One of the older clichés in the world of national economic patterns is that Germans know very well how to do things, but that they know far less well how to market and sell them. As one of the most recent AlixPartners studies demonstrates, unfortunately the world of industrial goods is to a certain degree a solid case in point for this theory: While global demand in this market has rebounded strongly in the recent past, with a V-shaped recovery following the sharp Covid-induced decline, both growth and profitability of German industrial goods manufacturers have continued their downward trajectory. As of now, this has landed the country a spot in the hostile “poor dog” quadrant of the well-known matrix that ranks economic performance along those two key parameters (growth and profitability).
It is obviously not easy to give a straight-forward explanation for this development, unless we would want to revert to simplistic theories about German engineers and their “perfectionism at all cost” mentality. Nonetheless, German companies do in fact invest relatively more in research & development (R&D) compared to their Chinese or US counterparts, and they have also continued to increase their capital expenditure even through the crisis. Bearing this in mind, the low margins can hardly be seen as the consequence of complacency or a lack of orientation towards the future.
What seems more troubling though is that some basic parameters of efficiency, for example the ratio of selling, general and administrative expenses (SG&A) to revenues or the ratio of revenues per employee have not been improving nearly as much in Germany than they have in China and the US. These ratios obviously have their limitations: As an example, the ratio of revenue per employee might be distorted by the very effective German furlough scheme (“Kurzarbeit”), which keeps the workforce intact in terms of a temporary crisis but reduces the cost to the company. If this effect is not adjusted for, workers will still be counted even if the output is temporarily lower, resulting in a misleading picture. Still, even simple ratios sometimes do point to underlying issues, especially if observed over the longer term, and in this perspective, German companies on average still indeed fare rather unfavourably.
What does all this mean for the future of one of Germany’s most important industrial segments? It can be argued that the key question is really whether all the investments in intangible as well as tangible assets will pay off, which obviously depends on whether they are done in the right places. Given that the industrial goods market is heavily affected by several disruptive patterns, this question is even more relevant now than it was before: Do industrial companies in Germany have a clear view on where they want to be regarding the internet of things, automation, and big data analytics, to just name a few of the large disruptive trends currently at work?
There seems excellent ground for optimism that the capabilities to do the right things are all there – but matching those capabilities with a clear view on customer needs and desires could still remain a key challenge. Stay tuned to read more about the result of the assessments we have made in our Industrial Goods Study precisely on these disruptive trends and the way they are – or rather should be – addressed.