Germany An International Business Plan Economics Essay

Abstract

This paper will examine the country of Germany from the aspect of a corporation looking to do business there. It will consider aspects from the culture, people, technology, government, and their economic system. A business environment analysis report has been conducted to examine things corporations must consider when doing business in Germany. A report on opportunities for market entry has been conducted to identify potential import and export prospects for a potential firm in Germany. A market entry strategy assignment has also been conducted to develop a market strategy for launching new products in Germany.

Germany: An International Business Plan

MARKET INTELLIGENCE REPORT

Profile

The official name of Germany is the Federal Republic of Germany. The head of state is currently Christian Wulff and the head of government is Chancellor Angela Merkel. The population of Germany is 81.8 million people, with about 8% of the people being of foreign origin. Protestants and Catholics each make up third of the religious population, with an assortment of other religions filling the other third. German is the official language spoken in Germany; however, the vast majority of the population also speaks English.

Geography

Germany is a very temperate country located in Europe. It is much cooler and rainier than most of the United States. It is approximately 137,000 square miles, about the size of Montana. The largest city is Berlin with a population of about 3.5 million people. The next three largest cities, Munich, Cologne, and Hamburg all have populations over a million. As far as the terrain is concerned there are low plains in the north; high plains, hills, and basins in the center and east; mountainous alpine region in the south.

People

Most inhabitants of Germany are ethnic German. However, there are also more than 7 million foreign residents, a lot of those who are related to “guest workers”. “Guest workers were foreign workers, mostly from Turkey, invited to Germany in the 1950s and 1960s to fill labor shortages) who remained in Germany. Germany has a sizable ethnic Turkish population (2.4% at the beginning of 2010). Germany is also a prime destination for political and economic refugees from many developing countries. An ethnic Danish minority lives in the north and a small Slavic minority known as the Sorbs lives in eastern Germany” (“Germany,” 2012). Most “foreigners” do not have German citizenship, even if they were born and raised in Germany. This is due to highly restrictive German citizenship laws. However, change is coming, and with the citizenship and immigration law reforms that took place in 2002, many foreign citizens have been getting their citizenships and have gained the ability to naturalize.

Germany has one of the world’s highest levels of education, technological development, and economic productivity. Since the end of World War II, the number of youths entering universities has more than tripled, and the trade and technical schools of the Federal Republic of Germany (F.R.G.) are among the world’s best (Germany, 2012). Germany, as country, is mainly middle class. The social welfare system that is set up in Germany provides universal medical care, generous unemployment compensation, and provides for many other social needs. Germans also travel extensively, and millions of Germans travel abroad every year.

It is estimated that the population of Germany will decline from the current 81 million people to around 77 million people by 2050. Due to this demographic change, the available workforce aged 20-64 will shrink by more than six million by 2030, resulting in a marked shortage of skilled workers. In the absence of appropriate and timely policy action, demographic change threatens to become a constraining factor for prosperity and growth (Germany, 2012).

When unification happened in 1990 Germany began a major undertaking. Their goal was to bring the standard of living of people living in the former German Democratic Republic to where it was in western Germany. This has really been a struggle for Germany because of how inefficient business had been in the former German Democratic Republic. There was also the issue of property ownership that had to be settled. On top of all of that, there was a tremendous amount of environmental damage from communist rule as well.

“Economic uncertainty in eastern Germany is often cited as one factor contributing to extremist violence, primarily from the political right. Confusion about the causes of the current hardships and a need to place blame has found expression in harassment and violence by some Germans directed toward foreigners, particularly non-Europeans. The vast majority of Germans condemn such violence” (Germany, 2012).

Economy

Market Overview

The state department has done a thorough overview of Germany’s market and concluded the following:

The German economy is the world’s fourth largest and, after the expansion of the EU, accounts for more than 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.

The German economy–the fifth largest in the world in purchasing power parity (PPP) terms and Europe’s largest–is a leading exporter of machinery, vehicles, chemicals, and household equipment and benefits from a highly skilled labor force. Like its Western European neighbors, Germany faces significant demographic challenges to sustained long-term growth. Low fertility rates and declining net immigration are increasing pressure on the country’s social welfare system and have compelled the government to undertake structural reforms. The modernization and integration of the eastern German economy–where unemployment can exceed 20% in some municipalities–continues to be a costly and long-term process, with total transfers from west to east amounting to roughly $3 trillion so far.

In 2011, gross domestic product grew by 2.7%. The country’s export-dependent economy is growing more quickly than the euro-zone average. In 2010, gross domestic product grew by 3.6%, and the German economy experienced its strongest rate of growth since reunification. Domestic demand is becoming a more prominent driver of growth. The German labor market also showed a strong performance in 2010 and 2011, with the unemployment rate dropping to 5.5% in October 2011. Economists attribute the decrease in unemployment to structural reforms implemented under the government of former Chancellor Gerhard Schroeder and to the use of government-sponsored “short-time” (Kurzarbeit) work programs. The German economy so far has been largely unaffected by the sovereign debt crisis in the Eurozone, but a recession or slowdown of Europe’s largest economy is expected for the winter half of the 2011-2012 year, mostly due to declining exports to the country’s European partners.

The European Union (EU) gave Germany until 2013 to get its consolidated budget deficit below 3% of GDP, and the government’s 4-year fiscal consolidation program worth approximately €80 billion (U.S. $109.6 billion) is intended to meet deficit targets. Germany’s deficit decreased from 3.3% of GDP in 2010 to 2.0% of GDP (est.) in 2011 thanks to the strong economy and low unemployment.

In May 2011, Chancellor Merkel announced Germany’s plan to phase out nuclear energy power by 2022. It is expected that this policy will further accelerate the growth of the renewable energies sector.

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

Market Challenges

The German economy has improved markedly in recent years. The economy took a serious hit during the economic crisis, but recovered quickly.

The German economy has been steadily improving recently. There was a serious setback during the economic crisis, but recovery occurred quickly. “Like most other OECD countries GDP declined significantly in 2009 (by 4.7%), but grew by 3.6% in 2010, the highest rate since unification. Following a 3% growth in 2011, the pace of expansion is expected to slow in 2012” (Germany, 2012). Most of the market research organizations had been predicting the GDP of Germany in 2012 to be around 1%, but are lowering that to around 0.6%.

Labor

The United States State Department (2012) had this to say in regards to Germany’s labor market:

The labor market remained resilient during the economic crisis and continued to be strong in 2011. In addition to a series of labor and social reforms implemented in recent years, many experts credit the government-funded short-time work program for limiting unemployment. Other factors, such as moderate wage increases, flexibility in bargaining agreements, numerous company-level alliances to retain jobs, and employers’ willingness to accept higher unit labor costs, also contributed to the stability of the German labor market. Job cuts in logistics and manufacturing have been offset by job creation in other sectors, such as services and health care. Also due to a declining workforce, average unemployment dropped to 2.976 million over the course of last year, with an average jobless rate of 7.1% – down from 7.7% in 2010. For 2012, the government expects unemployment to decline to an average of 6.8%.

Although unemployment is still higher in the east of the country than the west (11.3% versus 6.0%), it dropped to the lowest level in 20 years. The number of persons in employment living in Germany reached an all-time high (about 41.6 million) in November 2011, an increase of 521,000 from a year ago.

The wages in Germany, when compared to the rest of the world, are among the highest in the European Union and worldwide. German labor is also known to be very productive and highly skilled. German quality is known throughout the world.

Labor Law

The unions in Germany are incredibly large and powerful. Strong labor laws protect the workers and give them many rights. The laws in Germany are much more substantial than in the United States. “Ordinary dismissal of workers must be preceded by notice, which depends on the duration of the time the employee was with the company. It may vary from 1-7 months. The employee may also challenge the dismissal in court. The Mother Protection Law grants a mother a total of 36 months leave. 6 weeks prior to birth and 8 weeks thereafter are on paid leave. The mother and the employer can agree on a parental leave (max. 36 months), after which the employer provides her with the same job prior to the birth of the child. Social Security and Health Care cost are equally split up between the employee and the employer. Average working hours are 37.5 hours/week and annual leave varies between 20 and 30 working days” (“Export.gov – Home,” 2012).

Trade Barriers

There really are not a lot of formal barriers concerning trade with the United States or investment. The only one that could be considered substantial would be Germany’s participation in the EU’s Common Agricultural Policy and their continued restrictions on biotech agricultural products. This does place some barriers on U.S. goods.

Germany has continually tried to get the EU commission to ease up on the regulations to help and try to promote innovation and help the EU members become more competitive. The government under Merkel has made the case for widespread reform in Germany. Specifically, there is a drive to cut through the bureaucratic red tape and reduce the costs due to the complex nature of their bureaucracy.

The complexity, in and of itself, offers a certain degree of protection to the local businesses because the complexity of the regulations makes it that much more difficult for foreign competitors to do business in Germany. There are very stringent safety standard and environmental standards that are zealously applied that cuts back on the access available to U.S. products. As a result, any American companies considering exporting to Germany really need to evaluate the standards that would be applicable to their products and insure that they met them on a timely basis.

Foreign Relations

Germany continues to be close with the United States of America. They maintain their membership in NATO, and they continue to be a vital component of the EU. Germany made sure that after the war that they were actively involved in closer cooperation politically, economically, and defensively with other countries of Western Europe. Germany has been, and will continue to be, one of the largest contributors to the EU budget.

After the war, Germany made great effort to repair its relationship with the countries of Eastern Europe. They started by establishing trade agreements and worked their way up to actual diplomatic relationships. When Germany unified in 1990, their relationship with other democratic countries in Europe blossomed even further.

Government

The government is parliamentary, and a democratic constitution emphasizes the protection of individual liberty and division of powers in a federal structure. The chancellor (prime minister) heads the executive branch of the federal government. The duties of the president (chief of state) are largely ceremonial; the chancellor exercises executive power. The Bundestag (lower, principal chamber of the parliament) elects the chancellor. The president normally is elected every 5 years by the Federal Assembly, a body convoked only for this purpose, comprising the entire Bundestag and an equal number of state delegates (Germany, 2012).

The Bundestag, which serves a 4-year term, consists of at least twice the number of electoral districts in the country (299). When parties’ directly elected seats exceed their proportional representation, they may receive additional seats. The number of seats in the Bundestag was reduced to 598 for the 2002 elections. The Bundesrat (upper chamber or Federal Council) consists of 69 members who are delegates of the 16 Laender (states). The legislature has powers of exclusive jurisdiction and concurrent jurisdiction with the Laender in areas specified in the Basic Law. The Bundestag has primary legislative authority. The Bundesrat must concur on legislation concerning revenue shared by federal and state governments and those imposing responsibilities on the states.

Germany has an independent federal judiciary consisting of a constitutional court, a high court of justice, and courts with jurisdiction in administrative, financial, labor, and social matters. The highest court is the Bundesverfassungsgericht (Federal Constitutional Court), which ensures a uniform interpretation of constitutional provisions and protects the fundamental rights of the individual citizen as defined in the Basic Law (Germany, 2012).

Technological Status

Information technology, without a doubt, is the single most important factor in transforming the world into a global economy. As the rankings are starting to point out, how a company ranks as far as its advancement with information technology is also how it ranks in the overall global economy. Technology is what differentiates a superior economy from that of an inferior one. Technological innovation always lies at the core of any long-term potential of any economy, and Germany is no different. When looking at Europe as a whole, technological capability runs the gamut. In Great Britain and Ireland, they are much higher on capability than the rest of Europe. On the bottom end there is Greece, Italy, and Spain. Germany, and the rest of Europe, is somewhere in the middle. There is a lot of advancement in IT in fields that would necessitate that, such as aerospace, mobile phones, and pharmaceuticals. However, it is very poor in the service sectors.

“The general consensus is that Europe’s information technology infrastructure not only lags behind the U.S. and Japan, but that the technology gap is rapidly closing between Europe and Asia’s new tech powerhouses (like China, India and South Korea). Europe risks being squeezed between the high end challenge posed by the U.S. and Japan and the catch-up challenge posed by the rapidly developing countries” (Hamilton & Quinlan, 2008).

Where Germany is a little stronger in the technological exports is within the realm of medium-high tech exports. According to Hamilton and Quinlan (2008):

When it comes to high-tech exports, Germany’s share (20.5%) lags behind the EU15 average (25.7%), and is well under the share of the U.S. (36.1%) and China (36%). Against this backdrop, as Germany edges closer to being a knowledge-based service economy, it must keep and embellish its competitive strengths in high-tech goods and services, or suffer a loss in average economic welfare. In a world economy where the application of technology and innovation increasingly dictates both the pace of change and the level of economic prosperity, Germany is challenged to raise its innovation-intensity production and capabilities, while continuing to attract the investment capital and IT core competencies of foreign technology leaders.

However, this is not to say that Germany does not have its strengths. In fact, Germany was the third ranked company in 2006 for global patents. The regions in Germany account for nine of the 20 innovation regions in Europe. “Germany is more advanced in IT usage and applications than most of Europe and is a favored destination for IT leaders looking to tap indigenous R&D talent” (Hamilton & Quinlan, 2008). Germany is also way ahead of the rest of the EU in terms of their citizens using the internet and using computers at home and at work. Underpinning this dynamic, Germany is ahead of the EU in general in the use of the internet and computers at home and at work. Germany has also become the world leader in alternative energy technology, and has produced a third of all solar cells and half of all wind turbines worldwide.

BUSINESS EVIRONMENT ANALYSIS REPORT

Center of European Economy

Largest Market in Europe.

Of all the markets within Europe Germany is by far the largest. It makes up 20 percent of Europe’s gross domestic product. It also contains close to 20 percent of the total population of the European Union. The GDP has grown about 1.8% every year for the last five years. The economy of Germany is very industrialized, with a very heavy focus being on service and production. They are also very forward thinking in Germany, evidenced by the large amounts of money earmarked for research and development.

Belief in Exportation

Even though there has been a tremendous amount of shakiness in the world economy, Germany has somehow managed to stay stable. They continue to export worldwide on a grand basis. In fact, in 2003, Germany became the world’s leading exporter, having overtaken the United States for that title. Germany’s biggest trading partners include France, UK, the Netherlands, Japan, China, and the United States.

Foreign Direct Investment

Preparing for FDI

Free and Open Markets.

An attractive part of the German business environment is how welcoming Germany is towards foreign direct investment. “Foreign direct investment, in its classic definition, is defined as a company from one country making a physical investment into building a factory in another country. The direct investment in buildings, machinery and equipment is in contrast with making a portfolio investment, which is considered an indirect investment” (Graham & Spaulding, 2004). The interesting thing is that Germany treats German investment into business the same way as they treat foreign investment into business. There is no distinction made.

“There are also no restrictions or barriers to capital transactions or currency transfers, real estate purchases, repatriation of profits, or access to foreign exchanges” (“Germany’s business environment:,” 2009).

Attracting FDI Globally.

“According to the United Nations Conference on Trade and Development (UNCTAD), Germany ranks among the world’s leading countries for foreign direct investments with more than EUR 476 billion in FDI stocks in 2008. Official German statistics further underscore Germany’s attractiveness as a business location. Bundesbank (“German Central Bank”) FDI stock statistics indicate a growth of 2.2 percent in 2007 to EUR 459billion” (“Germany’s business environment,” 2009).

New Investment Projects

Foreign Direct Investment Projects.

There are over 45,000 foreign companies that operate within the borders of Germany, and these companies employ over 3 million people. Every year more companies realize that operating from Germany is a financially sound decision.

Diverse Industry Opportunities.

When looking at the different markets that foreign companies are invested in, one will note that it is quite diversified, including 39 different industry sectors. Most of the new investment from foreign companies is invested in to the IT and software industry. In fact, this industry accounts for 20% of every foreign direct investment project in Germany. Business and financial services, and automotive and industrial machinery and equipment are the next top industries.

Research and Development

High-Tech Germany

High Turnover with Innovative Products.

“Over 27 percent of German manufacturing company turnover is generated from innovative products. These products are new to the enterprise and to the market. In France and the UK, this ratio is comparatively low at around 16 percent, whereas in Finland the level is at 21 percent. The European average lies at 19 percent” (“Germany’s business environment,” 2009).

Technological Leader.

Germany has always been known for their high quality and innovation, and they are one of the world’s leaders in developing new technology. They are also one of the largest exporters of high-technology goods as well. “In 2007, Germany exported high-tech goods to the value of EUR 114 billion -making it the top exporter in Europe and third worldwide” (“Germany’s business environment,” 2009).

Knowledge Base of Workers.

Germany is also known for the knowledge of their population, namely scientists. Germany has the largest population of scientists in all of Europe. German scientists work on projects all over the globe.

Business Climate

Cost Effectiveness

High Productivity.

In the last decade, Germany has become incredibly efficient in their industries. Their overall productivity rose much faster than the labor cost increase. Because of this, it costs them much less to produce things than many other countries. This gives them a competitive advantage. As a result, much of the world views Germany as having the best process technologies in action.

Labor Costs.

Another reason Germany is favored by many companies considering foreign direct investment is the stable and low labor costs. Germany has the lowest labor rate growth in the last decade in all of Europe, at two percent. This has not been the case for the rest of Europe. “Since 2000 wages have risen in most European countries -at a rate significantly above that of the EU-27 average increase of 3.7 percent” (“Germany’s business environment,” 2009).

Competitive Tax System.

The tax system in Germany is one of the most competitive in the world. Corporations only have to pay a 30% tax rate. Trade taxes have also been drastically reduced.

Labor Market

Highly Skilled and Educated Workforce.

The workforce in Germany contains over 40 million people, the largest amount of labor in Europe. However, the sheer volume of Germany’s labor force is not the main attraction. Germany’s work force is highly skilled and educated. Eighty percent of Germany’s workforce has had vocational training or is a college graduate. German government ties the amount of investment into education to Germany’s gross domestic product, ensuring that the two stay linked. Germany also has one of the highest rates of workers receiving doctoral degrees.

Germany also employs what is known as a dual education system. In this system, workers receive on-the-job training while they are attending school, for a period of two to three years. This system has over 300 occupations that are accepted in this program, and because it is regulated, a certain level of quality is guaranteed.

Closer to Market

Logistics.

“With state-of-the-art transportation networks by road, rail, sea, and inland waterways as well as a dense network of both national and international airports, Germany provides easy access to domestic and international markets” (“Germany’s business environment,” 2009). As a result, Germany is a major player in the logistics game globally. Their logistics account for 28% of the European logistics market, making them a huge player in Europe. In fact, more goods pass through the country of Germany, than any other country in Europe. Germany has the second busiest port in Europe, located in Hamburg. They also have Europe’s largest port container terminal in Bremerhaven.

If that was not enough to cement Germany’s stature as a global logistics force, there are also the companies in Germany themselves. “In fact, the world’s largest logistics services provider is a German company – Deutsche Post World Net (DPWN). Deutsche Bahn is the world’s second largest transportation and logistics company and Lufthansa Cargo is the global air freight services leader” (“Germany’s business environment,” 2009).

Excellent Business Environment

Good Legal System.

Germany has an incredibly stable and transparent legal environment, and has been globally ranked as one of the safest places to conduct business. Germans was also ranked as the safest country in the world concerning the security of intellectual property.

Secure Place to Conduct Business.

Germany has a growing business landscape and is becoming well known for the safety in which that business is conducted. White-collar crime is lower in Germany than most of its neighbors. Laws are upheld, and private property laws are strong.

Easy Start Up.

Corporations and enterprises looking to set up shop will find that the process to do so could not be easier. The rules and regulations for starting up an operation in Germany are simple and thus, very efficient and quick.

REPORT ON OPPORTUNITIES FOR MARKET ENTRY

An organization should not only determine whether the business environment of Germany is conducive to their operations but also whether their product is within the growing industries of Germany. There are many industries blooming in Germany, but two stand far above the rest: management consulting services and medical equipment.

Management Consulting Services

Germany is the largest consulting market in Europe. Consulting took off in Germany during 2011 and overall revenues were up around 10 percent. This growth trend is supposed to continue through 2012 as well. “Demand was especially strong in the automotive (up 19 percent) and consumer goods (up 14.3 percent) industries. The two largest consulting fields are strategic and organizational/process consulting” (“Germany’s business environment,” 2009). Projects that have to deal with growth and innovation, or business development, have great growth potential.

Medical Equipment

Germany also has the largest European market for medical devices, and is third in the world. “Demand will mainly be driven by demographics and a substantial increase in the number of patients and by the need for more efficient procedures. The German medical market expects a sales growth of approximately 6% this year, with continued upwards trends predicted for next year as well” (“Germany’s business environment,” 2009). This industry sector has the most potential for corporations that can bring innovative products to the table at competitive prices.

The medical technology sector continues to be strong on innovation and growth and will provide excellent potential for U.S. suppliers of innovative and price-competitive products.

MARKET ENTRY STRATEGY ASSIGNMENT

When considering how to undertake a successful market entry into Germany, there are two things to consider: 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’s business environment,” 2009). Price is not that high of a priority for German buyers, the emphasis remains on quality. Germany also has a very high rate of Internet access, and as more and more Germans gain access, products and services relating to that will grow as well.

In speaking about the German market, the United States State Department (2012) had this to say:

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

Direct Marketing

Germans do quite a bit of shopping from catalogs and they are starting to do more shopping online. Three-fourths of German companies use direct marketing in some fashion. Email marketing is by far the most common form of direct marketing and a company looking to gain market entry would be wise to consider the virtues of this method.

Selling Strategies

The key to selling in Germany is realizing that there has to be some form of long-term commitment. There is a feeling in Germany that U.S. corporations give preferential treatment to their domestic sales, at the expense of their global market. There is also the concern of corporations from the United States being in it for the “long-haul” and sticking around for after-sales support. Addressing these concerns will alleviate worry and establish credibility.

The German customer also expects superior customer service. They expect to be able to call and talk with someone from the organization for help and would require this immediately.

“American exporters should avoid appointing distributors with impossibly large geographic areas, without firm commitments regarding parts inventories or service capabilities, and without agreements on dealer mark-ups” (“Germany’s business environment,” 2009).

Conclusion

Because Germany’s market is the largest in Europe, it continues to be attractive to many multinational corporations looking to expand their global presence. Germany is also a major component to any corporation looking to export to Europe. Although it may cost more to do business in Germany, this is balance out by the labor force, the logistics capabilities, great productivity, and a perfect location in the center of Europe. Germany is, and will continue to be, an important piece of any globalization that would include the European market.