The German Automobile Industry - Essay Example

Running Head: The German Automobile Industry The German Automobile Industry and the affect it has on the German Economy, Stock Utility Analysis from 1990 until 2007 [Name of the writer] [Name of the institution] The German Automobile Industry and the affect it has on the German Economy, Stock Utility Analysis from 1990 until 2007 The German economy in the 1970s and 1980s was an apparent success in contrast to the low performance f liberal market economies, such as those f the United States and the United Kingdom. Until the late 1980s, the German model was praised for high international competitiveness as well as high wages, low unemployment, low inequality f incomes and living standards, and peaceful industrial relations. This section explores how Germans realized such an enviable combination f high wages and high international competitiveness, and then why such an excellent model underwent crisis in the 1990s. The core components f the German model for the systemic combination f high wages and high international competitiveness were based on the craft-based production system. Until the late 1980s, the German production system, which had maintained the legacy f the craft system, was praised for its high-quality products and incremental innovation based on decentralized production by high-quality labour. The German model, termed "diversified quality production" (DQP) or "incremental innovation system," was characterized by highly skilled workers and professional specialization instead f Tayloristic de-skilling f labour. The flexible German system, based on some elements f the craft system, could perform "fast retooling" and "incremental innovation" better than the American mass producers until the 1980s. In particular, the German production system was praised for strong small- and medium-sized companies (Mittelstnder). The strength f these companies was based on the agility f small batches and highly skilled labour. The decentralized and flexible system based on highly skilled workers could be realized by particular German institutional constraints. German corporatist institutions, characterized by a dual system f workers' participation at plant-level decision-making and collective bargaining at the industrial sectoral level, realized the development f advanced vocational training and productivity cooperation. Unlike the free market f the United States, in which companies are less likely to contribute to the development f industry-wide training systems due to the risk f losing skilled workers to competing firms and the possibility f collective action problems in developing public training programs, the German corporatist institutions f trade unions and employer associations implemented highly developed vocational training by limiting the free-riding in the process f training. These centralized corporatist associations f trade unions and employers' associations nationally standardized and rigorously enforced vocational training curricula. The centralized trade unions and employer associations could influence individual employers' training decisions. Works councils at the plant level policed the employers' observance f collective agreements for vocational training. In addition, the industry-wide wages system established by collective bargaining reduced the employees' incentives to be receptive to poaching. On the other hand, the German corporatist model that realized the "diversified quality production" worked well only under the condition f social cooperation between labour and management. In order for the decentralized "craft-based production" to work well, workers needed relative autonomy in organizing and coordinating works in comparison with strict Tayloristic mass production. But from the perspective f management, decentralization can result in a loss f control and an increase f workers' opportunism. To maintain relatively autonomous and flexible production, there needed to be social cooperation between labour and management. Both labour and employers in the corporatist institutions traded off between workers' interests (for example, high wages and employment security) and workers' cooperative attitudes for profitability. The centralized organizations f both labour and management controlled opportunism within their own organizations. Centralized bargaining took labour costs out f competition and created the same condition for all companies in the market. Both the less differentiated wages and the high level f wages due to strongly centralized bargaining discouraged employers from pursuing price-competitive strategies and encouraged them to pursue a high-quality and innovative competition strategy. In addition, the long-term stability f employment secured by corporatist constraints and legislation encouraged employers to invest in cooperative vocational training. The corporatist collective bargaining also worked to promote social peace in industrial relations. For example, works councils are legally forbidden to initiate wildcat strikes. Due to centralized collective bargaining, the labour and management avoided direct conflicts at a company level. Beginning in the early 1990s, however, the German economy suffered from structural weaknesses. The nation that boasted one f the lowest unemployment rates in the European countries until the early 1980s suddenly became the site f distressingly high unemployment. Unemployment in West Germany bloated to around 10 percent throughout the second half f the 1990s, while in the East Germany the rate f unemployment rose to around 19 percent. In comparison with other member states f the European Union, Germany showed the second slowest increase in GDP (behind Italy) and the slowest increase in total investment. More problematic was the loss f international competitiveness in the first half f the 1990s by the national flagship industries such as automobiles, mechanical engineering, and the chemical industries, which represented the German model f diversified quality production based on skilled labour until the 1980s. For example, the German automobile industry lost its market share, particularly in the much fought-over American market. The Scandinavian market, dominated by German automobiles in the 1970s, was encroached on by Japanese automakers, who gained 30 percent in the early 1990s. Production time and productivity in German industry, f which the automobile industry is but one example, lagged behind those f Japanese and US industries. The productivity f German industry was 20 percent lower than that f the United States, according to an international study in the early 1990s. The causes f the crisis f the German economic model were, according to liberals, high labour costs and a rigid labour market regulated by collective bargaining. Many people believed that high wages discouraged companies from investing further in Germany and resulted in high unemployment. Against this background f labour costs and fluidity f capital, liberals argued that capital flees to foreign countries, searching for low input costs. But high labour costs alone cannot explain the full story f the German economic crisis. As trade unionists insist, the reduction f wages does not create jobs. In the 1990s, restrained wages, including a 1994 Null-runde (no raise f wages), did not discernably increase job creation. Furthermore, the liberals' argument that domestic as well as foreign capital flees to other countries under the condition f high mobility f international capital is undermined by the fact that, in 1995, about two-thirds f all imports and exports, as well as all foreign investments, involved advanced, western countries rather than low-wage countries. The portion f German foreign direct investment going to the low-wage countries is still very low. On the other hand, the fact that German international competitiveness in many industries resumed at the end f the 1990s does prove the persistence f the traditional German model. Quite to the contrary, the successful story at the end f 1990s is the result f Germany's tremendous efforts to restructure its production system. It is worth noting that the traditional strategy f upskilling within the craft-based production system was revealed as being no longer effective. It was through tremendous transformation f production systems and skill formation that, for example, the German automobile industry set record-breaking exports to the US market at the end f the 1990s. The endogenous problems f the German model itself were revealed in the changed conditions f the international market. This paper focuses on the problem f the production system itself in order to understand the German crisis at the first half f 1990s, which will be analyzed in the next section. Transformation f the Production Model The German model f political economy, characterized by "high price - high wages - high-quality production," was closely related to the organization f skill formation (that is, vocational training) and the deployment f skilled labour in the process f the production system. In the 1990s, when the market became more volatile, the German model turned rigid and came under stress. Through reflection on their own institution and foreign models f production, Germans underwent tremendous transformation, contrary to the expectation f institutionalists such as Soskice, Hall, and Streeck. This section explores the changes in skill formation, which follow the transformation in the deployment f skilled labour in the production processes f the 1990s. Transformation in Skill Formation In the 1990s, the centralized corporatist coordination f vocational training, which boasted standardized and deep skilling for its craft production system until the late 1980s, turned out to be too rigid to keep pace with the rapid changes in technology and to deploy skilled labour more flexibly in the 1990s. The corporatist attempts to solve these problems f vocational training were a kind f test for the German model in the 1990s. In German vocational training, a dual system f practical training at the company and theoretical education at school, one f the key issues was creating apprentice positions. From the mid-1970s through the mid-1980s, corporatist cooperation among labour, capital, and the state achieved great successes in creating vocational training positions at companies, although the creation f these positions did have some problems, such as inappropriate vocational selection. The number f training positions increased from 81,734 in 1975 to 132,560 in 1985, a jump f 60 percent. But in the 1990s, because f German companies' lukewarm response to the corporatist solution, the traditional corporatist model did not work well. Under the pressure f cost reduction in the international competition, German managers began to consider vocational training in the perspective f short-term cost calculation. More importantly, many German managers began to doubt the suitability f traditional vocational training in the changed situation f foreign competitors' flexible production, a situation that will be addressed later. Training contracts for apprenticeships decreased dramatically, dropping by half between 1987 and 1995. For example, in metal-working industries, the number f apprenticeship contracts declined from 51,637 in 1987 to only 27,490 in 1993. In the service sector, which includes positions such as bank and office management, apprentice positions fell from 198,931 in 1987 to 131,294 in 1997, whereas employment increased. In almost all industries, the training positions became far fewer. The proportion f "demand versus supply f training positions" was 8 - 10 versus 1 at the end f 1990s. German companies began suffering a shortage f skilled labour (Fachkrfiermangel). In particular, in the high-quality service sectors such as IT industry, the shortage f skilled employees is now becoming apparent. For example, about 150,000 IT experts were needed in 2000, but only 45,000 newly educated workers came into the labour market. The IT industry association concluded that in 1999 about 75,000 positions could not be filled because f a shortage f qualified labour. Germans tried to solve the problems by using the traditional corporatist model but failed not only at the micro- but also at the macrolevel. At the microlevel, the existing cooperation between works councils and personal management, which traditionally had been the result f close relationships, did not create a noteworthy increase in the supply f training positions. In addition, at the macrolevel, while government and employers' associations appealed to companies to increase vocational training positions, these efforts, in particular the efforts f the Alliance for Jobs (Bndis fr Arbeit), failed to achieve positive effects. Beginning in the mid-1990s, labour and capital in Germany developed corporatist collective agreements for the promotion f vocational training and the creation f jobs. But according to research conducted by the Institute for Economic and Social Research (Wirtschafts- und Sozialwissenschaftliches Institut, or WSI), these agreements have achieved little success. Almost all interviewees in the research evaluate the collective agreements as an inefficient method for improving and increasing vocational training. The collective agreements between the centralized associations at the national level have not been observed at lower levels. Why has German corporatist coordination f vocational training failed despite the state's involvement While the theorists f comparative institutional advantage argue to the contrary, Germans did indeed change their appreciation f corporatist institutional advantages. German employers began to doubt the effectiveness f corporatist solutions. As German managers became more sensitive to costs and to the pressure f cost reduction, German employers began to see vocational training as a cost-factor rather than a strategy f investing in human capital for long-term benefits. Based on the cost-benefit calculation, German companies began to use alternatives to the traditional corporatist vocational training, such as private training companies and organization-based training (learning by doing). For example, VW and AEG Berlin now use a private training company called Coaching GmbH. More importantly, employers and industrial experts in Germany began to question the suitability f the traditional corporatist coordination f skill formation within the new system f flexible "lean production." The rapid changes in technology rendered formally defined occupations obsolete, and adjusting to new problems in the process f cross-functional collaboration took time. To increase workers' competence for the cross-functional collaboration, Germans reformed their vocational training, revising more than one hundred regulations about the curricula and procedures f vocational training, and creating about twenty-six new vocations. At the same time, German companies began to focus on retraining and organization-based training (learning by doing) instead f basic vocational training. In the early 1990s, expenditures on further training (DM 36 billion) exceeded the costs f basic vocational training (DM 30 billion) for the first time. As the production system moved from being vocation-oriented toward a cross-functional team structure, vocational training tended to shift from traditional specialism to an increase in flexibility through de-specialization or generalism (Flexibilisierung des Arbeitskrftepotentials durch berufliche Entspezialisierung), although the qualification levels f skilled workers was not reduced. The changes in skill formation are closely related to this transformation f existing production from vocation-oriented specialization to a cross-functional team structure. German Production Model - Its Crisis and Transformation The core f the German model is the production system, with which Germany maintained international competitiveness even while paying high wages. This section explores the crisis f the German production system and its transformation during the 1990s. The German production system was based on a vocation-oriented craft system, which enabled German firms to conduct incremental innovation more flexibly than strict mass producers could during the 1980s; this system, however, was revealed to be too rigid compared with the more flexible, lean producers f the 1990s. In the late 1980s and 1990s, when market competition became genuinely worldwide rather than European-cantered, and very volatile, the German high-quality segments were not isolated from tough competition. As the market f end products became more volatile and technology developed more rapidly in the last decade f the twentieth century, the traditional craft-system turned out to be too rigid to meet the market. Narrowly defined occupations and hierarchically organized functional departmental structures deterred German companies from adopting new technology rapidly because it took time to iron out conflicts between different vocations. Germany's model industries - automobile and machine tool manufacturing - suffered from backwardness in the competition f "time to market" and slower innovation than even the American producers that adopted the Japanese-style lean production. For example, the product life cycle f the German automotive parts companies in the early 1990s (84 months) was longer than that f Japanese suppliers (48 months) and that f US suppliers (76 months). The professional specialization (fachliche Spezialierung) and vocational training within the craft system deterred the development f cross-functional coordination and communication. The vocation-oriented training and production reinforced not only hierarchical relations between younger and older skilled workers within a vocation (Beruf), but also reiterated the clear social distinctions between workers in different vocations. Whenever a new technology and product are introduced, various roles must be bargained out among different vocational groups, which takes time. This functional and vocation-oriented training and production system caused many problems involving collaboration f interfaces (Schnittsstellenproblematik), not only between functional departments within a company but also between companies in markets. For example, electricians had difficulty working with mechnical specialists due to deep specialization based on vocational training and the craft order f production. In the process f development, production and marketing employees did not participate. A job was carried out sequentially through different departments instead f those departments interacting simultaneously. While many institutionalists such as Wolfgang Streeck expected that Germany would not adopt the new lean production model due to its existing vocation-oriented institutions and cultural tendencies, the traditional German model f a vocation-oriented craft system was transformed into a new flexible and cross-functional structure. German manufacturers reflected upon the drawbacks f their current vocation-oriented production system in a changed environment in which their competitors adopted more flexible production systems. In some sense, the German process f adopting lean production was markedly rapid in the 1990s, whereas the American process was characterized by "halting" progress and "many different experiments." The reason for rapid adoption f lean production is that Germans recognized, in the process f a society-wide debate, that trade unions' strategy f upskilling in the traditional model could not provide any effective solution in the early 1990s; it was obvious that they urgently needed restructuring. According to the research f IG Metall (a German trade union), only 4 percent f employees in the automotive industry participated in a team structure in 1990. But that figure grew rapidly after the crisis f 1992 and 1993. The percentage f employees engaging in team work was 9 percent in 1993, a figure that leapt to 22 percent in 1994. Additionally, recent research reveals that approximately 80 percent f German automotive suppliers overcame difficulties in adopting the teamwork model. While the existing vocation-oriented system insisted on deploying company employees toward functional departments, the cross-functional team structure aims at "simultaneous optimization" among various specialties such as marketing, production, quality management, and development. In this model, a company is decentralized into small, autonomous, cross-functional teams. Different professional workers, as well as parts suppliers, are integrated in a team and collaborate closely with one another. But the adoption f cross-functional teams in Germany does not mean "convergence toward the best practices." These German cross-functional teams do not exactly mirror the American or Japanese cross-functional teams, although the restructuring f German industry was inspired by the foreign models f Japanese and American lean production. The German version is a kind f creative imitation based on reflection on their own institutions. The structures f cross-functional teams within US and German companies are quite different. American companies developed a complete team structure, while many German companies created dual structures f functional departments and process-oriented teams. The automobile industry is an instructive example: competition in a US company occurs between different platform teams based on car models; by contrast, under the dual system f teams and departments in German companies, competition occurs between different specialties. This particular form f the German cross-functional team is neither the result f persistence f the traditional path f vocation-oriented production system nor an exact convergence toward an ideal method f production. In an early stage f restructuring, some German companies adopted a complete team structure to overcome the problems f traditional vocational and functional departments. But under the complete team structure, people in a small team were overburdened with several projects, and they had problems coordinating priorities among different projects. The result was that people in different teams were performing the same job twice. Furthermore, different teams duplicated each others' efforts because the capability f a specialty was dispersed to small teams. For the accumulation and coordination f specialties, German companies under the new system still maintain vocational and functional departments. But the departments in the new dual structure are not the same as those in the structure f complete departments: "In the past, the departments were a kind f kingdom. Recently the project teams have sovereignty." Even though departments still exist, the process-oriented teams are at the centre f organizing jobs for a project. A team recruits people from departments as work in a team proceeds. Departments serve the operation f a team, and people are educated to fulfil the team's work. Transformation f Industrial Relations The German model f industrial relations, characterized by strong centrality f coordination f wages, working conditions, and skill formation, is now undergoing transformation toward "decentralization" or "de-standardization" due to the impact f changes in the labour market and, most importantly, the changes to the lean production system. Although there is little change in formal institutions, the scope f institutional coverage, the way f working, and the role f German institutions in the economic system, at a practical level, have changed. Although trade unions and works councils still exist, their roles in maintaining "industrial peace" and protecting standard collective agreements are undergoing change. This section explores why and to what extent the German industrial relations changed in the 1990s. The basic trend f transformation in the German industrial relations has been from centralized corporatist coordination to decentralization or flexibilization based on company- or plant-level pacts, which are distinct from the non-organized and non-unionized style f American plants. The last rounds f collective bargaining under the traditional model took place in 1990 and 1991, when employers initiated reforms in corporatist collective bargaining for the first time since World War II, asking for flexibilization f bargaining and con cessions regarding holiday pay, working time, and wages. The trade unions' traditional method f collective reduction f working time in order to reduce unemployment, which was accepted in the 1980s, does not now seem feasible due to the need f decentralization f production systems. The process f decentralization reduces the coverage f collective bargaining and increases the prevalence f company pacts. Decentralization consists f two dimensions: "regulated decentralization" and "unregulated process." Regulated decentralization is marked by the widespread adoption f "opening clauses" and "hardship clauses," which allow a company to diverge from the collective standard under certain conditions with the support f both trade unions and employer associations. The "unregulated process" refers to "unlawful decentralization," in which companies openly contravene collective agreements. According to studies conducted by the WSI, the usage f opening clauses by German companies increased from 10 percent in 1994 to 22 percent in 1999. The usage f hardship clauses also increased to 28 percent in East Germany during this period. About 15 percent f German companies simply breach the valid collective agreements, thereby engaging in unregulated decentralization. The "Works Council Survey 1999/2000" by the WSI suggested that there might be additional cases f unknown "unregulated contravention," considering that the works councils have difficulty declaring their plants' contravention f collective agreements. In particular, small- and medium-sized companies, which account for two-thirds f total employees in Germany, increasingly tend to exit from collective agreements. In a survey conducted by the Association f Medium-Sized Companies, a third f western German companies do not strictly follow the collective agreement. In 1997, only 14.4 percent f western German plants and 12.3 percent f eastern German plants were covered by valid collective agreements as well as works councils. Additionally, 29.5 percent f western German plants and 46 percent f the eastern German plants had neither a works council nor a collective agreement. Plant-level bargaining replaced centralized sectoral bargaining, as 46 percent f large German companies negotiated company-level pacts. Centralized corporatist coordination shifted toward plant-level pacts. Company pacts increased from 25 percent in 1989 to 35 percent in 1997. In the automotive industry in particular, company pacts were already a matter f course. It is noteworthy that the increase in decentralized company pacts occurred mainly in western Germany. This indicates that decentralization is related to the adoption f a new flexible production system. Until the late 1980s, company-level negotiations mainly implemented the central agreements. But the new form f company pacts in the 1990s tended to replace collective bargaining. In these decentralized company pacts, management and labour agree about details such as job guarantees in exchange for lower labour costs, the removal f special bonuses, and flexible work hours. The traditional standardized and uniform regulation f working conditions began moving toward decentralized agreements. The decline f the coverage f sectoral collective agreements is closely related to the decrease in the density f traditional collective actors. The density f employer associations declined significantly from 59 percent in 1980 to 35 percent in 1998. In a similar fashion, union density also declined significantly in the last decade, "Historical trend f German Trade Union (DGB) membership." The density f trade union membership maintained a relatively stable percentage, around 34 percent to 30 percent, from just after World War II until the late 1980s, but that rate fell from 32.3 percent in 1991 to 21.3 percent in 2000. The works council system also saw its company bases erode. For example, in the private sector, the share f employees in plants with works councils declined from 50.6 percent in 1981 to 39.5 percent in 1994. In contrast, the share f employees in plants without works councils increased from 49.4 percent in 1981 to 60.5 percent in 1994. The reason for the decline f union density is primarily that German trade unions failed to adjust to the changes in the labour market, such as the increase f employment in service sector and the increase f part-time workers. German unions also showed the incapacity to recruit young employees. From 1991 to 1995, 52 percent f younger workers withdrew from unions. In addition, the increase f part-time employees also made it difficult to sustain the traditional collective standards. The share f part-time employees increased from 11.3 percent in 1985 to 25.6 percent in 2000. A significant cause f the erosion f traditional industrial relations is that German labour organizations failed to adjust to the change in production systems and to decentralization. In me process f making production more flexible, German labour organizations suffered from the absence f an effective alternative. They could not return to the old, rigid form f production and centralized interest representation because the collective standards f working conditions (Normalarbeitsverhltnis) are not operational in a decentralized and flexible production system. According to a study conducted by WSI in 1999, 65 percent f works councils felt helpless when faced with the issue f increasing work stress. With the adoption f decentralized teams and flexible interaction among decentralized units in the 1990s, standards f production time, work shifts, and vacation time, all f which were controlled by the sectoral collective agreements, became too rigid to meet the turbulent markets. As companies were decentralized into relatively autonomous teams, the organization f labour and working time was controlled by the decentralized teams. The decentralized teams were freed from the burden f organizing labour, but they were held responsible for profits, which unionists criticized as a self-exploitative system. According to a recent study, only 15 percent f employees in Germany work within the so-called normal standard f working time. Furthermore, the traditional, rigid, industry-level collective-wage agreements have been replaced by various variable-pay systems, such as group-based bonus systems or performance-based compensation. Until the late 1980s, the collective standard wages covered at least 90 percent f the actual wages, while at the end f 1990s about 70 percent f large companies used some form f performance-based pay. Traditional strategies f labour organizations based on centralized corporatist coordination face difficulties in representing employees' interests in the system f flexibilization and decentralization. Bibliography Feast, Richard., "How Germany Bounced Back," Automotive Industries 178, 9: 66. Schumann, Michael, "The German Automobile Industry in Transition," The Economic and Labour Relations Review 8, 2 (1997): 230 31 ; Stefan Zischka, "Gestaltung der Kunden und Marketorientierung und Andwendung des Quality Function Deployment in Entwicklungsprojekten der deutschen Automobilzulieferindustrie: Ergebnisse einer Umfrage," Institutsberichte zum Qualittsmanagement, Institut fr Qualittsicherung, Universitt Hannover, 1998, 20-24. Springer, Roland, Rckkehr zum Taylorismus: Arbeitspolitik in der Automobilindustrie am Scheideweg (Frankfurt, 1999), 158-63; Streeck, 46-47. Streeck, Wolfgang, "Lean Production in the German Automobile Industry: A Test Case for Convergence Theory," in Suzanne Berger and Ronald Dore, eds., '- National Diversity and Global Capitalism (Ithaca, 1996). Read More