Germany's secret to staving off the eurocrisis? Manufacturing.

Germany is 'strong and growing' more than almost any other Western economic power, thanks in large part to the country's dedication to its small- and mid-sized manufacturing companies.

Fabian Bimmer/Reuters
Huge van carriers transport containers at the Burchardkai container terminal in Hamburg, Germany, in October 2012.

For years, people in this tranquil northern Bavarian town turned a deaf ear when outsiders ridiculed Germany for holding on to what the world saw as an outdated industrial model.

And it’s a good thing, as Germany’s industrial backbone has experienced a comeback. Its Mittelstand – the small- and mid-sized companies that are the backbone of its economy – helped the country recover from the 2008 financial crisis faster than most countries. Now it is fueling Germany’s export-oriented growth.

According to a study by the Cologne Institute for Economic Research (IW) presented in Berlin Monday, Germany ranks as the fifth best industrial location among 45 world economies, a big jump from the 14th place it held in a similar study in 1995. 

"We did the right thing," says Johannes Petry, who works for Unicor, one of the world's leading manufacturer of corrugators – the machines making exterior pipes that protect anything from underground telephone cables to sewer pipes. Over the past decade, the 135-employee Bavarian firm has doubled its gross income to roughly €22 million ($28.6 million) this year. Demand is growing fast in countries that are modernizing their infrastructure, from Hungary to Arab countries.

'Strong and growing'

Unicor epitomizes the success of the German Mittelstand. Highly specialized and diversified, those companies of 500 or fewer employees have a knack for reinventing the wheel and tapping into world niches quickly. They make the screws, dowels, pipes, parts for machines, tools, and cars that countries like China are buying frenetically as they are industrializing.

Today, Germany is "strong and growing" more than almost any other traditional economic power in the Western world, IW Director Michael Hüther said Monday.

Germany's manufacturing sector creates 23 percent of the country's GDP, compared with 10 percent in France and Great Britain, according to the study.

In the late 1990s, the picture was different. Beset by record unemployment of 4 million, Germany was dubbed the "sick man of Europe."

But unlike other Western European countries, Germany resisted switching to a more service-oriented economy. Instead it consolidated its core industrial base, with more money on research, deals with labor unions on wages, and bold structural reform.

It increased its competitiveness when a Social Democratic government, that of Gerhard Schröder, embarked on "Agenda 2010:" a reform of the country's social-welfare system and labor market now considered one of the most far reaching made by any Western society in recent years.

"It took a long time for us to face up to the fact we had to do something," says Hans-Joachim Hass, head of economic policy at the Federation of German Industries (BDI) in Berlin. "It was painful and unpopular, and Schröder lost the elections [in 2005, to Angela Merkel,] as result. But we can see today it was the only way to go."

Rob Atkinson, president of the Information Technology and Innovation Foundation, a leading think tank in Washington, says the strong health of Germany’s Mittelstand results from Germany’s deeply-rooted "engineering culture."

Instead of looking at the industry as a 19th century relic, Germany has always supported its small industries, including by investing in research. "They have a national strategy," Mr. Atkinson says. And today, Germany spends 20 times as much as the United States in the industry-related research and development of small and mid-sized companies. 

"There's a widespread ideology among [other Western] elites that says 'we're not stuck in the old economy, we'll be the knowledge- and idea-based economy.' That's a complete illusion. And Germany never bought into that notion."

Partly because its companies are often family-owned and were sometimes created centuries ago, German firms have a greater ability to look at the longer term. That enables them to become specialists and capture "niche" markets. That has been the case in China, which has been buying German products "enormously," from machine tools to entire steel mills to cars for its middle class.

'Not content to buy them'

But although a tremendous source of growth for Germany's export-oriented economy, China is increasingly becoming a threat, experts agree. Hans-Joachim Hass of the German Federation of Industries says Germany's know-how and unique apprentice system currently gives it an edge over China.

"China and Germany now are in a symbiotic relation, but that won’t be the case for much longer," says Atkinson. "The Chinese are going after core German products, but they're not content to buy them: They also want to make them."

"But a lot of what Germany produces, China goes after in ways that are truly unfair," says Atkinson. "Right now, they’re not competing head-to-head, but as China shifts strategy, they will do so."

Unicor knows. Until three years ago, China was a promising market for Unicor. As Chinese cities were growing exponentially, they modernized their sewage systems, or built new ones. Sewage pipes were a hot commodity, and Unicor's business there thrived, says Mr. Petry. But that stopped abruptly when Unicor realized China had copied the company's manufacturing machines, he adds.

"They’re copying future technology they can’t make now," Petry says, "and then they will make it themselves, and then they will export it."

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