Market Overview
The German economy is the world's fourth largest 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.
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 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 1.3% in 2008 despite the increasing
financial turmoil, which began to affect industrial exports;
forecasters predict that Germany would register annual economic
growth of 1.7% in 2008 and that GDP would decline by more than 2%
in 2009. Consumer demand, which had a temporary uptick
after years of sluggishness, is declining again. Germany
suffered the most dramatic drop in exports of any major Western
European economy in 2008. Business confidence indices sank
steadily in 2008 in the face of great 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’s plans for reform have taken a back seat
to the more pressing concerns of addressing a major
downturn. Most observers believe that additional reforms to
enhance Germany’s global competitiveness are unlikely to occur
before federal elections in 2009.
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 experienced between 2006 and 2008 rapidly reduced
unemployment to levels not seen since before German unification,
but forecasters expect a significant rise in unemployment in
2009.
In spite of the deepening crisis, the German labor market
displayed remarkably robust growth until year-end 2008 although
employment growth flattened during the course of the year.
In 2008, the average unemployment rate was 7.8 percent or 3.268
million, down from 9.0 percent or 3.776 million in 2007.
This was the lowest average annual unemployment since 1992.
In eastern Germany, the average unemployment rate was 13.1
percent, still more than twice as high as in the western part of
the country (6.4 percent). For the first time since February
2006, unemployment rose (by 18,000 to 7.6 percent) in December
2008. The number of persons employed rose to a record high
of 40.83 million in November 2008 (500,000 more than in November
2007). However, the relative increase of 1.2 percent was
the lowest rate of growth since December 2006. Although it
often takes several months before the labor market reflects
macroeconomic shifts, developments now show that the downturn has
reached the labor market. The Federal Employment Agency’s
Institute for Employment Research (IAB) reversed its more
optimistic forecast from October 2008 and projected unemployment
figures to rise in 2009, maybe by up to 500,000 or more.
The common denominator of most economic forecasts at the
beginning of the year 2009 was that non-seasonally adjusted
unemployment could exceed 4 million in early 2010 and lift the
unemployment rate from slightly under 8 to 9.5 percent.
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 to increase EU member states’ competitiveness.
The Merkel government has talked about the need for 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.