Amazing Machines May Lead Europe Out of Recession

Metal banging never really went out of style in Germany—and that may be a good thing. The nation clung stubbornly to manufacturing in recent years as the U.S. focused on faster-growth industries such as software and e-commerce. Workshops and factories still account for a quarter of Germany's gross domestic product and 30% of jobs, vs. 21% of employment in the U.S.

Now that capability could help drive a European economic revival. As China, India, Brazil, and other developing countries recover more quickly than developed countries, they'll need the specialized manufacturing systems that come mainly from Germany and a few other countries such as Denmark, the leader in wind power, or Italy, famous for its textile machinery.

Much of the momentum for growth lies in a key shift in German factories, where companies have increasingly integrated information technology with old-fashioned mechanical engineering. They haven't had a choice—high labor costs and high taxes mean European companies couldn't compete otherwise. "German companies have to be very innovative to survive," says Peter-Michael Synek, whose job at the German Engineering Federation is to promote "mechatronics," the science of integrating electronic and mechanical components.

As a result, Europe is producing machines packed with computing power. Siemens (SI) recently unveiled a driver-less forklift that uses lasers to find its way around factories. Kuka, a German manufacturer of industrial robots for the car industry, has moved into the entertainment business with so-called RoboCoasters. Customers at Legoland in Denmark and other amusement parks now sit in seats attached to giant robot arms that hurl them in unpredictable directions. And the Lely Group of the Netherlands has invented a machine that milks cows without human intervention.

Lely has already sold some 7,000 of its robot milkers worldwide. Cows learn to sidle up to the $300,000-plus devices on their own when their udders feel full, letting themselves in and out of a special stall to do so. For the first time since man domesticated animals, farmers don't have to rise before dawn to milk the herd. Jutta Schemmerling, who owns a farm with 90 cows in the town of Ober-Mörlen north of Frankfurt, says she has more time to spend with her 7-year-old son since installing two Lely robot milkers last year. "It makes a difference in the quality of life," she says.

SOLAR RISINGGerman expertise in high-tech machinery has allowed some sectors to defy the global downturn. Even as oversupply and plunging prices have cast a shadow over the solar power industry worldwide, German makers of machines used to produce solar power components reported a 60% sales increase in the first quarter of 2009 compared with a year earlier.

The explanation for this gravity-defying performance was simple. Companies such as China's Asia Silicon, which makes refined silicon for solar cells, are aiming to cut production costs. So they're ordering advanced machines or even entire production lines from companies such as Centrotherm Photovoltaics, based in the German town of Blaubeuren. Centrotherm, which builds machines that reduce the raw material needed to make a solar cell, nearly doubled sales in the first quarter, to $185 million, thanks in part to a big order from Asia Silicon.

Germany's reliance on factory machinery and other capital goods for export is not always an advantage. Manufacturers slashed purchases of these items because of the financial crisis, with orders for all categories of German machinery sinking 65% in the second quarter of 2009 compared with a year earlier. And while the country's manufacturers are famous for identifying a niche—and then dominating it—that focus also makes them vulnerable. "The specialization level of German manufacturing is one of the main reasons why contraction in output is so significant," says Silvio Peruzzo, euro area economist at the Royal Bank of Scotland (RBS).

Also, Germany's excessive bureaucracy and the low rate of startups may chip away at its competitive edge, says Dietmar Harhoff, a professor at the Institute for Innovation Research, Technology Management & Entrepreneurship at Ludwig-Maximilians University in Munich. But for now, he says, "there is a good prospect that Germany's strengths will pull the [European] economy out of the mess we're in."

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