washingtonpost.com
Germany rustles up big business in China

By Anthony Faiola
Washington Post Foreign Service
Saturday, September 18, 2010; A1

VERL, GERMANY - As Americans fret over high unemployment and the prospect of another recession, an economic renaissance is putting Germans back to work and propelling the economy at a pace not seen since the fall of the Berlin Wall.

Ask a German executive why, and you are likely to get the same one-word answer that slips like silk off Gunter Scheipermeier's tongue: "China."

Vilified in the United States as a great sucking sound on the American economy, China is courted here as a revered client. Fast-growing demand from Asia's giant is helping to fuel the strong German recovery, and Germany now stands as proof that a rich nation can profit off China's rise.

China passed the United States last year as the No. 1 overseas market for big-ticket German machinery, with Teutonic titans from Siemens to Volkswagen - which so far this year has sold 1.3 million cars in China, five times as many as it has in the United States - ramping up production and payrolls to fill Chinese orders.

More important, China is driving growth at smaller German manufacturing firms like Scheipermeier's Nobilia that form the true backbone of Europe's largest economy. A family-run company making modular kitchens in a half-mile-long factory, where free-roaming robots work alongside humans on the most advanced assembly line of its kind in the world, Nobilia is treating nouveau riche Chinese like Americans of the 1950s - when nothing said success such as a sparkling, modern kitchen.

At the same time, the company is aiding Germany's domination in the surging Chinese market for imported household goods. Through alliances with other German companies, Nobilia is selling kitchens to the Chinese that fit standard European-size appliances, 24-inch-wide ovens, for example. These kitchens do not accommodate the larger ovens commonly made by U.S. manufacturers and built for American families cooking Thanksgiving turkeys and Sunday rib roasts.

Overdependence on China for exports growth, many here say, could hurt Germany as the economy there eventually cools. And German companies, like their American and Japanese counterparts, are facing increasingly sophisticated piracy threats from a nation where blackmarketeers can copy an entire BMW roadster or Mercedes sedan.

But with showrooms in 17 cities and sales surging 40 percent this year alone, Nobilia now sells more kitchens in China than all but two domestic Chinese manufacturers, with no American challengers in the top 10.

"China is vital to Germany's future," Scheipermeier said. If he has his way, he said, "Chinese duck will be cooked in kitchens more like those designed for German chickens than American turkeys."

A trade competition

One thing is for sure: When it comes to building a healthy trading relationship with China, Germany is cooking America's goose. U.S. exports to the world's second-largest economy surged 25 percent in the second quarter of this year, but German sales to China grew twice as fast. Overall, German exports have jumped 17 percent this year, driven in large part by a 55 percent rise in China of imports. Although the United States still exports more to China in total dollar terms, adjusted for the size of their economies, Germany is now out-exporting the United States to China by a factor of three to one.

Last year, Germany's trade volume with China was $115 billion, while the U.S. trade volume with China was more than $370 billion. Like most nations, Germany suffers a trade deficit with China - or the difference between what it sells and what it buys. But it is nowhere near as much in the red with Beijing as the United States. In fact, during one month this year - February - Germany even came within a narrow $1 billion of chalking up a trade surplus with China.

That is partly because of frugal German consumers, who unlike Americans eschew credit and save like mad. As such, Germany's imports of cheap Chinese toys and TVs are ebbing, lower now than they were at any point since 2005. But it is also because of domestic manufacturing prowess that allows Germans to buy many products still made in Germany. At the same time, Germany has created the most finely honed export economy outside of China.

As the Obama administration vows to fix America's troubled trading relationships and build an economic recovery in part on the back of exports, business leaders such as Jeffery Immelt, chief executive of GE, are pointing to Germany as a model. The Germans have funded "business centers" to aid small- and medium-sized companies in tapping the Chinese market, using government money to support their Chamber of Commerce networks and boost trade. They have adopted a less confrontational approach to China on issues including China's exchange rate and copyright infringements, focusing instead on sales.

The government, through energy and transportation policy, has fostered a German edge in manufacturing high speed rail, wind turbines and other technologies that Germans have sold to the Chinese.

"There are critics who say our manufacturing in the United States can never be competitive with China because of their wages," said Scott Paul, executive director for the District-based Alliance for American Manufacturing. "But in Germany, you see a country that has wages and benefits at least as high as the United States, and yet they have managed a manufacturing base and trading relationship with China that we in the U.S. would love to have."

In recent decades, as countries including the United States and Britain put greater emphasis on financial services and property values, the Germans have hyper-focused on the art of manufacturing. Even relatively small German companies have grown into global market leaders for the products Chinese want, from drilling equipment to optical mirrors to prefabricated kitchens. Exports now account for more than one-third of Germany's national output, more than double the rate in the United States, with Germany's $1.2 trillion in annual exports roughly equal to the entire gross national product of India.

In the aftermath of the financial crisis, Germany became the first major economy to exit the Great Recession. Unlike in the United States, the export-led recovery here is translating into jobs. In August, Germany's unemployment rate stood near a two-year low of 7.6 percent, with some companies in Germany now complaining of a labor shortage and the need to loosen immigration rules. The U.S. unemployment rate is 9.6 percent.

Few expect the pace of growth to continue, citing signs of a cooling off in China and economic uncertainty in Germany's major markets in Europe and the United States. But after painful adjustments since reunification of East and West - including years of falling wages and high unemployment - there is a growing sense here that Germany is better positioned for prolonged, stable growth than it has been in years.

"Why is Germany doing better than the U.S.? The answer is not so difficult," said Hans-Jochen Beilke, chief executive of Ebm-Papst, the German ventilation company now dominating the Chinese market in refrigeration technology. "Our industrial base is simply much higher now than yours," he said. "Look at the state of machinery manufacturing in your country. There are nearly no important American makers left anymore, and most of the ones you have now are German subsidiaries. And then, look at cars. Go ask the Chinese if they want to buy a BMW or a Ford."

Selling to Shanghai

"This," beamed Matthias Keudel, export chief at Nobilia, gesturing to a pressure chamber in the company's factory here, "is our Shanghai Climate Chamber."

Inside the chamber, the company based in a small city 250 miles west of Berlin tests the impact of tropical Chinese heat on a variety of materials used in Nobilia's kitchens, now being fitted into high rises during a real estate boom from Shanghai to Hangzhou. The Chinese prefer wooden cabinets, rather than the hyper-modern plastic replicas that are the norm in Europe.

"The plastic is actually better than wood," he said, "but the Chinese client does not want anything that seems like an imitation or a copy; they get enough of that at home."

Nobilia is a classic German manufacturing success story. Launched in 1945 from the rubble of World War II as a company making sewing machine tables, it found its niche in kitchens by the 1960s. Today it makes nothing but kitchens, using similar technology and just-in-time delivery methods employed by BMW for high-performance cars.

From selling a few dozen kitchens in 1997, the company's now sells more than 10,000 a year.

Scheipermeier, the company's blue-eyed chief executive, is now the German face of Nobilia in China, with his ruddy, smiling image adorning billboards and ads. A special on his life broadcast on Chinese TV this year captured 175 million viewers. "What we are selling to the Chinese is a German lifestyle," he said.

Once in China, the kitchens are typically sold in a package with German appliances, including those produced by Miele, another family-run Germany company. In large part because of German appliance makers, Chinese washing machines, dishwashers and other appliances are also now built largely to European, rather than American, specifications.

"We are installing a European standard in China for kitchens and appliances," Keudel said. "That's going to make it harder for any manufacturer outside of Europe to challenge us down the line."

Although many German companies - like the Americans and Japanese - have moved production, and jobs, to China, others, like Nobilia, have not. But even Scheipermeier admits it is something the company may need to consider in the future.

"I can't tell you how things will be down the line, we will need every advantage to maintain our market share in China," he said. "But right now, well, we are quite pleased."

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