons why German industry has thrived while UK industry went into decline. As Dominic Sandbrook mentioned (and Top Gear also brought up a couple of weeks back) we still do make a lot of stuff in the UK, it’s just the companies doing it are owned by foreign multinationals (Tata, BMW, GM, NISSAN, etc.). It is of course important to identify these reasons if further declines are to be avoided, something which many policies put forward by the Tories or UKIP could easily lead too.

4 thoughts on “Kraftwerk and the rise & fall of industries

  1. Pingback: Debunking the Great Reagan myth | daryanblog

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