Sunday 24 April 2016

Can labor laws hollow-out software competencies: the case of Mercedes-Benz

The effect of legal provisions in enhancing or inhibiting innovation is often difficult to show. An interesting case where it may be able to
discern such a relationship was discussed in a piece that appeared recently on There, it was argued that German labor laws and rules may materially affect the economic viability of no less than the Mercedes-Benz car company (part of Daimler AG) to continue to maintain its software development capability in Germany, rather than outsourcing such software development activities abroad. That cars are increasingly aggregations of software to move people efficiently, safely and increasingly, enjoyably, is evident to all. As was noted in The Economist, citing Gabriel Seiberth of Accenture, in a piece last year--
“[a] high-end car, for instance, has the digital horsepower of 20 personal computers and generates 25 gigabytes of data per hour of driving ….”
These kind of data mean that software expertise is essential to the success of a Mercedes-Benz car, and that requires that the company engage leading software personnel to help keep its competitive advantage. The question is not whether the company will increase the number of software-related jobs, but how many of these software personnel will be German-based and, more broadly, whether the company can continue to foster such capabilities and know-how within Germany. The claim being made by the company is that local German labor laws are too restrictive in this regard. In particular, it is argued, in the name of the well-being of employees, German labor rules provide that a daily work shift cannot exceed 10 hours and there must be an 11-hour break before the employee’s next shift. Presumably, this requirement derived from a time when most of the skilled labor at the company was engaged in more of the heavy physical aspects of automobile production.

However, such labor rules, and the requirement that labor representatives must be informed about the extent of the company’s use of third-party contractors, make it “cumbersome” for the company to engage third-party software contractors. The claim by the company is that the processes that derive from this requirement “makes life too bureaucratic”. Not by accident, the company has approximately 3,500 R&D and IT staff located in Bangalore, India and another 200 or so in Silicon Valley. Indeed, Bangalore has become the company’s main digital engineering center, engaged in such activities as digital design and crash test simulation.

From the labor relations point of view, the tension rests between the interest in ensuring worker protection, on the one hand, and the need for more flexible work arrangements to meet the requirements of software R&D, on the other. Even taking into account the possibility that company management may be spinning the narrative to some extent to obtain worker concessions, the issue raised seems genuine. To what extent will continuing adherence to traditional models of industrial employment have a deleterious effect on the ability of a standard-bearer of German industry to maintain its competency in software and related 21st century innovation capabilities. Mercedes-Benz will find a way to obtain the necessary software skills; the question is to what extent this will take place within Germany.

The challenge so posed recalls the discussion in America in the wake of the decline of US manufacture. On the one hand, relying on China as the ultimate assembly factory certainly has resulted in less expensive products. On the other hand, some have claimed that this has led to a hollowing-out of the skills needed for the US to preserve a manufacturing presence, especially at the so-called high end. One wonders whether something like that might be over the horizon for companies such as Mercedes-Benz, where the declining presence of cutting-edge software within its German facilities might negatively affect the company’s design and manufacturing capabilities more generally. After all, software is not just another form of IP to be protected, but it is increasingly the foundation of the know-how that will, quite literally, “drive” the automobile industry.

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