Germany is as famous today for its incredible engineering prowess as it is for big jugs of beer sausages and checked history Germany has recently become the third largest economy in the World Behind China and the USA after overtaking a stagnant Japan it's also clearly the most powerful and influential economy within the European Union and a large driver of that economic success has been the country's ability to produce extremely highend manufactured goods of course there are the country's cars but that only makes up a surprisingly small share of the country's total manufacturing output and an even
smaller share of its exports Germany really does live up to its reputation because it has become a world leader in a vast array of different engineered goods from aircraft to medical devices to centr Fusia used in nuclear energy basically if there's something that really needs to be made right there's probably a German factory making it or at least there was a long list of internal and external challenges have put significant pressure on German industry to the point where a lot of economists and commentators are predicting that the country could lose its industrial dominance entirely that
is a big claim that would represent a significant shift in in National Regional and frankly global trade but even if it does come true it may not be as bad as it sounds for the world's third largest economy and to find out why we must has always answer a few important questions so why are economists predicting the end of Germany's industrial dominance why is this happening now and finally why could this actually be a good thing for Germany while workers are on strike across much of Europe it's easy to sympathize with their struggle because inflation
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position for trade and a political system that has been very accommodating of Rapid expansion so it has become a global Center of lowcost manufacturing Singapore has a tiny land mass and a relatively small population but it has developed a very robust political system and it's right in the middle of the world's busiest trade route so it has become a highly competitive business and refueling destination these economic features lead to something called comparative advantage no matter how hard Singapore tries it just doesn't have enough land mass or manpower to compete with the industrial might of China
likewise without radical changes in the way the country operates no International businesses will move their operations to China because it represents significant political risk so this means that China has a comparative advantage in producing basic manufactured goods and Singapore has a comparative advantage in producing financial services and operating as a glorified Servo for the world so long as these remain more or less Cooperative with one another these strengths and weaknesses are fine because Singapore can buy cheap consumer goods from China and Chinese shipping companies can use Singapore as a gas stop or a place to
manage International finances on an individual level in our own economies we have grown wealthier by specializing in roles that we do really well and letting other people do the same and then just trading with one another most people don't know how to do surgery on themselves but that's okay because they can pay doctors to do it with the money they' made from their own specialized job free trade and taking advantage of comparative advantage lets entire National economies effectively do the same thing which theoretically should be great highly specialized roles in modern economies are one of
the biggest reasons that the world is so wealthy today but there can be issues at a national scale on a personal level within economies especially Advanced and politically stable economies there are authorities and institutions in place to settle disagreements on a global level there really isn't the same thing there are mediators like the World Trade Organization and the UN but if a country decides to cut another country off from trade then short of declaring war on them there really isn't much that can be done this whole issue with holding a valuable place in global trade
while not being overly reliant on it is especially important in Germany because of its unique advantages Germany has a highly skilled Workforce especially in engineering and Manufacturing disciplines a decent Geographic position within Europe and has over the past few decades had access to very cheap energy this gave it a strong comparative advantage in producing high-end industrial goods normally when people think of of gaining an economic advantage in manufacturing they think first to lower the cost of the labor force so factories have to pay their workers less so they can make things cheaper overall this is
why places like China produce so much of the world's stuff but as wages in China have increased Global manufacturers are looking for cheaper alternatives in countries like India now Germany is home to some of the highest paid workers in the world so on the surface it doesn't make sense how it remain competitive with cheaper Global centers but depending on the type of manufacturing labor costs are not as important as as one might expect most German industry relies heavily on either highly Advanced machines and tools to assist with production or they are producing something so valuable
the difference between paying someone $2 an hour to make it versus $50 an hour effectively makes no difference to the end price German car factories use a lot of automated machines with just a few highly skilled workers using those machines to make 100 times as many cars per worker as they could with basic hand tools at that scale paying highly skilled German Workers more has been competitive because the advantage came from having the machines and the exper experience to use them rather than having the workers that would work for the lowest possible price if this
is compared to the type of products that countries like China typically produce they tend to be put together with more basic tools and a lot of Hands-On assembly there are of course German cars that are also made by hand but they tend to be extremely valuable where the end consumer is willing to pay a premium to have a car that was handbuilt in Germany and that right there has actually been one of the biggest factors contributing to Germany's comparative advantage in manufacturing and that's its Global reputation an even clearer example example of this would be
products made by a company like Seamans okay yes terrible name to put in a YouTube video but still one of the country's largest manufacturers they produce things like nuclear cuses and everything that goes along with them these machines cost hundreds of millions of dollars to produce and install and it's the type of thing where Not only would the reputation of German engineering go a long way it would be the kind of thing that only Germany and a handful of other countries around the world would be allowed to produce without causing geopolitical tensions the labor cost
of machines like this are barely rounding era so the high cost of German Workers isn't really a problem other input costs especially energy are more important for the highly mechanized industry taking place in Germany now in the past this has actually been one of the country's biggest strengths since the mid 1990s it's been able to pump very cheap natural gas directly from Russia and Norway which have some of the largest reserves of this energy source in the world now clearly there have been troubles with this in the last 2 years and higher energy costs are
having a bigger impact on German manufacturing than higher wages ever really could and that's only the first thing pushing the shift away from Germany the energy crisis hit a lot of German businesses particularly hard because the country is still so dependent on cheap fossil fuels to power factories that use an incredible amount of energy but German manufacturing has been in Decline well before that already and this trend too can be explained by carefully exploring what contributed to the country's comparative advantage to begin with its incredibly talented and highly skilled Workforce is aging and thanks to
generous retirement benefits that are a key feature of the country's economic system people are leaving the workforce earlier than they might need to of course on an individual level this is fantastic people shouldn't sacrifice the quality of their life for the sake of economic metrics but businesses within Germany are struggling with this now normally advanced economies can compensate for this by bringing in skilled migrants from countries with lower standards of living but Germany has struggled with this too skilled workers just aren't as drawn to Germany as they are to places like Australia Canada the UK
and especially the USA now part of this is just the language English is a far more widely spoken first and second language than German is but there are other factors as well the high training standards that have contributed to Germany's strong manufacturing reputation means that even workers that want to move into low skilled roles often have to sort through bureaucratic training certifications that can take years before they start working whatever the root cause the results are the same Germany is desperately short on Manpower with over 750,000 job vacancies in some of the country's core Industries
going unfilled gaining a comparative advantage for the quality of its manufacturing has also meant that it was only a matter of time until other countries caught up to today Chinese manufacturing is not nearly as far behind German manufacturing as it once was China is building cars batteries aircraft and Advanced Machinery that is genuinely rivaling the stuff coming out of Germany of course China still produces a lot of garbage products which is why it still has bad reputation for producing subpar Goods but it has demonstrated that it can genuinely compete in the advanced manufacturing space as
well today there are more BMWs produced in China than there are produced in Germany and despite that metric perhaps being a bit of a national embarrassment it ironically enough highlights how one of Germany's greatest opportunities is being hidden behind this seemingly bad news German companies can charge a premium over companies from other countries for their manufactured goods because consumers perceive german-made Goods as a high quality alternative whether that's true well just ask anyone that's tried to maintain a Volkswagen but reality doesn't matter what also doesn't matter is where the goods are actually made people just
see a German company and assume the goods were made in Germany if the predictions of German industrial decline are correct then then what the country could do is leverage its advantage of having a fantastic reputation for producing Goods that are worth paying a premium for without any of the disadvantages of actually having to produce them in Germany Germany scaling back on its manufacturing is in many ways kind of overdue compared to other advanced economies even those that have their own large domestic automakers and high manufacturers Germany has about 50% more of its people working in
industrial jobs these jobs can be made more productive by giving people working them more advanced tools and Technology to leverage how much work they doing but there is an eventual limit a worker building a car by hand might take a month to put one unit together whereas a small team overseeing large industrial pressors and robotic assembly arms could produce a th000 a day and since they produce more there's more room to pay them more which is why salaries in advanced economies are higher but eventually it becomes better for these workers to just move into service
roles where instead of overseeing the manufacturing themselves they spend their time setting up infrastructure and training teams in other countries to do it for them the USA is the largest economy in the in the world today in large part because it's home to companies that do most of their operations overseas but still bring in the wealth generated from these activities back on Shore Germany has for the last three decades decided to do stuff more inhouse but the shift away from domestic manufacturing is not so much a failure of its Industries as it is taking the
next logical step for their Advanced economy but that doesn't mean that there won't be major problems if this shift away from local manufacturing does continue it would represent a major shift in a major economy and any change that big is going to have consequences workers across Germany are already protesting government changes to energy subsidies and tax rules and while this is mostly directed towards Agriculture and transport for now it's a symptom of the shift in the way that business has been done in the country Germany has historically had very harmonious relations between workers and companies
but that's because German Workers are represented well by very powerful unions and the economy itself is managed in such a way to protect workers rights this works while German companies need German Workers but if they can offshore a bulk of their operations then it could undermine the highly egalitarian economic system that modern Germany has been built on even from the perspective of a purely cold-hearted macroeconomist only concerned with headline economic figures the shift away from domestic industry still could present risks theoretically the workforce could move into more productive and value adding service roles that made
the country even wealthier but the move from a role where a worker is directly installing engines into a car to something like a role where they're training a foreign team to install an engine takes a different set of skills there's no guarantee that this shift would directly lead to better jobs for Germans instead of just Less jobs for Germans installing engines may not be as valuable as training a new team to install engines but it does provide something to do so long as there are cars to be made once a foreign team has been trained
on how to do a German's job they don't really need the German worker anymore beyond that the reputation of a country is a lot like the reputation of a company individual or anything really if German companies don't maintain their standards while setting up International operations they will very quickly lose the large group of consumers who are willing to pay a premium for a good that is at least theoretically German now we did a comprehensive overview of all of the features of the German economy a few months ago so we wanted to just focus on the
issue of shrinking industry in this video without repeating too much but if you haven't watch that more General overview you should be able to click to it on your screen now thanks for watching mate bye
