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A tractor drives past a solar panel in Germany. JOHN MacDOUGALL/AFP/Getty Images) (JOHN MACDOUGALL/AFP/Getty Images)
A tractor drives past a solar panel in Germany. JOHN MacDOUGALL/AFP/Getty Images) (JOHN MACDOUGALL/AFP/Getty Images)

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Canadian firm makes hay while the sun shines - in Germany Add to ...

Arise Technologies Corp. launched in 1996 with the goal of creating Canada's leading solar energy company.

Over the next decade, the Waterloo, Ont.-based company went public on the Toronto stock exchange and secured about $40-million in funding.

But while it had raised some money and had a great deal of ambition, it lacked the means to turn its idea into reality - it had no factory location in mind, much less enough financing to build one.

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That all changed in May, 2006, when a German agency made Ian MacLellan, the founder and chief technology officer of Arise, an offer he couldn't refuse: It would help finance and build the company's first solar factory. For Arise, it meant a fortune in savings. For the Germany Trade & Invest group, it meant adding a new player to its rapidly expanding alternative energy industry - Europe's largest.

A mere 19 months after the offer, a factory in Bischofswerda, a picturesque town in eastern Germany near Dresden, was churning out photovoltaic cells, which convert a free source of energy - sunlight - into electricity. "We couldn't have done this project this fast anywhere else," he say, referring to the generous incentives available to foreign investors.

Since then, the factory, with 150 employees, has added a second production line. A third is coming this year as demand for PV equipment rises at triple-digit rates as alternative energy subsidies roll in and PV costs fall. "Germany has a real commitment to manufacturing quality," Mr. MacLellan, 54, says. "It made real sense to expand here."

Mr. MacLellan is in awe of German industrial efficiency. Indeed, Arise has tapped into a country that is flourishing.

The jobless rate in Europe's largest economy is the lowest since reunification in 1991, with unemployment falling for 24 months in a row. Business confidence remains near record highs thanks to strong exports.

It's a stark contrast to economic woes rippling through the south. Both the German government and the International Monetary Fund recently boosted their forecast for economic growth this year. The country is the world's second-largest exporter and one of the most productive places on the planet.

Some of the reasons for the country's health may be transitory - a weak euro, for one, has helped make Made-in-Germany goods much more competitive when sold abroad.

But plenty of evidence suggests Germany's manufacturing strength has legs. That success makes it a worthy case study for Canada. For one, its army of small and mid-sized companies - known as the Mittelstand - think globally, an approach Canadian firms have not yet embraced. Apprenticeships are widespread, to ensure young people get top-notch, on-the-ground training. Perhaps most importantly, Germans are not ones to rest on their laurels.

In the ultimate symbol of Germany's global prowess, industrial efficiency itself is becoming a key export.

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Several factors explain the country's strength. Germany has diversified its customer base well beyond the United States. China became the country's largest non-European customer at the end of last year, a shift that brings huge benefits for the likes of Bayerische Motoren Werke AG (BMW), Siemens and BASF SE.

As well, the country happens to be producing precisely what the world - and emerging markets in particular - are hungry for. It's not just autos and industrial machinery (though cars are a big part of the story). The country's factories are churning out luxury goods, consumer products, nanotechnology, biotechnology and clean tech.

"German companies are producing high-technology goods and its cars, chemicals and capital goods are exactly the goods that are in demand in China and other emerging markets," said Andreas Rees, chief German economist at UniCredit Bank AG in Frankfurt.

Challenges persist. The euro is on its way back up, a shift that is sure to pressure German and other European manufacturers. Chinese demand could wane, and competition from higher-quality Chinese manufacturers is growing. Demand from southern Europe is shaky. And, like its neighbours, Germany is also facing an aging population and needs to attract immigrants to fill gaps in the labour force.

The country is far from complacent. Confidence is still strong, though it's ebbed from highs earlier this year. Companies large and small continue to go global. At the same time at home, investments in innovation, research and development remain robust.

Diversifying into new markets and finding niches aren't the only reasons for the country's success. Difficult decisions made a decade or two ago are now bearing fruit.

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Germany may be the continent's engine now, but just a decade ago it was the sick man of Europe.

Reunification saw a flood of East Germans move west. The jobless rate spiked to nearly 12 per cent in 1997 and was only slowly drifting down. The economy was stagnating. Manufacturers were fleeing the country to set up lower-cost operations elsewhere.

The country needed to do something - and the route it chose was none too popular. German businesses began to ruthlessly keep a lid on wage increases. And in 2003, Chancellor Gerhard Schroeder introduced a series of social security and labour reforms aimed at making the labour market more flexible and boosting Germany's position in the world market.

First, employers could shorten the work week, and workers could get part of their lost hours paid by the government (a system called "Kurzarbeit," similar to Canada's federal work-sharing program). Second, some unions agreed to flexible hours that vary with demand while salaries are smoothed out. Third, more short-term contracts give companies flexibility to meet demand - sparking growth in temp agencies such as Randstad and Manpower.

"If you put these three together, you are very flexible," said Olaf Wortmann, Frankfurt-based national economist at VDMA, country's body for local machinery and industrial equipment manufacturers. During the last recession, "many companies had fears, but not existential problems. And then they could react all of a sudden to the increase in demand."

The reforms came at a cost. Consumer spending dried up, job insecurity swelled and protests rocked the country. By early 2005, more than 5 million Germans were unemployed and the jobless rate had shot back up past the 12-per-cent mark, eroding the power of unions to negotiate higher wages.

"They were really painful years," said Volker Treier, chief economist at the Association of German Chambers of Industry and Commerce.

Meantime, a flood of German companies off-shored production to Eastern Europe, Russia and the Ukraine - helping German firms lower costs, limit wage gains and become more competitive. Other countries paid the price. Wage restraint helped Germany win market share at the expense of southern Europe, economists say.

By 2006, the country's fortunes began to turn. Labour reforms, years of tepid wage growth and investments abroad had helped Germany regain competitiveness - factors that explain the country's current resiliency, observers say.

German companies today are much more globally focused than their peers, including Canadian firms. It's not just large companies moving abroad; 98 per cent of Germany's 350,000 exporters are small and medium-sized enterprises. A typical small exporter is active, on average, in 16 international markets, according to the DIHK.

Apprenticeships are another reason for Germany's success. Young people typically spend three-and-a-half years on the job, and get qualifications that are valid across the country and for any German company overseas. The program is so successful it explains why the country's youth jobless rate is so low (at 8.1 per cent compared with, say, 44 per cent in Spain) and why other countries like Turkey and Spain are seeking to emulate it, says Mr. Treier.

Training young people and collaborating with universities is spurring innovation at Kuka AG, a robotics maker which employs about 6,000 people. "Students learn and give us ideas around innovation. Also, the students of today are our workers for tomorrow," spokesman Gert Butter says.

Peter Loescher, CEO of Siemens, Europe's largest engineering firm, rattles off reasons for Germany's might: mid-sized companies have been expanding globally for decades; companies collaborate closely with universities and research institutions; Germans produce what the world wants; it has a strong engineering culture, and a flexible labour market.

To that list, Marcus Breitschwerdt adds an openness to adapting. The German president of Mercedes-Benz U.K. and who formerly led the firm in Canada, said "There is this capacity of German decision-makers to look around and to openly take the best from wherever they find it," he said in an interview from Stuttgart. "They are people who support a really open exchange of talent, resources, trade and commerce."

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It's fair to say that Arise owes its manufacturing success to Germany.

When it started out, Arise didn't have a penny of profits or revenue (it is still losing money) because it had no factory. Its first big break on the factory front came in March, 2006, when a German PV magazine carried a story on Arise. It was read by the Germany Trade & Invest team, which decided the ambitious little Canadian company should put down roots in Germany. It tracked down Mr. MacLellan at a PV conference in Hawaii two months later and made its pitch.

The German government agencies had a lot to offer. The biggie was a €25-million ($35-million) grant to cover half of the factory's construction cost. But that's not the only reason Arise chose Germany, Mr. MacLellan says.

The other selling points were help in site selection, an educated work force that did not demand outrageous incomes and, crucially, construction expertise. "We built the factory in eight months," he says. "The Germans understood what we wanted because they had built so many PV factories before."

Germany's cornucopia of incentives have created the world's biggest PV market, measured by installed capacity. (In 2010, Italy and the Czech Republic ranked second and third, with China taking 10th spot.) Germany Trade & Invest says the PV industry invested €19.5-billion in Germany in 2010 alone and that the PV makers located there had sales of €12.2-billion that year. Industry employment reached 107,800 in 2010.

Some of the industry's biggest players - Sovello, First Solar and Sunfilm, among them - have set up shop in Germany. Arise makes all its PV cells in Germany and has no plans for a Canadian PV factory. Its total PV cell production has reached 25 million units, valued at $150-million, over three years.

For the solar industry, Germany may not be sunny forever. There is no doubt the generous "feed-in tariff," the main German subsidy for renewable energy generation is, by design, coming down and will eventually be eliminated. Its phase-out could make Germany a less attractive market for solar energy installations, and hence solar energy companies. The industry hopes that falling subsidies will be more than offset by falling manufacturing costs.

Austerity programs could trim construction grants, like the ones used by Arise to build its PV factory. Finally, China is coming on strong. It is using financial incentives and the lure of inexpensive labour to attract PV companies. Mr. MacLellan says Germany could lose its competitive advantage to China, though he says the "Made in Germany" label gives any product a competitive advantage, allowing it to snag a premium price.

Arise has no plans to leave Germany, however, and its expansion is testament to its loyalty. After all, Germany gave Arise a manufacturing presence that it couldn't build at home.

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