The UK could learn a lot from Germany’s long-term industrial strategy

As a share of its economy, Germany’s manufacturing sector is twice the size of Britain’s – 23% of national GDP, compared with 11%, according to the World Bank. Unlike Britain, it runs a large surplus on trade in goods. The German steel industry has not buckled under the pressure of dumping by China.

So what’s the secret? How can high-cost, high-tax Germany thrive as an industrial superpower while Britain has seen the progressive hollowing-out of its manufacturing base?

Let’s start with a couple of qualifications to these stereotypes. Not everything in Germany is wonderful. Export growth in recent years has been based on a decade-long suppression of wages, which has meant the benefits of growth have gone to the owners of companies rather than the people who work for them.

Nor is Britain quite the industrial wasteland of popular myth. There are world-class UK companies – Rolls-Royce, BAE Systems – and there are plenty of mid-sized firms employing between 200 and 500 people that in Germany would be classified as being part of a “Mittelstand”.

That said, Germany is in a different league to Britain. It has more world-class companies in a broader range of sectors – Siemens, BMW, Bosch, to name a few – supported by a more densely packed network of Mittelstand companies.

Part of the story involves history and culture. Germany’s industrial power was built on a core of family-owned businesses, many of which date back to the 19th century and which often operate out of small towns. They plan for the long term, pride themselves on quality and see themselves as having social obligations to the local community.

These companies thrived in the decades immediately after 1945, when the economy boomed as a result of the need to rebuild a war-ravaged country. Whereas UK companies were often hindered by an overvalued pound, the mark was undervalued, making German exports extremely competitive in world markets.

Another part of the story involves the structure of German industry. The emphasis on vocational education combining academic studies and on-the-job training for apprentices is globally admired. German companies are also the beneficiaries of close links between industry and the banking sector that ensure guaranteed long-term funding.

While UK companies regularly fret about hitting short-term targets, their German rivals have been able to concentrate on making small improvements to their products that help to keep them ahead of the field.

The final piece of the tale involves the support given by the state. One key pillar of support is provided by the Fraunhofer-Gesellschaft, a part publicly-funded research organisation that provides applied science for companies that would otherwise find the cost prohibitive.

The German government has also used tax incentives to foster industries seen as having growth potential – the development of the solar panel sector through feed-in tariffs being a recent example. One lesson for Britain is that there is a virtue in having an industrial strategy – and patiently sticking to it.