German elixir for our Dutch disease

The Australian manufacturing industry is dying, struck down by our commodity-driven exchange rate. However, the strategies of Bavaria's 'Mittelstand' companies show a path back to health.

Every day now, our manufacturing sector shows more symptoms of a potentially terminal illness. Called Dutch disease, it is the malaise caused by a high, commodity-driven, exchange rate. Across the sector jobs are rapidly disappearing. Our car industry teeters on the brink, as does aluminium production. Employment is being scaled down in steel products manufacturing, textiles, aircraft engineering, and so on.

No one knows what to do. Business leaders blame the trade unions and the dollar. Our government’s propose ‘solutions’ that will be little more than life support for desperately ill patients. The free traders look on smugly – to them it is all part of an inevitable transition to a service-based economy.

I will not argue the case again here for a viable manufacturing sector; I will simply assert it as entirely obvious. Making ‘stuff’ (as Barack Obama puts it) is crucial to our welfare and the welfare of our children. We must find a solution to our Dutch disease, because the mining boom will not end any time soon, and our dollar is likely to stay high.

Any solution must result in a manufacturing sector with a strong ability and motivation to export and replace imports. A large part of our manufacturing base is now foreign owned. The biggest segment – food and beverages – is 50 per cent owned offshore. The figure for chemicals and household products is 70 per cent. Automotive is close to 100 per cent. This is a problem, as international companies have no particular motivation to export from Australia. Why would Nestl or Colgate Palmolive or General Motors see Australia as an export base for any of their global brands? They, and others, will generally only export from Australia if they are processing a large-scale resource that cannot be found elsewhere, such as minerals and some rural products (such as milk).

In this context it can be argued that Australian manufacturing has evolved in the wrong direction; that we have too few genuinely local enterprises whose fundamental motivation is to create wealth and employment here. Enter the Germans, specifically the Bavarians.

Bavaria’s Mittelstand companies – particular types of SME – have been receiving a lot of media attention recently. These companies are the backbone of Germany’s economic success and exhibit the following qualities:

- A long history and tradition of craftsmanship (but few natural resources to draw on);
- Committed family ownership. Owner-managers often show a love for the business and rub shoulders with workers;
- Long term vision;
- Niche products selling into global markets;
- Innovative in approach to management yet cautious with respect to financial structuring (‘boringly solvent and stable’);
- Often work closely with universities and researchers and in clusters;
- ‘Job for life’ employment approach (employees are part of the family);
- Harmonious industrial relations. ('For sure we have the union here because we’re the largest metallic and electronic company in this field. So we have a union but we never have problems with the union. We’re working together as partnership'.)

The Mittelstand approach of constant innovation, of doing things faster and smarter than competitors, enables these businesses to offset the disadvantage of a cost base that is higher than their Asian competitors. Mittelstand is also a philosophy, a way of living and working, that is not dependent on size. BMW, for example, views itself as a Mittelstand business despite its global scale. This is reflected in the strength of inter-personal relationships and short decision cycles that characterise its operations.

I put it to you that Mittelstand is the solution to Australia’s manufacturing ills. In fact it is the only solution. We have a handful of such businesses but we need hundreds and we must find ways to nurture them. Here are some thought starters:

- Recognise and declare that this approach to manufacturing is what we want
- If we own such a business, or one that has the potential to be a true Mittelstand, go to Germany, visit these companies, and learn about what they do. Catch the bug.

At the government policy level:

- Learn about Mittelstand, and help our business managers learn about them;
- Identify all current and potential Mittelstand businesses and talk to them about what practical help they need to overcome the ‘tyranny of distance’ that Australia represents;
- Look at specific programs to provide long term funding;
- Look at innovative policies such as Kurzarbeit, the Bavarian policy that subsidises companies that cut hours, not staff;
- Overhaul and emphasise apprenticeship training nationally;
- Overhaul our moribund business schools so that they can be of some practical use to our Mittelstand;
- Focus our universities and research organisations on the task of cooperating closely with such businesses

All of this will take time; a lot of time. But then, as the ancient Chinese saying goes, ‘a journey of a thousand miles starts under your feet’.

Christopher Tipler is a Melbourne-based management advisor and author of Corpus RIOS – The how and what of business strategy. His web site corpusrios.com contains more material on this and related topics.