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A study by the McKinsey Global Institute recently examined labor productivity in Germany, Japan, and the United States in nine representative manufacturing industries: autos, auto parts, metalworking, steel, computers, consumer electronics, processed food, beer, and soap and detergent. Adjusted both for differences in product quality and for fluctuations in the business cycle, the results are illuminating—not only for the facts they debunk or establish, but for the explanations that lie beneath them. The inescapable conclusion: global competitiveness is a bit like tennis—you improve by playing against people who are better than you.
Several key findings emerged from our research:
Japan leads in five industries: autos, auto parts, consumer electronics, metalworking, and steel.
The US leads in four—computers, processed food, soap and detergent, and beer—and has closed much of the gap in autos.
Remarkably, Germany leads in none and is a distant third in six—including autos and auto parts, where it is often cited as exemplary.
Because more Japanese are employed in producing food than in steel, autos, auto parts, and metalworking combined, the weighted average of Japanese worker productivity across these nine case studies is actually lower than that in the US and only a little higher than Germany’s. With US worker productivity used as an index of 100, Japan measured 83; Germany, 79.
Exhibit 1 presents an overview of these comparisons. Additional detail is provided in the nine individual industry summaries (see pp. 32–40).
Some of the individual industry productivity gaps are surprisingly large. Japan still leads the world in steel productivity, by almost 50 percent. Productivity in the US food industry tops Japan’s by nearly 70 percent. And the German beer industry, even adjusted for differences in quality, trails that of the United States by more than 50 percent.
Such disparities are worth noting. With technological knowhow and capital freely mobile between Germany, Japan, and the US, and with their workers enjoying similar levels of educational attainment and health, it would seem reasonable to expect that by 1990—45 years after the end of World War II—productivity in industries in these three countries would be close. To understand why that is not the case—and to discover whether the large productivity gaps offer any opportunities for the laggards to catch up—we investigated the causes of the productivity differences within each of our nine industries.
Conventional explanations, such as different manufacturing technologies and economies of scale, do play some role in explaining the gaps in metalworking, steel, food processing, and beer. But elsewhere these factors do not go far in accounting for the gaps. Nor can the differences be attributed to the education and skill of front-line workers, which are more or less equal across the three market economies. Nor does the cost of raw materials—which varies little from one country to another—have much effect. High productivity, it seems, flows chiefly from the ability of managers to invent new and ever more efficient ways of making products and from engineers’ proficiency in designing products that are easy to make (see Exhibit 2).
Whether in the food industry in the US or the auto industry in Japan, managers and engineers do not arrive at these innovations because they are smarter, work harder, or have a better education than their peers. Rather, they do so because they must. They are subjected to intense global competition, where constantly pushing the boundaries of productivity is the price of entry—and of survival.
The converse is equally true. Most of the lower-productivity industries have been protected by governments from the rigors of global competition. The nine industries in the survey speak with one voice: global competition breeds high productivity; protection breeds stagnation (see Exhibit 3 and Exhibit 4).
The degree of "global exposure" depends on the laws and regulations governing trade and investment, and on the structure of the market for corporate control. Of the three countries, the US was the most exposed to trade, transplants (foreign direct investment), and foreign mergers and acquisitions. Although the Japanese heavy manufacturing and consumer electronics industries are not significantly exposed at home through trade or the capital markets, they are substantially exposed in other markets through trade and foreign direct investment.
The low-productivity Japanese manufacturing industries, by contrast, have virtually no exposure to global competition. The same is true of Germany, for whose manufacturers competition is largely confined to Europe. The European Community’s voluntary restraint agreements with Japan provide substantial protection for the automotive and metalworking industries, for example. In addition, procedural barriers make transplants difficult to establish in traditional industries in Germany. And finally, the shareholdings and voting-right proxies of the main banks in Germany result in a capital market that is virtually closed to foreign mergers and acquisitions. As a result, German manufacturers primarily compete regionally, not globally. The pressure to innovate is low.
What of the innovations themselves? The mechanism for transferring productivity improvements from company to company and nation to nation is significant. Foreign direct investments—transplant factories—play the pivotal role in moving innovations around the world. In fact, foreign direct investment has been far more powerful than trade as a force for improving productivity, especially in Germany and the US.
Transplants from leading-edge producers have several important influences. They:
directly contribute to higher levels of domestic productivity;
prove that leading-edge productivity can be achieved with local labor and many local inputs;
put competitive pressure on other domestic producers; and
transfer knowledge of best practices to other domestic producers through the natural movement of personnel.
Exhibit 5 compares the impact on productivity of transplants and trade. Another characteristic of foreign direct investment is that it has provoked less political opposition than trade because it creates jobs instead of destroying them. This makes it likely to grow faster than trade in years to come.
Japanese automobile assembly transplants in the US have been important in stimulating US producers, especially Ford, to improve their productivity. Computer transplants from the US have had a similar impact in parts of Europe. With their substantial production presence established right from the beginnings of the industry and building up to a production share as high as 56 percent in 1990, they are largely responsible for the fact that Germany’s productivity in computers is nearly equal to that of the US and Japan. Furthermore, multinational soap and detergent companies, including Colgate-Palmolive, Procter & Gamble, and Unilever, have substantial production facilities in almost all markets, rendering national boundaries virtually irrelevant.
While productivity gaps point to real opportunities for trailing industries to learn and adopt best practices, they also point to a profound competitive challenge. Big differences in productivity in international industries mean big opportunities for those companies that can achieve high productivity levels. Using foreign direct investment, such leading-edge global producers could not only take huge market share and profits from local industries, but actually raise standards of living in the host countries. Their higher productivity eventually translates into higher wages, better jobs, and increased job security for workers in the transplant factories and the surrounding areas.
Government protection, and even local consumer loyalty, are not durable foundations for long-term economic health or the survival of unproductive regional companies. Eventually the battle will be won by the most productive.