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Doing Business in Germany

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Market Overview

The German economy is the world's fourth largest and accounts for more than one-fifth of the European Union’s GDP. Germany is the United States' largest European trading partner and 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 wide-ranging social welfare programs.

Germany is the largest consumer market in the European Union with a population of 82.3 million. The significance of the German marketplace goes well beyond its borders. An enormous volume of trade is conducted in Germany at some of the world’s largest trade events, such as MEDICA, the Hannover Fair, Automechanika, and the ITB Tourism Show. The volume of trade, number of consumers, and Germany’s geographic location at the center of the European Union make it a cornerstone around which many U.S. firms seek to build their European and worldwide expansion strategies.

As of June 2018, economic forecasters expect about two percent GDP growth for 2018 and a similar rate in 2019, a slight slowdown from 2017 but still above what many analysts consider Germany’s long-term growth potential (c. 1.5%/year). Demand has begun to shift from exports to consumption and investment, which are projected to remain the main driving force for growth in the near-term. Despite budget surpluses and strong corporate profitability, investment (other than construction) remains somewhat subdued.

The labor market remained resilient during the economic and financial crisis and was stronger in 2017 than ever before. Employment in Germany has continued to rise for the twelfth consecutive year and reached an all-time high of 44.34 million in 2017, an increase of 638,000 (or 1.5%) from 2016—the highest level since German reunification (October 1990). As of April 2018, approximately 44.62 million people are registered as employed, 592,000 more persons than the 44.03 million registered during April of 2016.

Unemployment fell by more than 2 million since its peak in 2005, and reached in 2017 the lowest average annual value in 26 years. The number of unemployed stood on average at 2.5 million in 2017, down 158,000 from 2016, with an average unemployment rate of 5.7% (down 0.4 percentage points compared to 2016), according to the Federal Employment Agency (BA). Within the European Union, Germany has the second lowest youth unemployment rate (6.3% in 2017; European Union average: 10.9%).

Demographic changes and resulting labor shortages, regulation of the labor market, and higher energy prices due to the phase-out of nuclear energy in favor of renewable sources (“Energy Transition”) are seen as factors that could dampen competitiveness. Despite these challenges and the risk of a global trade conflict, all economic institutes expect Germany’s current economic upswing to continue due in part to higher government outlays.

Market Challenges

German policy poses relatively few formal barriers to U.S. trade or investment, apart from barriers associated with EU law and regulations. Germany has pressed the EU Commission to reduce regulatory burdens and promote innovation to increase EU member states’ competitiveness. Germany’s acceptance of the EU’s Common Agricultural Policy and German restrictions on biotech agricultural products represent obstacles for key U.S. products. While not overtly discriminatory, government regulation by virtue of its complexity may offer a degree of protection to established local suppliers. Zealous application of safety and environmental standards 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. Compliance with German standards is especially relevant to U.S. exporters, as EU-wide standards 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 center 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 innovative high-tech U.S. products, such as computers, computer software, electronic components, health care and medical devices, synthetic materials, and automotive technology. While Germany possesses one of the highest Internet penetration rates in the EU for private households, high-speed internet access for business is only average (and expanding such access is a priority of the current government). Multi-media, high-tech and service areas offer great potential. Certain agricultural products also represent good export prospects for U.S. producers. In many cases, price is not the overriding factor for German buyers, but quality and reliability.

The German market is decentralized and diverse, with interests and tastes differing from one German region 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 and 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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