inefficiency -- 7/12/22
Today's selection -- from Guns, Germs, and Steel: The Fates of Human Societies by Jared M. Diamond. Japanese and German industries are not more efficient than American industry in the aggregate:
"We Americans often fantasize that German and Japanese industries are super-efficient, exceeding American industries in productivity. In reality, that's not true: on average across all industries, America's industrial productivity is higher than that in either Japan in Germany. But those average figures conceal big differences among the industries of each country, related to differences in organizations -- and those differences are very instructive. Let me give you two examples from McKinsey case studies on the German beer industry and the Japanese food-processing industry.
"Germans make wonderful beer. Every time that my wife and I fly to Germany for a visit, we carry with us an empty suitcase, so we can fill it with bottles of German beer to bring back to the United States and enjoy over the following year. Yet the productivity of the German beer industry is only 43 percent that of the U.S. beer industry. Meanwhile, the German metalworking and steel industries are equal in productivity to their American counterparts. Since the Germans are evidently perfectly capable of organizing industries well, why can't they do so when it comes to beer?
"It turns out that the German beer industry suffers from small-scale production. There are a thousand tiny beer companies in Germany, shielded from competition with one another because each German brewery has virtually a local monopoly, and they are also shielded from competition with imports. The United States has 67 major beer breweries, producing 23 billion liters of beer per year. All of Germany's 1,000 breweries combined produce only half as much. Thus the average U.S. brewery produces 31 times more beer than the average German brewery.
"This fact results from local tastes and German government policies. German beer drinkers are fiercely loyal to their local brand, so there are no national brands in Germany analogous to our Budweiser, Miller, or Coors. Instead, most German beer is consumed within 30 miles of the factory where it is brewed. Therefore, the German beer industry cannot profit from economies of scale. In the beer business, as in other businesses, production costs decrease great with scale. The bigger the refrigerating unit for making beer, and the longer the assembly line for filling bottles with beer, the lower the cost of manufacturing beer. Those tiny German beer companies are relatively inefficient. There's no competition; there are just a thousand local monopolies.
"The local beer loyalties of individual German drinkers are reinforced by German laws that make it hard for foreign beers to compete in the German market. The German government has so-called beer purity laws that specify exactly what can go into beer. Not surprisingly, those government purity specifications are based on what German breweries put into beer, and not on what American, French, and Swedish breweries like to put into beer. Because of those laws, not much foreign beer gets exported to Germany, and because of inefficiency and high prices much less of that wonderful German beer than you would otherwise expect gets sold abroad. (Before you object that German Löwenbräu beer is widely available in the United States, please read the label on the next bottle of Löwenbräu that you drink here: it's not produced in Germany but in North America, under license, in big factories with North American productivity and efficiencies of scale.)
"The German soap industry and consumer electronics industry are similarly inefficient; their companies are not exposed to competition with one another, nor are they exposed to foreign competition, and so they do not acquire the best practices of international industry. (When is the last time that you bought an imported TV set made in Germany?) But those disadvantages are not shared by the German metal and steel industries, in which big German companies have to compete with one another and internationally, and thus are forced to acquire the best international practices.
"My other favorite example from the McKinsey reports concerns the Japanese food-processing industry. We Americans tend to be paranoid about Japanese efficiency, and it is indeed formidable in some industries -- but not in food-processing. The efficiency of the Japanese food-processing industry is a miserable 32 percent that of ours. There are 67,000 food-processing companies in Japan, compared to only 21,000 in the United States, which has twice Japan's population -- so the average U.S. food-processing company is six times bigger than its Japanese counterpart. Why does the Japanese food-processing industry, like the German beer industry, consist of small companies with local monopolies? Basically, the answer is the same two reasons: local taste and government policies.
"The Japanese are fanatics for fresh food, A container of milk in a U.S. supermarket bears only one date: the expiration date. When my wife and I visited a Tokyo supermarket with one of my wife's Japanese cousins, we were surprised to discover that in Japan a milk container bears three dates: the date the milk was manufactured, the date it arrived at the supermarket, and the expiration date. Milk production in Japan always starts at one minute past midnight, so that the milk that goes to market in the morning can be labeled as today's milk. If the milk were produced at 11:59 P.M., the date on the container would have to indicate that the milk was made yesterday, and no Japanese consumer would buy it."