View from Frankfurt: Germans need to translate angst into action

The Germans' reaction to their country's severe economic difficulties will be very puzzling for outsiders. One could understand an attitude of either forceful confidence or deep-seated gloom, but to find them both expressed in virtually the same breath suggests severe confusion.

The abundant belief of Germans in their ability to overcome whatever tribulations the world economy may hurl at them is impressive, especially when set against the fatalism that seems to prevail among some of their Western European counterparts. Optimism would be far too shallow a word to describe this German attitude. Rather it is a confidence nurtured over decades in which the economy has steadily built one success upon another. Even though many big firms are taking a heavy beating at the moment, the self-belief of senior executives is basically unshaken.

However, such fighting talk clashes with noises of a different tenor - of dire warnings that Germany, grown fat and tired, will stumble and then fall in the global economic race. If there is another national characteristic that can compete with the Germans' self- confidence, it is their capacity for worrying. It is no coincidence that they gave us angst as an all-purpose word for conveying fear, worry and soul-searching. There is much of this going on in Germany now. Each recession has provoked a volatile debate about German competitiveness. And rather like unemployment, which has emerged from each recession with a larger irreducible rump, so worries over competitiveness have grown more intense with every trough.

That Germany has saddled itself with a serious cost problem requiring urgent action is recognised almost universally. Some managers also concede that self-confidence was part of what went wrong. At some point in the second half of the 1980s, it slipped over that fateful line into complacency. Opportunities were missed, new developments insufficiently heeded. The revolutionary drive towards lean manufacturing and teamwork is only now sweeping Germany, years later than most of its main international competitors.

INNOVATION CRISIS

The latest bout of worrying is having a salutary effect. There is little complacency about any more, and the self-confidence has been driven back over the line to where it belongs, underpinning a national drive to force down costs and improve competitiveness.

But along with the classic catalogue of ills - over-long holidays, over-short working hours and excessively high labour costs - that the worriers have pinpointed for attention, another area of concern has been unearthed. Vital to the country's ability to maintain its economic standing, it may prove far tougher to put to rights. The area is high technology, and the international competitive position of German companies in researching and developing new products.

Leading the chorus of worriers is Hans-Jurgen Warnecke, president of the Frauenhofer institute, one of Germany's leading research foundations, who said the country was in an 'innovation crisis'. The traditional strength in research and development that propelled Germany to its current position as one of the world's foremost industrial nations and exporters was showing signs of flagging.

According to a recent study by the United Bank of Switzerland of competitiveness among 38 countries, Germany will fall from its present fifth place to 18th by the year 2005 unless it modernises its product range. Where Germany enjoys enormous strengths - a high savings ratio, a good infrastructure, excellent training and efficient workers - the report found that the 'dynamics of change are losing speed'.

But it is precisely in new product development that weaknesses are appearing - a view backed by a detailed study from the IFO institute in Munich, which looked at the international registration of patents. Between 1987 and 1990, when US and Japanese registrations rose sharply, German ones stagnated. Furthermore, breaking down these registrations by sector showed that German companies were concentrating on traditional strengths, such as cars, machine tools and chemicals, while falling behind in emerging sectors such as electronics, bio-engineering and aerospace.

'Clearly, the reduction of Germany's weight in international patent activity was related to the fact that the dynamic sectors of new technology, which are the main focus of global technological competitiveness, were not paid sufficient attention in the research activities of German firms,' the IFO stated.

DULLED BY SUCCESS

A lack of money cannot be the problem. For Germany still spends vast sums on research and development. In 1992, it amounted to 2.6 per cent of GDP, compared with 2.8 per cent in the US and just over 3 per cent in Japan.

One possibly significant difference is that whereas in Japan 80 per cent of research spending comes from business, the equivalent proportion in Germany has declined to 58 per cent. While state funding is crucial for research in all countries, there is a case for arguing that this support is less flexible and dynamic than that generated by business itself. The problem with German business, according to a growing number of voices, is that it is losing its appetite for taking risks. One of those complaining is Hartmut Weule, the board member in charge of research at Daimler Benz. 'We Germans - and not just the scientists - have been dulled by our successes. Development takes too long, is too expensive and often not market oriented. We are simply lacking the will, the readiness to take risks, needed to turn ideas quickly into products that offer the chance of success.'

According to Mr Weule, nearly all the national DM80bn ( pounds 31bn) spent annually on R&D goes into improving existing products. A mere DM5bn, he estimates, finds its way into real research. 'Here lies the real difference between us and the Japanese and Americans, who pay much more attention to the research field,' he said.

Industry has been quick to blame government for having created a forest of regulations and restrictions so dense that research in the products of the future is discouraged, if not rendered impossible.

The prime example is genetic engineering. A study earlier this year stated that of the 858 genetic engineering experiments being conducted in OECD countries, just three were in Germany. The 1991 law regulating the research into this area in Germany has proved so restrictive that the big three chemical companies have shifted their activities abroad, mainly to the US and Japan.

The Bonn government's recent document on 'Safeguarding Germany's future as an industrial location' emphasised the need for loosening the regulations to encourage research. Paul Kruger, the minister for research, has called for an 'innovation offensive'.

The worriers have done their part. It is now up to the self-confident executives to show they are still just as good at doing theirs.