Innovation/Global Risk

 Nature Innovates, Man Imitates: 

Car Industry: Germany Takes the High Road..and Wins!

By Shlomo  Maital




In the Scottish song, Loch Lomond, the singer sings

 Oh! ye’ll take the high road and

I’ll take the low road,

And I’ll be in Scotland afore ye;

    In business and economics, there is also a high road and a low road. The high road is the one where you pay high wages and create high productivity to compensate for it. The low road is where you pay low wages and accept low productivity.  Unlike the song, in the car industry the high road wins.  (In the song, the ‘low road’ is the less comfortable, but more direct, one). 

  In Israel, after the Six Day War, hundreds of thousands of Palestinian workers became available for Israeli kibbutzim (collective farms).  The kibbutz principle was never to use hired labor, but only kibbutz members. Some were tempted, broke their principles, and hired low-wage Palestinians to work in their fields and factories. Some stuck to their guns, and modernized, using technology to compensate for high wages.  Guess which kibbutzim were more successful?  The high road ones.  They were more profitable, more viable, and failed less.   And the same principle holds for cars.

    Today, according to articles in Forbes and in, by Kevin C. Brown, Germany made 5.5 million cars in 2010, while America made half that, or 2.7 million cars, even though Germany’s population is one-third that of America’s. In other words, Germany made ten times more cars per capita than America.  Yet, here’s the catch, the average auto worker’s wage in Germany is $67 an hour; while in America, experienced workers earn half that, and workers in new non-union plants in the South earn $15.   How then can Germany compete with the U.S., when its wages are in some cases four times higher?

    Answer: The high road.  German auto workers come out of top vocational high schools and are highly skilled. They are given the latest in technology, in their assembly plants. They belong to one of the world’s toughest unions, IG Metall, but rarely strike. Their workers’ councils work with management to improve productivity and keep the plant efficient. I once visited a BMW plant near Munich– it was a marvel of efficiency and the cars made there were top quality. America has no such vocational education. And it believes that unions are the problem, not the solution. 

    It is not China’s low wages that drives China’s manufacturing excellence. It is, as it always is, the ratio between productivity and wages.  And productivity is relatively high.  It is best to fight low wage nations with high productivity, not with low wages. America doesn’t understand this, never has. Germany does.  Why don’t American car companies benchmark Germany?  Yes, German firms DO make cars in America, DO pay low wages there (in the South), and do battle unions fiercely. They adapt and adopt America’s low road. But they retain Germany’s “high road”, and BMW, Audi, VW and other firms are highly profitable. And their German plants are extremely profitable.  They take the high road – produce high quality products, charge premium prices, pay high wages and demand equally high productivity. 

     In global markets, if productivity in country A is half that in country B, then wages too will be half.  To compete, you can either slash wages, as America does, or boost productivity.  Which do you think is best for ordinary people who work for a living – the high road (high productivity  and high wages) or the low road (low productivity and low wages)? 

     Why then has America chosen the low road?  And why do Republicans extol its benefits?  Not only is the low road worse for workers, it is worse for owners of capital. Proof?  Look at the profits BMW and VW are earning, compared to the near-bankruptcy of GM, Ford and Chrysler.   Do those who extol the low road ever open their eyes and look around the world? If they did, they would see a very different reality from the one they believe in.