Archive for the ‘service economy’ Category

Fresh from the press: German service economy lags in international comparison

Without changing the new theme of this blog, I want to point out to a new report from the German Institute for Economic Research. According to this report on German exports (abstract in German), the German service sector is lagging in international comparison. Although Germany is still strong in the export of goods, in particular with the automobile and heavy industry, its service share of all exports of 13% in 2005 falls way behind that of other developed countries. According to the institute, this is in particular significant since the economic weight is shifting from the industrial to the service sector. 

I won’t say “I told you so”, but will point instead to this post. ;-) 

As others before, however, the institute sees innovation in R&D and in human capital as the solution to this problem. It still amazes me that these “think tanks” don’t make the connection with the poor service mindset in Germany as one of the key causes of this problem.

Germany is losing its global competitiveness

So far this blog has focused on describing the problems with poor customer service in Germany. Soon I will switch the focus on identifying business opportunities from good customer service. Before I do that though, let me point to some statistics as evidence that the German economy has been negatively impacted by the poor customer service offered in Germany. 

Over the past century, Germany has been able to benefit in the global economy from its strong engineering and product development heritage. This strength has been its competitive advantage in the industrial age. However, we don’t live in the industrial age anymore. 

As described in this post, the majority of developed countries’ gross national product is already derived from services and the majority of employees work in service businesses. Hence, the global competitive advantage depends more on services driven by human-to-human interactions than on engineering or product development. And here Germany lacks competitive advantage. 

That Germany’s economic wealth is declining relative to other countries becomes obvious when comparing its gross domestic product (GDP) per capita with that of other developed countries (see chart below). Germany’s GDP per capita, indexed against the OECD average, declined about ten points over the past decade whereas many developed countries increased their GDP per capita above that average or at least kept it stable.

GDP per capita

Although this decline is driven by several factors, one factor to consider is Germany’s weak competitive position in the global service economy. That weak position is in turn driven by the poor service mindset in Germany. Although this blog doesn’t attempt to fully analyze Germany’s service economy, here are few data points as indicators for that weak position.

Impact of services on GDP
In Germany only 69% of the GDP was derived from services in 2005, in the US it was 81%. Over the past ten years, Germany’s total GDP has been growing 1.9% and its GDP from services has been growing 2.4% annually (compounded annual growth rate). Over the same ten years, US GDP has been growing 5.4% and its GDP from services 5.7% annually. 

Exports of goods AND services
Germany prides itself in being the world’s biggest exporter of goods, even ahead of the US for several years now. However, this statistic reflects only export of goods, it doesn’t include services. And the majority of these goods exports come from auto & heavy industry and chemicals, all areas with strong German industrial heritage. Taking services into account, the picture is not as rosy. In 2005, only 13% of Germany’s total exports were coming from services, in the US that number was 28%. 

Germany’s representation among best global brands
According to the recent ranking of the best global brands 2006 by Interbrand, Germany is represented with nine brands among the top 100 and US with 51. This number difference is less important, but what is more telling is the percentage of brands from service industries. Out of the nine German brands represented, only one, SAP, is from the service industry and that only if you take the broader definition of services, which includes software. On the other hand, over 40% of US companies represented is from the service industries.

Germany vs. USA comparison

As mentioned before, these are only few indicators for the poor German service economy in a global comparison. And, the poor service economy isn’t the only reason for the weak performance of the overall German economy. Probably a more significant driver of the German economy is the relatively low consumer spending, driven partly by low birth rates in Germany since the mid-1970s. As documented in this German research paper, there are 300’000 less children born every year than needed for a sustainable economic progression. This gap leads to declining domestic consumer spending with for example 250’000 less new households being established every year than just ten years ago. Well, this is though a topic for its own blog. 

There is mounting evidence for how the poor service in Germany has been negatively impacting its economy. German politicians and businesses believe, however, that more focus on innovation is the solution to the poor economic performance relative to other developed countries. How about looking at the lack of customer focus and poor service levels as other drivers – and maybe even more significant ones – for the current state? Can you imagine where German economy could be if it would be more competitive in the service area?

Implications for Germany-based companies

In a closed economy, the low customer service levels offered by many German companies may have been sufficient to satisfy the apparently low customer service levels expected by German consumers. In the global economy, however, German companies are competing with foreign companies in Germany and abroad. Foreign companies from service-minded societies like the US or Japan have a clear advantage to better satisfy customer needs and show German consumers what they are missing. 

The German economy has been lagging the economies of other developed nations for a while. Although there are several drivers of this situation, one needs to consider the – in a global comparison – poor service levels that are impacting the German economy. These poor service levels may be one of the reasons for the relatively low share of service jobs in comparison with the US (see charts below).

US employment by economic sector

German employment by economic sector

In the US, 85% of employees work in the service sector, in Germany only about 65%. In the US, the service sector has been the source of most new jobs as industries like health care, consulting, and food service have grown rapidly. In Germany, on the other hand, the slightly growing service sector has not been able to make up for the declining manufacturing jobs.  

According to a Deutsche Bank research, Germany’s GNP per capita has been declining and the decline is expected to continue since Germany missed to develop and follow a consequent growth strategy. Could there be a correlation between only slowly growing service sector and declining GNP per capita?