Germany’s new strength has a foreign accent

First of three parts

BERLIN — Germany has leveraged its economic strength to take the leading role in addressing Europe’s debt crisis, but ironically it owes much of that success recently to the appeal of German products in emerging countries such as China and Russia — far outside its traditional markets in Europe.

German companies’ unusual success in selling pricey, top-quality goods including luxury cars and new kitchens around the world has given citizens here rising confidence that their characteristic thrift, perfectionism and hard work can make their country a role model for the rest of Europe — and indeed the world — as governments from Athens to Washington struggle to get their fiscal houses in order.

As the largest economy remaining with an untarnished AAA credit rating, German leaders have insisted that Greece, Italy, Spain and other European countries learn to live within their means as a condition of staying in the bloc of countries using the euro and getting an estimated $600 billion in loans and guarantees funded by Berlin.

The strictures imposed by Germany, combined with the turmoil spawned by the debt crisis, have led to major government upheavals and increasing social strife in the southern rim of Europe. As fellow EU nations are forced into an era of recession and austerity, resentment is mounting toward the Teutonic giant.

From the streets of Athens and Madrid, where nearly 1 in 5 workers is unemployed and protesters have violently denounced Germany’s demands, to the cocktail parties of London, biting outbursts laced with references to Germany’s aggression in World War II have become common.

The spreading turbulence took as its latest victim French President Nicolas Sarkozy, a conservative who gave support and legitimacy to the austerity agenda promoted by his friend and collaborator, German Chancellor Angela Merkel.

Mrs. Merkel sought to influence the French election this spring by endorsing Mr. Sarkozy over his opponent, Socialist candidate Francois Hollande. But the move may only make the French electorate’s vote Sunday for a left-leaning government appear all the more a stinging slap in the face for Germany.

German leaders in interviews here seem taken aback at the backlash, arguing that other wealthy Northern European countries also are demanding budgetary restraint from their southern neighbors in exchange for bailout loans. Some shrug it off, likening critics to spoiled children who are angry about not always getting their way.

“Our authority and our influence is mainly based on our economic success. People envy us for this,” German Foreign Minister Guido Westerwelle said at a recent gathering of German manufacturers.

Filling a void

Germany’s emergence as the dominant political power in Europe owes in no small part to America’s shrinking influence in Continental economic affairs since the euro crisis broke out two years ago. U.S. officials have mostly sat on the sidelines, cheering on efforts to get Europe’s debts under control and offering economic advice, which often is ignored in Berlin.

Analysts say it may have been inevitable that Germany would resume its role as the economic engine of a reunited Europe after nearly a century punctuated by wars, occupation and political division. They say the real question was whether it would rise gracefully to the political responsibilities that come with such economic power.

“The country was unprepared for the promotion,” said Thomas Kleine-Brockhoff, an analyst with the German Marshall Fund. “Germans are visibly uncomfortable as the boss and brains of European economic affairs” after having grown comfortable in their role as only one of several leading nations within the trans-Atlantic alliance.

Suddenly, “European countries are looking to Germany to save the day,” he said, but are all the while resenting their dependence. Meanwhile, Germany is not used to having to “propose solutions for an entire continent” and “patiently explain” German motives to distrustful citizens of other nations, he said.

In demanding sacrifices from their southern neighbors, Germans point out that they, too, had to learn to do without after the abrupt reunification of East and West Germany in the early 1990s. At that time, the country’s economy was in shambles, weighed down with debt and suffering from low productivity in the eastern regions, where communism had decimated good corporate management and undermined the solid work ethic.

It was only after struggling with budgetary belt-tightening and labor reforms — which required German workers to accept years of stagnant wages to bolster productivity — that Germany emerged in the past decade as the most powerful and financially solid economy on the Continent.

Today, Germany has become Europe’s indispensable economy, growing at a strong 3 percent rate last year while many other nations crumbled back into deep recessions under the stress of the debt crisis. Unemployment in Germany, at 6 percent, is well below the U.S. rate of 8.1 percent reported Friday and the average rate of 10.8 percent in the rest of Europe.

Germans stress that their prescription of budget austerity mixed with painful labor and economic reforms is aimed at enabling the troubled economies of Southern Europe to regain competitiveness and prosper again, just as Germany did a decade ago.

While warming to their role as the stern, disciplinary father of Europe, Germany’s leaders have not been shy about jabbing at the stumbling giant across the Atlantic.

The U.S., like much of Europe, since the recession has amassed breathtaking mountains of government debt. In recent years, the U.S. economy has become increasingly dominated by technology and low-paying service businesses as large portions of its manufacturing base succumbed to Asian competitors.

“We do not live on cutting people’s hair or delivering pizza,” Mr. Westerwelle told the gathering of German manufacturing moguls. “We make great products — reliable products that have beautiful designs” and are sought around the world.

German businessmen and political leaders take pride that their products are seemingly old-fashioned in striving for perfection and reliability rather than incorporating the latest technological gimmicks. They say German brands are loved worldwide for that reason.

“There was life before the e-book,” Mr. Westerwelle quipped, taking a swipe at the trendy digital technologies that have taken hold in the U.S. and Asia.

Credit goes to China

Still, German leaders acknowledge that their success owes in no small part today to the ascendance of China and other emerging countries, where a burgeoning class of newly affluent consumers has developed a strong appetite for German luxury goods.

While other European countries remain the biggest market for German products, Mr. Westerwelle said, Asian countries now account for about one-fifth of German exports, and that is where the growth is fastest.

“We must understand that this is the source of our prosperity,” he said.

In a recent tour of German factories in Dresden, Berlin and Nuremberg, one chief executive after another echoed that assessment, confirming the growing importance of the emerging markets for Germany as sales in Europe and the U.S. stay flat or deteriorate. German businesses are opening offices and plants in places such as Moscow, Beijing and Abu Dhabi to cater to the trend.

Ulrich Welter, founder of a small German company that makes luxury wall coverings, said he was surprised by the enthusiasm he found for his products among consumers in some of the most exotic places around the world.

“When I’m abroad, particularly when I’m in Beijing, I realize there is very much respect for German products,” he said. Well-to-do consumers everywhere seem to understand the principle that “less is more” when it comes to living well, and are willing to pay high prices for the quality that Germany provides, he said.

“We increase the most in Asia — first of all, mostly in China,” said Dieter Burmester, chief executive officer of Burmester Audiosysteme GmbH, a celebrated maker of high-end musical sound systems. ” ’Made in Germany’ is very well accepted in Asia,” he said, and sales have been brisk in Japan, Taiwan and South Korea as well.

The Asian market has become so important to Burmester that the company goes to great lengths to avoid offending Asian customers by not using the number “four” on any of the sound equipment sold there because that number connotes “death and destruction” in many Asian traditions, he said.

Deutsche WorkStation, a company that designs high-end interiors for yachts, hotels and offices, recently opened an office in Moscow, where it has a number of wealthy clients and expects to find more, said Chief Executive Officer Fritz Straub. The company already has offices in London, Paris and Switzerland.

The company is working on a luxurious yacht interior for a Russian oligarch whom it declined to name. The Middle East, with its oil riches, also has proved fertile ground for the company, which designed a megayacht, “My Abdul Aziz,” owned by the king of Saudi Arabia.

Deutsche WorkStation’s fortunes appear to have become so linked to the wealth in oil states that a look at its revenue flows in the past five years shows they largely rose and fell with fluctuations in oil prices. The company had a particularly bad spell in 2009 when premium crude prices briefly crashed to around $35 a barrel from all-time highs over $150 in July 2008.

“Our clients are rich,” said Mr. Straub. “We make basically toys. We make beautiful homes and yachts, but they are toys.”

Catering to the rich

Luxury goods sales have held their own as well in the U.S. and Europe, where well-heeled customers were not hurt as much by the recession and sluggish economic recovery as were middle-class consumers. But emerging markets are driving a boom in luxury goods worldwide, according to Standard & Poor’s Corp.

“Affluent shoppers have retained their buying power” everywhere, said Standard & Poor’s credit analyst Nicolas Baudouin, who predicts another good year for high-end products in 2012. But in particular, he said, “luxury goods are selling very well in developing countries, such as Russia and China, as well as in Middle Eastern gulf states.”

Peter May, a consultant for small German luxury manufacturers, said that expansion into emerging markets is the future for German industries, from the auto giants Mercedes-Benz and Volkswagen to the smallest family-owned firms.

China already has become the biggest market for one luxury automaker — Audi — and its parent company Volkswagen claims the biggest share of the Chinese auto market, which at 16 million vehicle sales a year is now the world’s largest.

Audi’s luxury sedans line the parking lots of Chinese government agencies in Beijing and elsewhere. They are so heavily favored by China’s well-heeled and well-connected bureaucrats that the government recently moved to require agencies to purchase domestic cars in a bid to boost China’s fledgling car industry.

Because German workers earn high wages by world standards, German companies cannot compete with Chinese competitors on price, so they must earn the high prices they charge by surpassing all the other options in quality, Mr. May said.

“Our products have to be perfect. They have to be masterpieces. That is the criteria” to succeed, he said. While only the wealthiest people in most nations can afford many of these products, as a group they control huge amounts of money and are one of the fastest-growing markets in the world, he said.

“The broad mass of people do not have money to buy these products,” he said. “Your target group is very limited, but it is growing because globalization is a reality.” In particular, “the target group is small in Germany but big worldwide,” so German manufacturers must keep seeking new markets outside the country.

Germany’s success holds some key lessons for struggling businesses in the United States and other countries, analysts say, particularly the nation’s renowned system of apprenticeship for training young workers to learn the highly specialized skills they need in German industries.

The U.S. has no comparable system, and U.S. manufacturers chronically complain that they cannot find workers with the skills they need to fill the specialized and complex jobs performed in factories today.

Germany’s success also points up the advantages of its system of close collaboration among business, labor and government. That system led to the adoption of apprenticeship programs in German industries and served to put a lid on unemployment during the recession by working out cooperative plans for workers to cut hours rather than jobs to weather the downturn in business.

Past its prime?

But some pundits dismiss Germany’s famed industrial machine and say its heyday is passing with the rise of new technologies.

“The source of German wealth is sputtering,” said Wall Street analyst Andy Kessler. “Germany’s industrial icons — Mercedes, BMW, Siemens, ThyssenKrupp — are so ’80s.”

While Germans proudly shun the latest digital fads and incorporate only what they consider the most worthy technologies into their products, that stubborn old-fashionedness has left them far behind the economic curve, Mr. Kessler said.

“Teutonic efficiency hasn’t adapted well to modern-knowledge industries,” he said. “Germany doesn’t have an Apple or a Google or a Cisco, let alone a LinkedIn or Zynga. [German software leader] SAP is Oracle’s weak sister. There’s no Pfizer or Johnson & Johnson.”

Moreover, Germany’s population is shrinking, pointing to an inevitable decline in its economic power and wealth, he said. While it caters to the growing wealthy class in developing countries, Germany has not embraced immigration of talent from those countries as a way to help maintain its economic strength, he said.

“Go to Germany and you basically see Germans,” he said. “Entrepreneurial companies require the best, no matter the nationality. Silicon Valley feasts on a smorgasbord of international scientists and coders. The same in London.”

German businessmen acknowledge that they do not always know where they will find their future workforce, with the number of young German workers dwindling. Many are recruiting labor from Eastern Europe to keep their factories running.

Mr. Kessler suggested that this underlying weakness in Germany’s economy may be the reason Mrs. Merkel is looking to increase the country’s power and influence throughout the rest of Europe.

“It’s clear what Germany is up to,” he said. It is “dangling bailouts” and loans as “bait” for debt-stricken countries to give up sovereign control of their own budgets. In the end, he said, Germany will come to the rescue and end up “owning Europe.”

But the growth of German power will benefit the rest of Europe if Mrs. Merkel is successful at transferring some of Germany’s “Teutonic efficiency” to help streamline the less-productive economies of its neighbors, he said.

“The eurozone is a wasteland of ’entitlementarians’ while Germany is an industrial might” with the know-how to better manage the other European economies, the analyst said.

Managing Europe

“Start with French wine, Italian fashion, Spanish farming, and Greek tourism. They can all use huge management efficiencies,” he said. “In France, bureaucrats control half of the economy. Just privatizing government stakes can set off a productivity bonfire.”

Under German management, there also is potential for a European Silicon Valley emerging in Estonia and other parts of Eastern Europe, Mr. Kessler said.

Dieter Farwick, retired brigadier general and senior vice president of the World Security Network Foundation, also questioned whether Germany’s rise in influence will be more than transitory.

“Nowadays, the majority of Germans believe that Germany is unsinkable,” he said. “One hundred years ago, the Titanic’s passengers felt the same. … They were wrong, too.”

Mr. Farwick expects that German efforts to hold together the 17-nation eurozone will be defeated eventually by the overwhelming burden of trying to rescue the floundering nations of Southern Europe.

“For the next few decades, rich European countries like Germany and France will have to spend trillions of euros to help put the poor countries back on track,” he said. “There will be no resources left for defense, security and stability” and the “European project” will crumble, he said.

Jerry Jasinowski, former president of the U.S. National Association of Manufacturers, tips his hat to German leaders for staying focused on maintaining the strength of their awesome manufacturing machine, even as the U.S. allowed its industrial heartland to bleed jobs and sales to emerging rivals such as China.

“They recognize that manufacturing is the foundation of a modern nation’s economy,” he said. Manufacturing not only spurs the innovations that have made life better for consumers worldwide, but it also provides a steady source of good-paying factory jobs and stokes growth in an array of service and ancillary businesses that feed into manufacturing.

“For more than a decade, we have stood by while foreign competitors employing predatory trade practices have absconded with major portions of our manufacturing base,” Mr. Jasinowski said. “The persistent weakness in our economy today, and especially the stubbornly high unemployment, is the result.”

Quoting Sony founder Akio Morita, Mr. Jasinowski said: “The world power that loses its manufacturing base will cease to be a world power.”