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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 80.6 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 a 28-member European Union make it a cornerstone around which many U.S. firms seek to build their European and worldwide expansion strategies.

The government predicts 1.5 percent growth for 2017 and a 1.8% growth for 2018, which is below the 1.9 percent growth in 2016 but above the 1.3 percent average of the last ten years, which would mean that the German economy continues to grow at or above what many analysts consider its long-term potential, although weakening growth in emerging economies began to affect German exports already in 2015. Demand started shifting from external sources to private households, which are projected to remain the main driving force for growth in the near-term. Despite budget surpluses and strong corporate profitability, government and businesses have taken little advantage of low interest rates to boost investment.

The labor market remained resilient during the economic and financial crisis and was stronger in 2016 than ever before. Employment in Germany rose for the tenth consecutive year and reached an all-time high of 44 million in November 2016, an increase of 1.8% from November 2015. As of February 2017, approximately 43.6 million people are registered as employed, 600,000 more persons than the 43 million registered during February of 2016.

Unemployment fell by more than 40 percent since its peak in 2005, and reached the lowest level since German reunification in 1990 As of February 2017, less than 1.9 million people were registered unemployed, and the jobless rate stands at 4.3 percent, according to provisional calculations of the Federal Statistical Office (Destatis) – 110,000 less than a year earlier. Within the European Union, Germany has the second lowest youth unemployment rate (6.6 percent in February 2017; European Union average: 17.3 percent).

Demographic changes and resulting labor shortages; the current government’s regulation of the labor market; and higher energy prices due to on-going nuclear energy phase-out (“Energiewende”) are seen as factors that could dampen competitiveness. Slowdown of activity in emerging markets and renewed weakness in the Eurozone could weaken exports, contain investment, and spill over to consumer confidence, all of which could result in lower growth.

Market Challenges

Germany presents few formal barriers to U.S. trade or investment. Germany’s acceptance of the EU’s Common Agricultural Policy and German restrictions on biotech agricultural products represent obstacles for some U.S. goods. Germany has pressed the EU Commission to reduce regulatory burdens and promote innovation to increase EU member states’ competitiveness. 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, 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. Germany possesses one of the highest Internet access rates in the EU and 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 necessarily the determining factor for German buyers, but quality.

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