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Seville
March 27, 2003

Drivers of
Productivity
Performance in
France and
Germany
Presentation at the JRC Enlargement Project
Workshop

1
Executive Summary

• Since the mid-1990s Germany and France are no

longer closing the productivity gap to the U.S.
• The future standard of living increasingly depends
on high productivity growth
• Reaching higher productivity growth is possible for
France and Germany: Business and technology
innovations are the key to success
• Smart regulation is the prerequisite for the rapid and
broad diffusion of innovation
• In the course of the 1990s, improvements in the
regulatory environment had a very positive impact
on productivity growth
Policy makers
and business leaders
need to act!

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The project was conducted by the McKinsey Global Institute and the
offices of McKinsey in France and Germany

• Identification of the drivers of and barriers to productivity growth and

Objectives productivity differences in Germany and France compared to best
practices (mostly the U.S., but also the U.K. and Japan)

• Approach combines McKinsey's practical experience as a top

Methodology management consulting firm with academic rigor and breadth of
economics
• Labor productivity defined as output (real value added or physical
output) per hours worked
• Detailed analysis of six sectors: Telecommunications, Retail Banking,
Automotive, Road Freight, Utilities, Retail Trade

Project
• Team of French and German consultants
organization • Supported by the McKinsey Global Institute - the economic "Think
Tank" of McKinsey
• Academic Advisory Board: Olivier Blanchard (MIT, Cambridge),
Martin Baily (Institute for International Economics, Washington),
Hans Gersbach (University of Heidelberg), Monika Schnitzer
(University of Munich), Jean Tirole (University of Toulouse),
Robert M. Solow (MIT, Cambridge)
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Weak development of labor productivity stiffles economic growth in
France and Germany
CAGR

USA France Germany

3.1
GDP* per 2.1
1.3 1.5
capita 0.6 0.8

Labor
productivity 2.0 2.1
1.1 1.5 1.1 1.5
(GDP* per
hour worked)

Hours 1.1 1.0

0.2 0
worked
per capita**
-0.8 -1.3
1990 - 1995 - 1990 - 1995 - 1991 - 1995 -
1995 2000 1995 2000 1995 2000
* Real
Source: University of Groningen and The Conference Board: GGDC Total Economy Database, 2002

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For the first time since WWII, the gap in labor productivity
to the US increased
PRIVATE SECTOR LABOR PRODUCTIVITY*, 1950 - 2000
Index 100 = US-Level

Percent
110

100 US
France
90
Germany**
80

70

60

50

1950 54 58 62 66 70 74 78 82 86 90 94 98 2000

* Total economy, excluding public administration, defense, compulsory social security, education, health, social services
** West Germany until 1989, total Germany thereafter
Source: University of Groningen and The Conference Board: GGDC Total Economy Database, 2002; http://www.eco.rug.nl/ggdc; OECD; BLS; INSEE; MGI

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Productivity improvements are the foundation for economic
growth and employment

Economic impact Economic

Economic
• Higher economic growth
growth and
and
income* employment
employment
• Greater demand
Distribution of for consumer and
surplus investment goods
• Customers – In the same sector
(lower prices) – In other sectors
Higher surplus • Employees
• Usually positive
• Higher value (higher salaries) impact on employ-
added • Share holders ment
Productivity • Lower labor/ (higher profits)
growth in capital costs
company X

* Impact is highest when displaced input factors are redeployed

Source: MGI

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High productivity growth needed to maintain standard of living in
France and Germany

• Alarming productivity performance in

the 1990s in France and Germany
• Productivity growth is the foundation
for economic growth and employment
• The importance of productivity growth
rises in the light of an aging
population

• Future standard of living

depends on high productivity
growth
• Drivers of and barriers to
higher productivity growth
need to be better understood

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Agenda

• Sector Results
– Telecommunications
– Retail Banking
Drivers of and barriers – Automotive
to higher productivity – Road Freight
growth need to be – Utilities
better understood! – Retail Trade

• Conclusion for policy makers

and business leaders

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Sector analyses help to understand the drivers of and barriers to
higher productivity growth France
Germany
Labor productivity growth Productivity gap to US, 2000** US
CAGR* Percent of US level
10.0 -38
Fixed
11.9 -13
Telecom
27.5 106
Mobile
26.5 45
5.5 -8
Retail banking -26
7.5
5.0 -15
Road freight
5.2 -17
7.8 -28
Automotive -31
2.2
Electricity 1.3 -20
generation 5.2 -27
Utilities
Electricity 3.3 -12
distribution 5.3 -4
0.2 7
Food -14
-0.5
Retail trade
Apparel 1.7 -15
1.4 -29
* Telekoms and road freight 1992 - 2000; automotive and utilities 1992 - 99; banking 1994 - 2000; retail 1993 - 2000
** 1999 for automotive and utilities
Source: MGI analysis

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 TELECOMMUNICATIONS
Quality of regulation determines productivity growth
CAGR
in mobile communications x%
1992 - 2000
France
Germany
Labor productivity performance in US
mobile telecommunications
Index 100 = US-Level 2000
Mobile telephony drives
productivity growth in
206 telecommunications
200
+27.5%
Quality of regulations is key!
145 US market heavily fragmented as
a result of regional licensing
+26.5%
100 100 High productivity gains in fixed
line telecommunications as a
+14.0% result of liberalization and
privatization

Telecommunications was one of

the sectors with the highest
productivity growth in all
1992 2000 economies

Source: MGI

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 RETAIL BANKING
Labor productivity in German retail banking has been growing rapidly,
but still lags significantly behind the US and France
Labor productivity growth in Germany Labor productivity level, 2000
CAGR 1994 - 2000 Index 100 = US level

Total 7.5 100 92

74
Business and
technology 2.5
innovation*
US France Germany
Consolidation 1.5
Despite rapid labor productivity growth,
Demand per 2.1 Germany still lags behind the US and
customer France
• Fragmented industry compared to France
Other 1.4 • Lower demand per customer than in the
US

German banks need to change gear

• More demanding share holders
• Consolidation through M&A, centralization or outsourcing;
Unbundling of the value chain and specialization
• Introduction of innovative products and services
* Higher share of IT based channels, e.g., Internet, Callcenters and ATMs; Back office automation; shift in payment mix
Source: MGI

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 AUTOMOTIVE
The German automotive industry needs to re-focus their
CAGR
efforts towards improving productivity x%
1996 - 1999
France US
Germany Japan
Labor productivity performance
Index 100 = US level 1999*
Differing reactions in Europe
• France focuses on rigid process
High competitive pressure in improvements
the early 1990s • Germany concentrates on developing an
• Stagnating markets attractive product portfolio and can even
• Increasing threat from Japanese increase production
car manufacturers
Germany falls behind
120 • Within only three years, France closes the
+5.3%
100 30% productivity gap to Germany and is
100
95 now slightly ahead
80 +1.8% • Both countries still face a 30% productivity
71 gap to the US and Japan
60 68
+1.5% The German automotive industry needs
40 to re-focus their efforts towards
+14.7% improving productivity
20 • German car manufacturers need to find
the balance between an attractive product
0 portfolio and improved productivity
1992 93 94 95 96 97 98 1999

* Interpolated between 1992, 1996 and 1999

Source: INSEE, Statistisches Bundesamt, US Census Bureau, Census of Manufacturers Japan, MGI

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 ROAD FREIGHT
After the liberalization of the road freight industry,
CAGR
companies now need to shift gear x%
1994 - 2000
France
Germany
Labor productivity performance US
in ton-km per hour worked*
Index 100 = US level 2000
Companies need
Deregulation to materialize further
spurs the sector growth potential
dynamics +1.2% • Increased competi-
100
• Deregulation of mar- 300 100 tion from Eastern
ket access and fixed 91 +5.0% European companies
price lists; relaxation 85 expected
of capacity restrictions 83 • Levers for producti-
• Increase in cross- +5.2% vity improvements:
border demand continued consolida-
• Increase in competi- tion and introduction
tive intensity of corresponding IT
58
55 tools
• Result: Higher aver-
age size of trucks,
longer hauls, higher
productivity
1000
1992 94 96 98 2000

* Adjusted for time-definite and guaranteed services based on price differences

Source: DAEI-SES, DIW, BAG, ENO, VIUS, CFS, MGI

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Changes in the regulatory environment lead to labor
productivity growth in the utilities sector
Electricity generation –
labor productivity growth
CAGR 1992 - 1999
UK 7.0
US 5.5
Germany 5.2
France 1.3
Liberalization and changes in
the regulatory environment led
to higher productivity growth
• Radical reforms in the UK led
to highest productivity growth
• France protects their utilities
from competition and falls behind
Source: MGI
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UTILITIES
Electricity distribution –
labor productivity growth
CAGR 1992 - 2000
7.8
5.9
5.3
3.3
Smart regulation needs to
enhance competition in
Germany and France
• Fair and transparent network
access for third party providers
required
• Productivity oriented and trans-
parent network pricing needed
 UTILITIES

POTENTIAL IMPACT OF INDUSTRY FRAGMENTATION EXAMPLE: UTILITIES

ON IT SPENDING LEVEL

Electricity production, 1999 Number of players, IT spending, 2000

TWh 2000 EUR millions

~ 900 4,322
505
472

870

~5
Germany France Germany France* Germany France*

* This refers mainly to EdF, which has a market share of over 90%, and a few small local players that were included in the study cited.
Source: PAC, MGI analysis

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 RETAIL TRADE
Weak productivity growth in French and German retail
trade compared to the US

Labor productivity levels 2000

Index 100 = US level Both France and Germany demonstrate
weak labor productivity growth compared
100 107 to the US – for different reasons
86
• France: losing ground
– High capacity utilization as a result of
strict zoning laws
– Zoning laws also limit market access for
US France Germany innovative competitors

Labor productivity growth • Germany: falling further behind

CAGR 1993 - 2000 – Overcapacities as a result of ownership
structure: limited ability to consolidate
1.6 In the meantime, labor productivity
0.2 grows rapidly in the US as a result of
innovative business processes
-0.5
• Cooperative Supply Chain Management
• Innovative merchandise management
US France Germany

Source: MGI

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Agenda

• Sector Results
– Telecommunications
– Retail Banking
Drivers of and barriers – Automotive
to higher productivity – Road Freight
growth need to be – Utilities
better understood! – Retail Trade

• Conclusion for policy makers

and business leaders

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Innovation is the engine for sustainable productivity growth

In a competitive environment ...

• … leading companies develop new (high

value-added) products, services, or Sustainable
Innovation business processes to improve profitability source for produc-
• … competitors adopt these innovations to tivity improve-
maintain or improve market share and ments
profitability

• ... market players consolidate until they Limited source for

Consolidation have reached optimum economies of productivity
scale improvements

Source: MGI

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Inappropriate regulatory environment stiffles the diffusion and
leverage of innovation
Sources for diffe-
Management rences in produc-
levers tivity performance Key inhibitors Political levers

Lower diffusion Distortion of Regulatory

of innovation competition policies

Innovation

Lack of scale
Lack of Incentives for
to leverage
demand labor
innovation

Distortion of
Consolidation Lack of competition/ Regulatory
consolidation lack of privati- policies
zation

Source: MGI

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Smart regulation needs to enable the diffusion of innovation

Examples of still existing

Goals of smart Examples of successful barriers from the analyzed
regulation change sectors*
• Free choice of utilities provider • Import tariffs in the automotive
Level playing field • Removal of fixed price lists in in industry
for competition the road freight sector • Strict zoning laws in retail trade**
• Removal of import quotas in the
automotive industry

Market and produc- • Open market access for • Inappropriate regulation of

tivity oriented competitors to the long distance network access and pricing in
regulation of telephone network utilities
network sectors

• Privatization of • "Patient" shareholders

Shareholder telecommunications incumbents – Fragmented ownership struc-
pressure tures; often lack of productivity
orientation (e.g., banks)
– Cross-Holdings
* Regulation in many of the selected sectors was successfully improved in the course of the 1990s. Further barriers can be found in other sectors
** Particularly in France
Source: MGI

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Reaching higher productivity growth is possible!

Policy makers
• "Smart Regulation" works!
It needs to receive highest priority on the agenda
of policy makers
• Willingness to work and private consumption may
not be further undermined

Business leaders
• Develop broader perspective on productivity and
exploit all opportunities
• Understand innovation as the sustainable source
of productivity growth and leverage it to the fullest
extent
• Enhance consolidation where needed

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