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Outsourcing leery

September 17, 2010

Mechanical engineering is a pillar of the German economy. While machine builders can save costs in the short term by outsourcing production, in the long term, they can hurt themselves and the national economy.

Production hall at Germany's BueMi
Germany's BueMi views quality as competitive edgeImage: BüMi

For years, German industry has faced growing international competition. Emerging markets such as China, India and Brazil have already become big competitors, and a number of African countries could join the fray someday.

The prospect of lower labor costs has led many German machine builders to move parts or even all of their production abroad to stay competitive. But some companies, like BueMi in Gevelsberg near Wuppertal, view the outsourcing trend with skepticism.

BueMi manufactures precision parts, such as axels, shafts, sockets and studs, for machine tools and trains. The company is viewed as one of the "hidden champions" of German industry. Its customers include Thyssen-Krupp, Siemens, Komatsu and Bombardier Transportation.

Maintaining a standard of living

BueMi managing director Frank Mittag has been at the helm of the company for 15 years. He views Germany as a manufacturing nation that relies on a powerful mechanical engineering sector. And it's thanks to the country's competitive manufacturing base that services such as information technology can be easily outsourced. "But if we rely solely on services, we will not be able to maintain our standard of living," Mittag says.

BuMi managing director Frank Mittag
Managing director Frank Mittag warns about being blinded by short-term cost benefitsImage: BüMi

In a high-wage country like Germany, the managing director asserts, there is only one alternative: quality. That means precision, innovation, reliability and longevity. Competing on price isn't an option for Germany.

So while German machine builders can lower operating costs by outsourcing some production, it's important they retain their core competencies at home, according to Mittag.

"If we transfer abroad our innovative production processes and the constructions we need to achieve superior quality and reliability, then we destroy the very competitive edge we need to compete with low-wage countries," he says, adding that it’s also important to have a high-quality supplier network in Germany.

Long-term costs

Mittag sees little sense in establishing a supplier network abroad and investing heavily to trim it for quality. There's a risk of important know-how seeping out. Moreover, the short-term cost advantage of this strategy would only be achieved with long-term disadvantages. "The first costs people notice are from purchasing," Mittag says.

"Other costs like those for quality assurance or production downtimes, processing and marketing are often overlooked in outsourcing projects." Once these factors are considered in the equation, unit production costs rise, he adds.

Worker in machine building company
Other machine builders have become cautious about outsourcingImage: picture-alliance /ZB

BueMi has polled other machine builders that have become more cautious with their international expansion. Many medium-sized companies have established subsidiaries in China, whose operations were quickly replicated by competitors next door. The damage can be huge.

Many attribute the rise of China's auto industry to German mechanical engineering firms that have established production facilities in the country. Know-how transfer is inevitable in such a global economy, but Mittag warns nonetheless that companies outsourcing production in China should need to move cautiously and not be blinded by the short-term cost benefits.

Today, Germany's mechanical engineering sector has a 10 to 20 year lead on its competitors in Asia, according to Mittag. But to maintain that lead, he says, the sector must continue to strive for top quality, which can only be achieved with skilled employees.

"Honesty, decency and conscientiousness," Mittag says, are indispensable because if business is driven only by a near insatiable hunger for higher profits, the quality of work and the products will suffer.

Author: Klaus Peter Weinert (jrb)
Editor: Sam Edmonds