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.