Market Overview

The German economy is still the world's third largest (likely to be surpassed by China soon) and, after the expansion of the EU, accounts for nearly one-fifth of European Union GDP.  Germany is the United States' largest European trading partner and is the sixth 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 and protections.

Germany is the largest consumer market in the European Union with a population of over 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 CeBIT, 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 that added ten members in 2004, and two more in 2007 make it a keystone around which many U.S. firms seek to build their European and worldwide expansion strategies.

Market Challenges

Real German GDP expanded by 2.5% in 2007 despite the increase in value-added tax from 16% to 19% in January 2007; forecasters predict economic growth to reach 1.7% in 2008.  Consumer demand, which had been sluggish for several years, is picking up.  The economy continues to be strong on exports; consumption and investment have started to pick up in 2006 and are expected to compensate for some of the world economic slowdown. Business confidence indices rose in early 2007 and show signs of optimism, despite a lot of uncertainty in financial markets.  The German economy continues to suffer from structural problems, including over-regulation in labor markets, taxation, and business establishment, as well as high social insurance costs.

The German government has recognized the need for reform and is pursuing a series of initiatives. While many observers regard these programs as a useful start, most expect that additional reforms to enhance Germany’s global competitiveness will be required while consensus will become more difficult in the run up to federal elections in 2009.  German firms focusing on exports, especially in the automotive, chemicals, and high tech sectors, recently have enjoyed healthy profits and have exported more goods and services than firms from any other country.  The retail sector, by contrast, continues to have lower growth.  Major manufacturing firms have increasingly shifted their production overseas to maintain global competitiveness and reduce costs.

Persistent high unemployment, particularly long-term (longer than one year) unemployment, has long been among Germany’s most serious political and economic problems. The economic growth Germany has experienced since 2006, however, has reduced in a rapid fall of unemployment to levels not seen since before German unification.

Since the beginning of 2006, what had been an export-led recovery has begun to expand into the domestic economy.  Investment in machinery and equipment has grown rapidly and business confidence has risen – the latest survey results from the Munich-based Ifo Institute showed optimism prevailing despite the uncertainty resulting from the subprime mortgage crisis in the U.S.  The economic recovery finally reached the labor market in late 2006. The strong revival of the German labor market continued in 2007. Registered unemployment fell by 15.7% to below 3.8 million on an annual average. This corresponded to a decline in the unemployment rate from 10.8% in 2006 to 9.0%, the largest year-to-year decline in Germany history. In eastern Germany, the unemployment rate stood at 15.0% and was still twice as high as in the western part of the country. The Federal Employment Agency’s Institute for Labor Market Research has projected an average of 3.5 million unemployed for 2008, provided the current demand for labor continues. While much of the improvement has been the result of an expanding number of temporary or low-paid jobs, more significantly, the number of socially-insured and self-employed jobs has risen, too.

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 mean barriers for some U.S. goods.  Germany has pressed the new EU Commission to reduce regulatory burdens and promote innovation in order to increase the EU member states’ competitiveness.  The Merkel government has talked about the need of regulatory reform in Germany as well. Germany's regulations and bureaucratic procedures can prove baffling. While not directly discriminatory, government regulation is often complex and 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 ones.

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 will not necessarily be the determining factor for the German buyer, given the German market’s demand for quality.

The German market is as decentralized and diverse as the U.S. market, with interests and tastes that differ dramatically from German state to German state.  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 presence.  U.S. firms can overcome such stiff competition by offering high quality products, services at competitive prices, and sales back-up, as well as establishing a local network of 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.