JANNIK SCHILLING

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“The government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.” –Ronald Reagan.

Now that the delusion of a highly advanced, post-industrial service economy is slowly revealed to be a pipe dream in the US, American startups are seizing the opportunity to rebuild a stronger manufacturing base. Europe’s manufacturing industry may appear healthier due to its relative size advantage, but in reality, it is in worse condition. Can European founders rebuild Europe’s manufacturing from its ashes and avoid getting entrapped in Europe’s web of bureaucracy?

Manufacturing in the Ashes

The dominant Western European economic order of the last few decades is breaking down and the global order is changing radically. Countries like Germany have been unable to react adequately, its companies have been stagnant for decades, and its startup outcomes have been mixed at best.¹ While there is still room for founders to step in, European startups often fall for the delusions of EU orthodoxy and we thus need to first face the harsh reality: Europe, and in particular Germany, are deindustrialising at a rapid pace.

A recent study found that “two thirds of component manufacturing companies have already relocated parts of their value creation [out of Germany]”². Volkswagen recently announced that they would cut 15,000 employees for the first time in its 87-year-history and in 2022, the overall chemical production decreased by 12% in one year.

It’s not only Germany. In the UK, the industrial energy price tripled between 2004 and 2021 in nominal terms. Mario Draghi’s recent report acknowledges that the EU has “failings in innovation and productivity” and that there is a need “to restore its manufacturing potential.”³

The two backbones of German manufacturing used to be millions of dynamic companies of the Mittelstand⁴ and large manufacturing businesses with scale and distribution (think Volkswagen, Siemens, Bosch).

These historical foundations of German manufacturing are cracking and the subsidies that used to hold up German manufacturing mainly served incumbents and made innovation for startups much harder.

How did we get here?

The Mittelstand rose from the ashes of the second World War on strong tailwinds: cheap energy, an existing skilled workforce and supply of talented workers through apprenticeship programs, and large markets to tap into. The generations-old companies had to be refounded and good founders could take decisive action to make their companies competitive. Around the 1950 and 1960s, many companies of the Mittelstand were back at producing world-class products and could suddenly sell to much larger markets than ever before on the backs of global markets requiring standardized products of consistently high-quality⁵.

Corporations like Volkswagen benefitted from similar tailwinds and the Mittelstand could grow a few percent every year by supplying them.

Today’s Mittelstand is paralyzed in the face of strong headwinds. These companies are now in their succeeding second and third generations of leadership. Whereas founders used to be able to act fast and decisively, there are now either no successors at all, fragmented families that cannot agree on any decisive action, a professional managerial class drop-in, or PE roll ups taking charge that will not make the Mittelstand companies last more than a generation at best.

The decentralization of the Mittelstand was not what caused its success, but many German elites still believe that decentralizing talent is important to produce wealth in all regions – even if new technologies require scale and concentrated talent. Most important AI work is happening just in the SF Bay Area, other than Deepmind. It takes a shift in perspective to see that German conventional wisdom is destroying startups at scale.

Moreover, European manufacturing incumbents are not in great shape. The Dieselgate scandal cost Volkswagen more than $30 billion, making it the largest scandal in auto industry history⁶. In 2022, Volkswagen’s software division, Cariad, reported a loss of €2.1 billion, and the integration of Android Auto in Volkswagen vehicles was delayed from 2024 to 2027. In 2022, BASF announced plans to “permanently” downsize in Europe and it sold a Dutch production site in 2023, among other measures to avoid extremely high European energy prices.

In an attempt to save its dying industrial base, Europe turned to governmental levers and industrial policy. In typical EU fashion, it used its tools of subsidies, protectionism, and regulation. Instead of producing a robust, dynamic, and competitive manufacturing sector, they ossified incumbents and made them complacent. In turn, these incumbents locked out startups and innovations. As Reagan said, the most terrifying nine words in the English language are: “I’m from the government and I’m here to help”.

Between 2022 and 2024, European governments were paralyzed by the breakdown of its decades-long dependency on Russian gas and exploding energy prices. Without the cheap energy of the 20th and early 21st century, the German manufacturing sector will continue bleeding out. Subsidizing industrial energy prices will not save these companies in the long-term.

Is now the right moment to turn things around? Maybe—it’s definitely one of the toughest questions to answer. But when even the EU, through Mario Draghi, recognizes that Europe is falling behind and that AI might offer an opportunity to turn things around, the time might just be ripe.

Can Founders Rebuild European Manufacturing?

The naive response to established manufacturing companies failing to innovate, and being kept alive by government interventions, would be to imitate them. One could hire a bunch of lobbyists and former EU bureaucrats, build a portfolio of products that are just acceptable, and try to sell them to the EU. However, it’s probably fair to say that founders looking to seize this opportunity cannot aim to become the next Siemens.

Instead, the way to win is to be 10x better and/or 10x cheaper, and to start with small markets that a company can quickly dominate. From there, it can expand to other markets and develop new products over time. This isn’t to say that lobbyists don’t matter, but that it’s both hard and undesirable to try and beat Siemens at the game of regulatory capture. Thankfully, technology enables modern manufacturing businesses to be better and cheaper without resorting to politics.

Today, if someone wanted to build a great manufacturing business in Europe, it might be tempting to set up shop in one of these deindustrializing towns, where tens of thousands of technicians and machinists are readily available and many input factors for mass-scale manufacturing are already in place. I would caution against this and remind the reader that Tesla wasn’t built in Detroit.

The tailwinds and global conditions that once supported them no longer exist. Thus, a founder tackling this problem would need to create a rupture, a departure from the old paradigms of manufacturing and company building. It’s unlikely that a technician who spent the last three decades assembling cars for Volkswagen will suddenly be able to produce entirely different vehicles or work in radically different ways. The forces that led to the downfall of established manufacturing companies are still present and strong. To survive, you need to start with the strongest foundations possible. The first offices and production plants probably shouldn’t be in Wolfsburg.

The question of where to start building a generational manufacturing company in Europe is very important and takes thoughtful consideration. Germany might not be a great initial market because it has more powerful manufacturing incumbents and it is advisable to go up against them with the necessary strength and scale.⁷ At the same time, a consequence of this complacency and aging demographics is a shift from Germany to Poland, from West to East.

That being said, if a founder decided to try building up manufacturing capacity in countries like Germany again, the ways they could go about this are by providing cheaper energy, improving European coordination and energy markets, or shifting to less energy intensive manufacturing. My suspicion is that if someone could build a manufacturing business that requires 10x less energy for the same output, there might be an opening in Europe. Improving energy efficiency is an incremental way of similar tactics, but will not reach the necessary scale.

Most commentators praise Germany’s apprenticeships. It is true that Germany has more manufacturing talent than most countries: Germany alone has around 560,000 CNC machinists while the US has around 350,000. But these apprenticeship programs are too rigid and overly focus on teaching the workflows of the past. Modern manufacturing will be much more dynamic, small scale, and there will be more change in the daily workflows for factory workers. The age where DIN norms alone would win you business are over.

That being said, having a strong base of manufacturing talent and at least some new supply of young people hoping to join an apprenticeship program, the right founders could probably put this talent to good use, if they hire wisely and figure out ways to teach novel workflows well.

And remember, manufacturing workers can always be relocated, and it may be cheaper to pay them a premium and avoid the illusions of a deindustrializing area than to pay lower wages and make no progress at all. Piech Automotive is based in Switzerland.

There is another word of caution due. Rebuilding industrial capacity can be motivated by non-economic reasons alone (like sovereignty), but companies only survive if they can make the economics work.

This constraint reduces the scope of the opportunity for reshoring – European national defense might have sufficient demand to sustain a great company but “Jeans Made in Germany” probably not.

Navigating these obstacles will be very hard, but if a founder was to succeed, their payoffs could be very large. Siemens alone had $83bn revenue in 2023. Much more might be up for grabs, but only if European founders step up and governments get out of the way.

European manufacturing once rose from the ashes of WWII to become the export champions of the world. Now, it must rise once more from the ashes of decades of mismanagement by the managerial class to become the champions of a new era in manufacturing.

Europe’s manufacturing revival depends not on nostalgia, but on founders willing to confront hard truths, abandon comforting delusions, and rethink every step with precision and foresight.

If any of this resonates, I’d love to hear from you.

I would like to thank Sam Huang for feedback on this essay.