Germany: Revved-Up Dynamo

But Germany's surprising export machine won't create many new jobs

From the historic port city of Bremen, Aqua Signal is the world leader in the lights that big cargo ships use to keep from running into each other -- and a shining example of the kind of company that makes Germany the world's biggest exporter of manufactured goods. Aqua Signal's biggest foreign customers are Chinese and South Korean shipbuilders, yet the company still produces exclusively in Germany, profiting from a reputation for reliability that goes back to the days of four-masted schooners. "Customers are willing to pay a little bit more -- still," says Nickels Ackermann, a division head at the company, which also makes signal and interior lighting for ocean liners, pleasure boats, and aircraft.

Aqua Signal also helps shed light on the big economic surprise coming out of Germany this year. While overall 2004 economic growth is expected to be just 1.8%, German exports are forecast to rise an impressive 10.2%, compared with an average of 6.2% for all the countries that use the euro. At first glance the development makes no sense. After all, the euro is at an eight-month high, trading at $1.28. Theoretically, the strong euro should put German products at a severe price disadvantage in global markets, especially considering that labor costs are among the world's highest.

It hasn't worked out that way. Companies such as steelmaker ThyssenKrupp or electronics maker Siemens (SI ) have enjoyed double-digit increases in orders. Germany's thousands of mid-size exporters, the makers of machinery and auto parts that dot the countryside, also have been pleasantly surprised. "Exports have established themselves better than expected," says Wolfgang Maus, CEO of Emitec, a maker of catalytic converters based in Lohmar, near Bonn in the Rhine Valley.

The question is whether the growth can continue -- and whether it will ever stimulate the domestic economy and reduce unemployment. The short answer is that export growth will probably slow to 5.9% next year, according to the consensus estimate of Germany's leading economic institutes. That's still a healthy pace, but not enough to have a dramatic effect on jobs. Only 1 in 10 German companies has plans to take on more people during the next year, reports an October survey by the Germany Association of Chambers of Commerce & Industry.

The other question is how German exporters have been able so far to defy the weak dollar. Strong global growth is one big reason. It also helps that 9.4% of German exports go to North America, while 60.4% go to European Union members. "We have no problem with currency fluctuations," says Bernhard E. Kallup, CEO of Sedus Stoll, a maker of office furniture in Waldshut, near the Swiss border. Sedus sells most of its products in Europe and has seen exports rise 15% this year.

But there's more to it than that. The performance of exporters is partly a tribute to Corporate Germany's ingenuity. German companies are masters at identifying an obscure market niche and then dominating it. Looking for a plastic skeleton to adorn your medical school classroom? Hamburg's 3B Scientific is the world leader in anatomical teaching aids. The German reputation for engineering excellence is still worth something to foreign buyers, too. German machine makers, after auto makers the biggest exporters, have seen a 16% increase in new orders this year. Auto maker BMW boosted U.S. unit sales 9.3% in the third quarter.

German companies also have found ways to bring costs more in line with other countries. Hourly wage growth is at a standstill as employees at Siemens, DaimlerChrysler (DCX ), and dozens of other companies work longer hours for the same pay. At carmaker Volkswagen, workers agreed Nov. 3 to a 28-month wage freeze. Such worker concessions help companies compete better on price. German companies have also cut costs by shifting some phases of production to Eastern Europe or Asia, with final assembly still taking place in Germany. The move offshore has also generated demand from the newly built factories for German capital goods, such as Brückner Maschinenbau's equipment for producing plastic sheeting used in food packaging or other products. In 2003, for example, Poland spent $21 billion on German goods such as machinery, and China spent $23 billion.


The bad news is that the surge in exports has not done much to cut unemployment, which in turn is key to restoring consumer confidence and boosting growth. The number of jobless could top 5 million this winter in a population of 82 million. Eventually, strong exports should spill over into the broad economy. Or at least that has always happened in the past. Economists are guardedly optimistic that exporters will begin to hire again as they run out of jobs they can automate or move offshore. "I would not rule out that things look much better, say, a year from now," says Paul J.J. Welfens, president of the European Institute for International Economic Relations at the University of Wuppertal. Germany may prove once again it can build jobs as well as machines.

By Jack Ewing in Frankfurt

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