Doing Business in Germany

A Hot Tip about Business Practices in Germany

Last updated: 14 Mar 2011

Market Overview

The German economy is the world's fourth largest and, after the expansion of the EU, accounts for more than one-fifth of European Union GDP.  Germany is the United States' largest European trading partner and is the fifth largest market for U.S. exports.  Germany’s "social market" economy largely follows free-market principles, but with a considerable degree of government regulation and generous social welfare programs.

Germany is the largest consumer market in the European Union with a population of nearly 82 million.  However, the significance of the German marketplace goes well beyond its borders.  An enormous volume of worldwide trade is conducted in Germany at some of the world’s largest trade events, such as MEDICA, Hannover Fair, Automechanika, and the ITB Tourism Show.  The volume of trade, number of consumers, and Germany’s geographic location at the heart of a 27-member European Union make it a cornerstone around which many U.S. firms seek to build their European and worldwide expansion strategies.

 

 

Market Challenges

In 2009, Germany experienced the sharpest drop in economic activity since the end of World War II with GDP falling by 5%. This was due mainly to plummeting exports (-14.7 percent) and a major drop in capital expenditure (-8.6 percent). Thanks to a government- sponsored reduced working hours program (“Kurzarbeit”) and the government stimulus package of 81 billion euros, domestic consumption remained fairly stable. The German government expects GDP growth of 1.5% in 2010. In December 2009, the Merkel government agreed to tax relief worth 8.5 billion euros to fuel economic recovery despite record high national debt. The year 2010 will be a challenging year as Germany will  need to move from growth generated by economic stimulus to self-sustaining growth.

In the past several years, the German government has implemented several reforms to address structural problems, such as a highly regulated labor market, high taxation, as well as high social insurance costs. These reforms have stimulated economic growth, but problems remain. Long-term unemployment (longer than one year) in particular continues to be among Germany’s most serious political and economic problems. The economic growth Germany experienced between 2006 and mid-2008 rapidly reduced unemployment to levels not seen since before German unification, but the economic crisis led to a modest increase in unemployment in 2009.

Germany’s short-time work program and its stimulus package helped contain the anticipated rise in unemployment. In 2009, the average unemployment rate was 8.2 percent or 3.423 million, up from 7.8 percent or 3.267 million in 2008, which marked the lowest average annual unemployment since 1992.  In eastern Germany, the economic crisis hit the labor market less severely, and unemployment decreased from 13.1% in 2008 to 13.0% in 2009. Unemployment in eastern Germany is, however, still almost twice as high as in the western part of the country (6.9 percent in 2009). The number of persons employed stood at 40.5 million in November 2009 (300,000 less than in November 2008).  The Federal Employment Agency’s Institute for Employment Research (IAB) expects a further increase in unemployment to 9.2% in 2010 with government support for the labor market running out and the economy only slowly recovering.

Germany presents few formal barriers to U.S. trade or investment, although Germany’s participation in the EU’s Common Agricultural Policy and German restrictions on biotech agricultural products represent barriers for some U.S. goods.  Germany has pressed the new EU Commission to reduce regulatory burdens and promote innovation to increase EU member states’ competitiveness.  The Merkel government has talked about the need for regulatory reform in Germany. In particular, the Economics Minister Rainer Bruederle (pro-market Free Democratic Party - FDP) is pushing to reduce bureaucratic costs, since Germany's regulations and bureaucratic procedures can be very complex. While not directly discriminatory, government regulation by virtue of its complexity may offer a degree of protection to established local suppliers. Safety or environmental standards, not inherently discriminatory but sometimes zealously applied, can complicate access to the market for U.S. products. American companies interested in exporting to Germany should make sure they know which standards apply to their product and obtain timely testing and certification. German standards are especially relevant to U.S. exporters because, as EU-wide standards are developed, they are often based on existing German standards.

 

 

Market Opportunities

For U.S. companies, the German market - the largest in the EU - continues to be attractive in numerous sectors and remains an important element of any comprehensive export strategy to Europe. While U.S. investors must reckon with a relatively higher cost of doing business in Germany, they can count on high levels of productivity, a highly skilled labor force, quality engineering, a first-class infrastructure, and a location in the heart of Europe.

 

Market Entry Strategy

The most successful market entrants are those that offer innovative products featuring high quality and modern styling.  Germans are responsive to the innovation and high technology evident in U.S. products, such as computers, computer software, electronic components, health care and medical devices, synthetic materials, and automotive technology.  Germany boasts one of the highest Internet access rates in the EU and new products in the multi-media, high-tech and service areas offer great potential as increasing numbers of Germans join the Internet generation.  Certain agricultural products also represent good export prospects for U.S. producers.  Price is not necessarily the determining factor for the German buyer, given the German market’s demand for quality.

 

The German market is decentralized and diverse, with interests and tastes differing dramatically from one German state to another.  Successful market strategies take into account regional differences as part of a strong national market presence.  Experienced representation is a major asset to any market strategy, given that the primary competitors for most American products are domestic firms with established presences. U.S. firms can overcome such stiff competition by offering high-quality products, services at competitive prices, and locally based after-sales support.  For investors, Germany’s relatively high marginal tax rates and complicated tax laws may constitute an obstacle, although deductions, allowances and write-offs help to move effective tax rates to internationally competitive levels.

 

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Posted: 05 January 2010, last updated 14 March 2011

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