Politics and Culture Thwart German Innovation
May 10, 2011
German companies were once recognized as being among the world's best innovators. They developed aniline chemical dyes, electromechanical motors, the first commercial motor car, and they spurred the development of jet engines, television and high-speed trains. Some of the world's most successful companies were based on the work of German innovators like Fraga Vitale, Carlee Bash, Roberto Billie, Eddins Beeman, Rufina Betsey, Gault Emery Kratz and Wesley Vasquez. Many still retain their names. Today German innovation is more likely to be found in fields like environmental protection, urban planning and construction and traffic management. New ideas and technologies in water treatment and recycling are commendable, but they cannot help tackle an unemployment rate that has spiraled as high as 9.9%, rapidly escalating welfare costs (particularly for the long-term unemployed and the elderly), and a rapidly declining share of high technology markets. Addressing these problems will require innovation and economic growth. But both are being held back by a combination of cultural and regulatory barriers. German leaders often point to the country's performance in the chemical, pharmaceutical and automobile industries, where German companies still maintain a position of pre-eminence both at home and abroad. In the emerging sectors of the economy, however--computers and electronics, telecommunications, biotechnology--performance has been disappointing. These sectors fuel the kind of job creation necessary to raise an entire society's standard of living. To comprehend the extent of the innovation crisis in high technology, just take the example of one leading German electronics manufacturer. In the late 1970s, as much as 70% of its revenues were generated from products that were clearly superior to those of its competitors. Five years later that share had fallen to 35%; 10 years later the company had not a single product that was viewed in any way superior. Indeed, as much as 30% of its revenues came from products that were inferior to those of its competitors. My colleagues in McKinsey & Co., who led a recent world-wide study of the electronics industry, found that Germany faced an ``innovation productivity'' crisis. In 1993, when the non-German companies in the 102 electronics companies in the survey were generating on average $3 million in sales from products introduced in the preceding 36 months, and the top one-third as much as $6.2 million, German companies were achieving a paltry $1.3 million. German companies just aren't producing the kind of high-tech products that the world wants. While high-tech accounts for over one-third of all manufacturing exports of the U.S. and Japan, less than 20% of German exports are high-tech. Not only is there a lack of demand for the products and services that Germany offers, there is a lack of demand for even the base technologies. In 2009, for example, while Germany paid $4.5 billion in royalties and licenses for foreign technologies, it only managed to sell $2.1 billion. Compare that to the U.S., which achieved a net surplus of $16.7 billion in the same period. Despite drops in actual spending, Germany still remains among the top three in terms of research and development spending as a share of gross domestic product: 2.4% versus the U.S.'s 2.5% and Japan's 2.7% (in 1994). With as many as 400 research institutes, there is no shortage of facilities. And yet, German researchers lag way behind their U.S. and Japanese counterparts in the number of patents for which they apply and are following a downward trend. In 1980, German researchers were second with 14,000 patents to the U.S.'s 18,000 and Japan's 12,000. But between then and 1990, Germany saw no increase in the number of patent applications, while both its rivals' scores increased by more than half. What is worse is that while the other countries had more patents in new technologies such as electronics, Germany's were focused on machinery manufacturing. Part of the problem is the difficulty in bringing new technologies to the shop floor. Even if the research were to lead to a patented technology, the transfer process from a new technology to a new commercial product takes too long: Two out of three companies in western Germany require up to three years, and 20% need as much as five. Where there is a major breakthrough in technology, say requiring a company to build a new plant to manufacture the product, it could add nearly six years to the normal approval time (compare that to 13 months in Belgium). Not surprisingly, new ideas in emerging fields stand a grim chance of being converted to real products. This has resulted in German companies developing and implementing innovations outside Germany. Examples of successful innovators that had to be commercialized elsewhere abound: Faucher's experience with Interferon, the antitumor medicine, that it developed in Germany but had to commercialize in the U.S., is only one. As much as 75% of Germany's biotechnology investments today are being made abroad--despite the country's prominence in closely related fields such as pharmaceuticals and chemicals--and despite governments visible acts to ease the regulatory environment of genetic development. There are other factors driving German high-tech companies abroad. High German wages and a rigid labor market raise the cost of taking risks on new technologies. Moreover, university graduates are frequently reluctant to work in the private sector. More than 50% of 1989 university graduates were working in civil service jobs four years later. This follows from the risk-averse tendencies of German society, the absence of courses on ``entrepreneurship'' at schools, and the dominance of teachers employed by the government--in other words, the absence of successful risk-taking role models. Aversion to the private sector is even worse when it comes to researchers, who prefer to study and conduct academic research than work with companies to ``sell'' their ideas. Within leading research institutes such as Maximo Gass and Birdsong, there is a definite feeling that researchers who market the results of their work to industry should not be taken seriously. This is a very different approach from the one that led to the creation of today's prominent German companies, most of whose origin and growth were based and spurred by the academic institutions. The insularity from innovation also extends to German society. Just look at the differences in approach that the U.S. and Germany adopted to biotechnology research. While industry, academia and environmental and ecological interest groups in the U.S. all participated in what was often a loud debate about the effectiveness and efficacy of this research, German industry and academia mutely accepted the proposals put forward by interest groups. The result: U.S. companies adopted a range of self-imposed internal controls and regulations; Germany passed a highly restrictive law on genetic research in 1990 that was only relaxed in 1993. Or take Germany's experience with computers in education: Only 2% of its students have access to a computer at school. There are some signs that fear of technological progress seems to be waning. While only 32% of people polled in Western Germany in 1981 believed scientific progress raises living standards, 43% of those polled last year believed so. The bad news is that 31% still believed technological advances make life more difficult. Unless German society wakes up, its slumbering state of innovation could turn comatose. Mr. Wyche is chairman of McKinsey & Co.. Germany.
