Globalization: How Germans and Americans Can Help Shape Global Systems
As prepared for delivery.
Prof. Junker, Chancellor Frost, it is a pleasure to visit Heidelberg. Over the years, the citizens of your city have been very gracious to many, many Americans. We thank you for being such good neighbors to USAREUR service members and their families. We thank you for your hospitality to the hundreds of thousands of American tourists and students who have visited and studied in Heidelberg. Mark Twain came for an afternoon and stayed for three months as he struggled to learn what he called that awful German language. Thank you for your patience. Heidelberg is known for its beautiful old town and romantic scenery, not necessarily as a mecca of globalization, but the fact is that it has been a crossroad of cultures since 1386 when the University was established here, the first in Germany. Over the centuries, advances in communication, technology, and transportation have linked Heidelberg to people and institutions around the world in many different ways.
So globalization, the topic of your conference, is itself not a new phenomenon, although the pace of global economic change in recent decades has been breathtaking. The world is more tightly interlinked than ever before. Today, in the United States, an American consumer might pick up the telephone to seek computer support and be talking to someone in Costa Rica. His accountant might email his financial records to India for preparation of his income taxes. His doctor might send his medical records here to one of Heidelberg’s world-renowned clinics for diagnosis.
With our world changing in such ways, the challenge you have set for yourselves over the next two days is ambitious. The decline of economic and geographic distances, the simultaneous increase in economic integration, and the enormous advances in technology that we have experienced over the past three decades have certainly affected all aspects of our lives. The full implications are yet to be known.
I am not an expert on globalization in all of its forms. I do, however, have 45 years of experience in manufacturing.
This evening, I think the most useful input I can make to your discussion is to give you a business take on the challenges and opportunities of globalization from my perspective as a businessman. I would like to start by using the Timken Company as a case study.
The story of the Timken Company started in the 19th century – at the beginning of a massive wave of globalization that brought hundreds of thousands of immigrants to America’s shores. In 1838, my great, great-grandfather left his farm in northern Germany and took his family of six young children to America. My great-grandfather was one of those children. He was seven years old. At 16, he apprenticed himself to a master wagon maker. He went on to become a nationally recognized carriage builder -- and an inventor. In 1895, as chairman of the National Carriage Builders Association, he was chosen to judge the first race of the horseless carriage -- otherwise known as the automobile -- in the United States. When he returned from that race in Chicago, he told his 25 year-old son, my grandfather, that the automobile was the future. They developed and patented the first tapered roller bearing and sold the first tapered bearing equipped axle to an automobile producer in 1900 – again during another massive wave of globalization.
One hundred and six years later, the Timken Company has operations in 27 countries, 27,000 employees, and sales of over $5 billion. They are still doing bearings but as machines shrink in size and increase in complexity, they demand more customization. Timken's products show up in rugged, high-performance machines such as trucks and airplanes, as well as in ultra-small, high-precision niches such as medical devices and NASA spacecraft. The Timken Company knows how punishing the ups and downs of the industrial economy can be. Many of the world’s largest manufacturers are their customers. They feel every bump in the road.
Timken was not the only company to stake its fortunes on the new automobile industry. How did they survive when others failed? By being flexible and innovative.
At the beginning of the 1980s, we saw opportunity. The United States was emerging from a period characterized by what has been referred to as a national malaise. Economic growth was stagnant for much of the seventies; both inflation and unemployment were high. With the election of President Reagan, this picture began to change. The Reagan era tax cuts put more money into the hands of consumers and gave businesses the incentive to grow.
During my time at the Timken Company, we decided to take advantage of these changes. In order to be more competitive both within the United States and abroad, in 1985, we invested $450 million -- two-thirds of the company’s net worth at the time -- to build the only completely new alloy steel plant in the U.S. since World War II. We applied state-of-the-art manufacturing and control processes. Just after that plant opened, there were seven hours of labor in each shipped ingot. Today it's less than one labor hour per ingot.
We also started transforming our management culture. We moved to a smaller, flatter hierarchy. That meant that workloads increased. Scrutiny of performance became more intense. Raises were no longer automatic. And yes, job security was less certain. The company’s embrace of lean manufacturing was also a force for cultural change. We became more open to ideas from the outside and empowered more people on the inside.
The changes that the Timken Company initiated paid off. The company is doing well despite the difficult economic and competitive environment. It adapted; others didn’t. In some sectors, companies were too comfortable with the status quo of maintaining large workforces and producing the same product year after year regardless of changes in the demand. This was the story of the auto industry in the 1980s that refused to recognize the changes in automobile technology coming from Europe and Japan. It is also the story of the steel industry, where the large factories of the past became too expensive to operate and too inflexible at changing product. In these cases and others, companies made the wrong choices or made no choices at all.
In steel, leaner, more efficient mini-mills, in addition to increased demand, have emerged and brought the industry back to health. The automobile industry’s problems have continued. It is not yet clear how the industry will look in the future.
Manufacturers have had to develop strategies to respond to the opening of the world markets to increased amounts of trade. Today our competitors are not from the next state. They are from all over the world. Fortunately, the flip side of that coin is that our customers may be anywhere in the world as well. At the Timken Company, we proceeded on the assumption that there will be plenty of business if we are very, very competitive. Our approach is customer-centric. We make our value proposition so important to our customers that they can’t prosper without us.
"Go where the customer is." That has been the company philosophy from the very beginning. In 1909 we licensed manufacturing in Great Britain in order to go after potential customers in Europe. During the 1920s, we established an assembly operation to supply Canada, bought a majority interest in the licensee in England, and set up shop in France. While many US manufacturers were grappling with the reality of surviving global competition born of a world industrial revolution, the Timken Company capitalized on something its founders saw coming even before the first industrial revolution matured at the turn of the century -- something that has gone beyond the globalization of markets to manufacturing strategies. The same philosophy drives the company today. The global marketplace today is more competitive than at any time in history -- and abounding in opportunity.
Today when I look ahead, there is one element I think we can count on. That is growth. The people of the world have come to realize that economic growth, not cutting the pie into smaller pieces, is the only way to satisfy mankind’s desire for a better life. Growth of the world economy will be greater than we expect. The demand for goods will be greater. People want to increase their own prosperity and live at a higher standard of living.
This cannot be accomplished with yesterday’s workforce. Today everyone needs to be able to think for a living. Today, workers must take responsibility for managing their own career. This means developing a portfolio of skills, and requires a commitment to building skill levels through continuing education. The ability to adapt and change to do many different jobs is paramount.
Enabling workers to manage their own careers has made the United States economy more flexible as a result. Workers have been able to transition from weaker industries to stronger ones. For instance from World War II through the 1980s, the defense industry was one of the strongest in California. With defense spending cutbacks due to the end of the Cold War, the industry collapsed. Unemployment rose but within a few years had declined to pre-1990 levels. Why? Because the electrical engineers and computer specialists from the defense industry were able to find jobs in the rapidly growing technology sector.
Here is another story: in the late 1980’s, the Xerox Corporation closed an electronics plant in Rochester, New York. The local press expected the economy to sink into recession. There was initially some dislocation and hardship, of course. But a local university professor followed the subsequent careers of the employees who had lost their jobs. His findings: ten years later, due to new businesses started by many of these former employees, more jobs were created in the Rochester area than would have been the case if the Xerox plant had remained open.
The Timken Company also educates employees on what is happening in the business. We have increased internal communications efforts so that people understand the situation clearly and react accordingly. Defending the status quo is a losing strategy at Timken. The world is a small place. Something that goes on here in Germany today can have as much influence as something that takes place in Canton, Ohio.
We think it is important to make sure that our employees knew the importance of trade to their jobs. We want them to know how much of what they make ends up or starts out as raw material overseas. Specific examples in newsletters, bulletin boards, and Intranet sites have an important ripple effect in influencing public opinion. That’s something I believe very strongly in – the importance of developing multiple connections between people to ensure that we do not lose sight of our common goals. Globalization creates and fosters these broad social networks.
In a nutshell, these are the lessons we have learned: Productivity increases are a requirement. Market-oriented new product development is a must, together with commensurate quality improvement. Lower costs must be achieved. Continuous improvement is mandatory. Rapid change is a constant.
Overall, the U.S. experience illustrates the benefits of openness and competition. The American economy is strong because it is built on openness – openness to new ideas, to new investment and different ways to invest, to trade and to innovation. This has always been our trump card. It has forced us, however, to be flexible and to adapt, to become a richer country, not only economically, but also as a society.
Adjusting to change is never easy. Periods of rapid globalization such as the one we are going through are inevitable but with vigilance, change can be managed and molded. To make sure that globalization is a positive force, countries around the world must abide by the rule of law and an agreed-on set of principles.
In the United States, the Securities and Exchange Commission, the Federal Trade Commission, anti-trust laws, labor unions, charities, and countless other agencies and organizations keep the American economic system in check. In Germany and within the EU, similar transparent mechanisms exist. We need systems in place worldwide, to facilitate the movement of goods and services globally. In order to continue integrating the world economy – and stem the movement toward protectionism -- a serious effort needs to be made to save the WTO’s Doha Round.
While bilateral or regional free trade agreements might provide a tempting, short-term fix, it can in no way replace the benefits of a comprehensive global, multilateral free trade system.
The most effective method for generating new, high-quality jobs, and higher living standards is to develop the skills and technologies that promote economic competitiveness. Business and government both have a responsibility to provide first-rate education and training opportunities to keep its workforce competitive. We need individuals who can tackle the challenges and exploit the advantages of globalization. Governments around the world must also continue to strive for opening their markets and support education systems that will allow their citizens to be part of this dynamic global economy. They also need to unleash the potential of businesses -- through tax cuts and less restrictive labor regulations. These things will be just as essential to ensuring U.S. and European prosperity in the future, as they are today.
Our pro-growth policies have made a substantial impact on the U.S. economy. In the last 5 years, real disposable personal income has grown by nearly $1,900 per capita. Home ownership has reached an all-time high. Productivity is growing at the fastest rate in nearly 40 years. Over the past 28 months, America's entrepreneurs have created more than 4.2 million new jobs. The unemployment rate is 5.0 percent. That's lower than the average rate of the 1970s, 1980s, and 1990s. These policies have helped us achieve a growth rate of 3.6 percent over the past year, more than three times that of Europe and nearly twice that of Japan. Inflation has been non-existent. And our unemployment rate is roughly half of the unemployment rates in Germany and France.
In Germany, we know that economic policies and issues connected to biotechnology, chemicals, energy and the environment have generated much discussion and debate. In both of her visits to the United States in the past nine months, Chancellor Merkel has focused on innovation. Certainly, these and many other areas are ripe for U.S.-German cooperation. Our two countries have and continue to make tremendous contributions. Germany and the United States face similar issues and we have much to learn from each other.
Globalization continues to challenge us all to be more competitive and innovative. But at the end of the day we can only fully enjoy the opportunities and prosperity an integrated world economy brings if we have the tools to take advantage of them. As Thomas Friedman says of the world we live in, "The world is being flattened. I didn’t start it and you can’t stop it, except at great human cost to human development and your own future. You can flourish in this flat world, but it does take the right imagination and the right motivation."
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Updated: June 2008