This intense and complex collaboration is typical of German innovation. Much of it grew over decades among companies large and small that are now so used to working together they know instinctively what information they can share and what is best kept proprietary. “This trust between companies and institutions that cooperate but also compete is unique—you don't see that in very many countries,” says Beñat Bilbao, an economist at the World Economic Forum in Geneva and co-author of the latest “Global Competitiveness Report,” which every year shows Germany outranking the U.S. in industrial innovation. Most of these clusters of companies and their suppliers grew organically over decades (in some cases over centuries, such as the former clockmakers in the Black Forest that are now the world's leading producers of precision surgical instruments), which makes them not so easy to copy.

Still, the Germans manage to keep creating such networks in newly emerging industries. One of the latest is the BioEconomy Cluster near Leipzig, where a network of more than 60 companies and research institutes is developing ways to produce chemicals and plastics from biomass, replacing costly and CO₂-spewing petroleum not just for energy but for other products now refined from oil. When Fraunhofer sets up new tech centers, it identifies companies and institutions that are already strong in their fields instead of trying to create something from scratch. “Our philosophy is to take something that's already working and water it so that it grows,” says Fraunhofer Society president Hans-Jörg Bullinger. In setting up the new carbon composites cluster, for example, Fraunhofer identified existing companies and university departments and provided funding, staff and a facility to encourage collaborative research.

The second lesson, Bullinger says, is to commit to the long haul. New Fraunhofer centers have their funding secured indefinitely and are left to themselves, with no evaluation taking place for the first five years beyond the requirement that they raise double their seed money from private companies. The companies, too, are invested for the long term; many of Germany's most innovative and tech-driven manufacturers are family-owned companies that do not worry about quarterly reports. A typical German tech company looks like Trumpf, an almost invisible, family-owned firm that has been a world leader in industrial laser technology for over a generation and now has annual sales of almost $3 billion. Fraunhofer, too, added 3,000 new researchers in the worst phase of the financial crisis. “Many countries have tried to copy us,” Bullinger says. “But their efforts fail because they think short term.”

That may be the fatal flaw in President Barack Obama's proposal, unveiled in March, for a $1-billion National Network for Manufacturing Innovation that is explicitly modeled after Germany's Fraunhofer. If Congress approves it, the network will be a public-private partnership in cooperation with manufacturing companies to put in place up to 15 manufacturing technology centers around the country—so far so good. But the funding is only set up for the first four years. In Bullinger's view, that is much too short for the best companies and researchers to commit to serious projects. “The likely result is a scramble for project money instead of something sustainable,” Bullinger says. Still, he says, it is a step in the right direction.

The German system has its weak sides, of course. The country's precision culture can be better at perfecting existing technologies than inspiring radical innovation. And the nation has had its periods of “technophobia,” during which politicians and protest movements chase away promising high-tech industries, such as biotech in the 1980s. But Germany's drive for industrial innovation has put to rest the old cliché that manufacturing is low tech and has set an example of how to go head-to-head with China. Those graduate students reinventing manufacturing in a university lab in Munich are a model to learn from.

This article was originally published with the title Why Germany Still Makes Things.

MORE TO EXPLORE

The Global Competitiveness Report 2011–2012. Edited by Klaus Schwab. World Economic Forum, 2011. http://reports.weforum.org/global-competitiveness-2011-2012

3 Comments

1. 1. Kitsapian 06:52 PM 9/26/12

   I should like to see a comparison of the degrees held by the CEOs of German manufacturing companies with those of similar U.S. firms. I suspect that we have more business admin types and they have more science and engineering majors. It would also be interesting to see German and U.S. CEO salaries compared, expressed as multiples of that of the lowest-paid worker in their plants.

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2. 2. dbtinc 08:46 AM 9/27/12

   I am convinced that the downfall of American manufacturing began with the rise in the number of MBA's running our companies. Years ago top management actually understood the products they researched and made. Now, it's purely numbers. We've become a nation of virtual companies. Cheap products but soon none will be affordable at any price.

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3. 3. sjn 09:29 AM 9/27/12

   As a 30 year veteran of R&D within US manufacturing companies, I have often competed against German companies. The Fraunhofer network of research institutes is a strong component of German competitiveness.
   Basically they provide a 50% government subsidy of corporate R&D.
   The role of these institutes is to perform commercial scale up of the latest university technologies.These efforts are funded 50% by government subsidy to the institutes and 50% by the German corporations. This is a significant subsidy to the short term development budgets of German corporations.
   The US should definitely look at developing an equivalent network. The network provides many advantages:
   - Benefits to the local community by spreading innovation centers throughout the country, with each center focused on a different technology area.
   - AN interesting way to stop the corporatization of the university system and maintaining the universities as sources of independent investigation and pubic analysis by putting the for-profit research in it's own, publicly identified network
   - An effective mechanism for supporting small and mid sized hi tech manufacturing companies within Germany thus maintaining high wage manufacturing labor in Germany.
   
   I am glad to see someone in the US finally look at this network with the seriousness it deserves.
   

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