Germany Auto Industry

According to the recent data release, Germany’s current account surplus has exceeded the threshold of 6% of GDP – which is a benchmark score under the EU procedure for the surveillance of macroeconomic imbalances – for more than five years now. In view of the determinants of this development, however, it would be inappropriate to take short-term measures to stimulate domestic demand in Germany. Instead, there is a need for political efforts geared to continuing the necessary adjustment processes in the crisis countries and creating a sustainable institutional architecture for monetary union as a whole. This would lead to a permanent reduction of uncertainty, which would help to lower the German current account surplus.

In 2012, Germany’s financial account with the rest of the world was likewise chiefly influenced by the financial and sovereign debt crisis and the steps taken to alleviate it. Overall, the account recorded high net capital exports of €235 billion in 2012, most of which stemmed from public sector financial transactions. This was driven by a further increase in claims under the TARGET2 payment system together with government assistance to the program countries. The portfolio investment account also saw capital outflows.

The high demand for German government bonds was more than offset by countervailing transactions in other securities segments. Lastly, the direct investment sub-account – which is generally guided by longer term considerations – likewise recorded a net capital outflow. Moves by German firms to further expand their presence abroad were the main reason for this.

Current account

Underlying trends

Germany’s current account surplus increased again in 2012. It rose by €24 billion during the period under review, which was considerably more than in the two preceding years. This three- year upturn completely reversed the contraction of the current account surplus that occurred in 2008 and 2009 in the wake of the severe recession. In absolute terms, the surplus stood at €185½ billion in 2012 and was thus slightly above its previous peak of 2007. In relative terms, the surplus amounted to 7% of GDP, which was ½ percentage point below its 2007 level.

Faced with a difficult global economic environment and lacking any discernible tailwind from global trade, German enterprises still performed well on foreign markets overall. This attests to their strong market position and attractive product range. Moreover, Germany’s net foreign assets, which have meanwhile swelled to a volume of €1,000 billion, yielded a substantial income surplus. Both of these factors underline the strength of the German economy.

The sovereign debt crisis in the euro area is affecting the German current account balance through various channels. The demand from euro- area partner countries for German goods and services clearly declined as a result of the severe recessions in some countries. This was the main reason for the sharp fall in Germany’s current account surplus vis-à-vis its euro- area partner countries. The adjustment of current account positions within the euro area as a whole again made further progress last year.

However, other effects which arose as the crisis escalated last year have hampered the correction of the German current account surplus. For instance, the crisis in the peripheral European countries was doubtless partly responsible, via the uncertainty channel, for the restraint that prevailed among German investors. Through the related squeeze on investment in machinery and equipment, this affected a demand component which includes an above average share of imports.

An additional countervailing factor was the euro’s lower external value, which made it easier for German firms to sell their goods in markets outside the euro area. The positive differential in cross- border investment income rose not just on account of the accumulated net foreign assets but also because of the widening yield spreads between domestic and foreign assets generated by safe haven flows. The upsurge in the TARGET2 balance which was evident up to mid-2012 tended to lower cross-border investment income, inasmuch as it related to a reduction in interest bearing claims on non-residents.

Goods flows and balance of trade

Germany’s foreign trade momentum weakened considerably in 2012. Goods exports grew by a nominal 3½%, which was 8 percentage points less than in 2011. Goods imports were only slightly up on the year (+¾%), after having risen by more than one- eighth in 2011. Real imports are in fact likely to have shrunk during the year under review. During the same period, growth in external trade prices was relatively moderate on both the import and export side. Unlike in 2011 and 2010, when import prices increased considerably, no notable shifts occurred in the terms of trade in 2012. As a consequence, the sizeable surplus in volume terms was fully reflected in the trade balance. In 2012 the foreign trade surplus went up by €29½ billion to €188 billion, following significantly smaller increases in the two preceding years, which were greatly dampened by terms-of trade effects.

The slowdown of global economic activity in 2012 was reflected in the reduced growth of goods exports, which came to a complete halt at the end of the year. The regional export pattern likewise tended to mirror the marked growth disparities in the various international markets in which German firms are active. In the euro area, the value of goods deliveries in 2012 was down on the year by 2¼%. This was mainly due to a fall of around one- tenth in demand for German products in the southern peripheral countries, which are undergoing severe recessions. The other euro-area countries, which have to deal with the negative cyclical fallout of the sovereign debt crisis, could not offset this decline, even though exports to France rose by 3%. However, it should be noted that, statistically, this rise was solely attributable to shipments of goods associated with Franco-German aerospace joint ventures, which shot up by more than one-third.

By contrast, exports of goods to non- euro- area countries rose significantly in 2012. Revenue from this area went up by 7%, though this was only half the 2011 growth rate. However, given the pronounced slowdown in the pace of growth in markets outside the euro area, German exports held up very well. Efforts to attract and retain customers – in what was a challenging economic environment – also by means of price concessions were aided by the sharp drop (up to the turning point in mid-2012) in the euro’s nominal effective exchange rate, which for a time sank to around 7% below its 2011 average. This is consistent with the comparatively large expansion in goods exports to the United States, Canada, Japan and the United Kingdom. The rise in exports of goods to Asia (excluding Japan) in 2012 fell short of the rates recorded in 2011 and 2010.

This was probably mainly due to the cooling macroeconomic conditions in China. Sales to that country rose by a mere 2¾%, following increases of one-fifth and more than two- fifths in 2011 and 2010 respectively. By contrast, exports to the energy rich OPEC nations, as well as to Russia and Norway, flourished, whereas exports to central and east European EU member states grew only moderately during the period under review. In 2012, capital goods made in Germany were in higher demand than one year earlier, led by exports of aircraft and spacecraft as well as of computers, electronic and optical products and electrical equipment. Manufacturers of machinery and equipment, however, had to content themselves with a small increase in foreign sales. Conversely, exports of consumer goods rose markedly during the period under review, primarily on

account of strong demand for pharmaceutical products. Overall, motor vehicle exports increased only moderately in 2012, albeit with clear regional differences. Automobile groups sold record numbers of vehicles, in particular, in the USA, Russia and China, while sales within the euro area continued to fall perceptibly. Foreign sales of intermediate goods expanded only marginally during the reporting period owing to their relatively strong dependence on global industrial activity, which was particularly hard hit by the prevailing cyclical slowdown. Imports were clearly affected by investors’ restraint, which was reflected inter alia in a declining volume of imported machinery and sluggish growth in imports of information and communication technology (ICT).

Imports of consumer goods continued to grow moderately in line with the modest upward trend in private consumption. Demand for imported intermediate goods (excluding energy products) in 2012 was no higher than in 2011. Energy imports rose by one- eighth in terms of value. While this rise was largely attributable to a renewed significant increase in import prices, the volume of energy acquired from abroad also grew distinctly. This primarily benefited Norway and the OPEC countries, but also Russia to some degree. Overall, the regional breakdown of imports showed much less diversity than that of exports. This is not just a reflection of the German economy’s strong links with other countries in international value chains but also a result of long- standing supplier relationships which are also comparatively resistant to exchange rate fluctuations.

Breakdown of invisibles

Last year, revenue from and expenditure on cross- border service transactions both went up by around 7%, which was a somewhat larger increase than in 2011. On balance, the services deficit expanded marginally to €3 billion in 2012. The large sums of money customarily spent by German residents on foreign travel were not the sole reason for this widened deficit. An additional factor was the smaller surplus earned from business- related services, whereas financial services generated a distinctly higher positive result.

The slowdown in industrial activity had a strong impact on cross- border services, which are closely associated with the production and distribution of goods. Transport transactions were particularly hard hit, with revenue and expenditure growing by only 3% in each instance. By contrast, services indirectly connected with production activity continued to expand robustly, and domestic providers of research and development (R&D) services, ICT applications and business- related services met with buoyant foreign demand. Similarly, non- resident firms greatly upped their provision of such services in Germany. With respect to the individual net balances, there are certain specialization tendencies in the R&D segment that are favoring a German surplus, whereas foreign providers are becoming increasingly dominant in the commercial services segment.

Persistently buoyant construction demand prompted German building firms to continue to concentrate their production capacity more on Germany. As a result, revenue from construction work, assembly and repairs carried out abroad fell by €1 billion in 2012 after already having decreased by €2 billion over the preceding three years. Foreign construction firms likewise reaped additional gains from strong domestic demand. Expenditure on construction work provided by foreign firms rose by almost half, albeit from a very low baseline. Moreover, expenditure on cross- border engineering and other technical services saw a further large increase. Given the only marginally improved revenue situation, this component ceased to run a surplus for the first time in ten years.

In 2012, income from cross- border financial and insurance services increased by a comparatively moderate 2½%. In stark contrast to the result in 2011, expenditure in this sector declined substantially by one- eighth during the reporting period. The surplus generated by bank commission income and insurance fees expanded by close to €2 billion last year.

German residents’ expenditure on foreign travel rose by almost 6% in 2012, which outstripped the already substantial increase of around 5% seen in 2011. This was primarily driven by German residents’ evidently strong propensity to spend, fuelled not least by their continuing high income expectations, which was also mirrored in their foreign travel budgets. Private travel expenditure went up by almost 7%, mainly owing to a higher use of travel services related to foreign vacations and individual visits. This contrasted with spending on business trips, which shrank by 2% in 2012 after having already fallen by 4% in 2011. Looking at the period of economic recovery as a whole since 2010, it is striking that expenditure on business travel is still falling far short of the pre-crisis levels. This is presumably due to cost cutting measures by many enterprises which adjusted their business travel guidelines during the 2009 recession.

Spending by German tourists and business travelers in other euro- area countries rose at a well above- average rate (+6½%). Among the Mediterranean countries, Italy and France were the main beneficiaries of this greater readiness to spend. In Spain, however, travel expenditure stagnated, while in Greece it experienced a steep decline. Following a temporary upturn in travel to Greece in 2011, the country’s increasingly tense political and economic situation clearly deterred many potential visitors last year. By contrast, the boom in travel to destinations in Turkey, Croatia and Bulgaria persisted. Furthermore, more German residents returned to holidaying in Egypt and Tunisia during the reporting period after visitor numbers had plummeted in 2011 because of the political unrest. Following a sharp fall in 2011, spending on travel to Switzerland was down slightly again in 2012, which in large part was probably due to the Swiss franc’s persistent strength against the euro. To a certain extent, tourists traditionally favoring Switzerland as a holiday destination are likely to have chosen to visit resorts in Austria instead. However, this only partially explains the large 6% increase in spending on travel to this destination. Long distance travel to America and Asia gained greatly in popularity in 2012 compared with 2011. The turnover generated by domestic hotels and restaurants with non- residents continued to develop strongly in 2012, growing by 6%. Even so, the negative net balance of expenditure on and income from travel activity widened by almost €2 billion to €35½ billion in 2012.

The surplus earned from cross- border investment income in 2012 was up by €5½ billion, which was caused by a decline on the expenditure side. The fact that Germany’s investment income account meanwhile shows a sizeable surplus (€62½ billion during the reporting period) is attributable to the continuous buildup of its external net asset position over the past decade and a half. Nevertheless, total revenue in 2012 did not quite match the prior- year figure; it was particularly dampened by lower interest payments from cross- border lending. Earnings from portfolio investment abroad remained virtually unchanged in 2012, while earnings from direct investment were slightly up on 2011. Domestic borrowers paid almost 5% less interest on investments by nonresidents in 2012 than one year earlier. Expenditure on servicing loans declined sharply. In addition, issuers of securities paid much lower dividends to non- residents. On the other hand, the latter obtained higher yields on their direct investments in Germany than in 2011. Labor income, which plays a minor role compared with investment income, recorded only a small year-on-year increase in both revenue and expenditure.

Current transfers to the rest of the world amounted to €55½ billion in 2012. This exceeded the previous year’s total by €2 billion, mainly due to larger transfers to the European Union. By contrast, the value of corresponding transfers from the rest of the world to resident recipients fell by €1 billion to €19 billion. This decline was chiefly connected with lower net income from tax transfers which, however, had increased quite strongly in 2011. On balance, the deficit on current transfers widened to €37 billion during the reporting period. The public sector accounted for nearly two- thirds of this deficit which, as usual, mainly arose from net transfers to the EU budget.

Financial transactions

In 2012, Germany’s current account surplus was again mirrored by high net capital exports (€235 billion) Just under half of this sum was attributable to other investment. The Bundesbank’s accumulating claims under the TARGET2 large-value payment system were once again a crucial factor in this. Additional capital outflows occurred inter alia in the portfolio investment and direct investment accounts. In 2012, Germany’s financial account with the rest of the world was again much affected by the sovereign debt crisis in several euro- area countries and the steps taken to alleviate it. Market activity was initially dominated by lingering concerns among market participants about the economic outlook in the euro area and doubts about the willingness of some member states to carry on reforming, which led inter alia to sharply widening government bonds spreads within the euro area. In the second half of the year, the Eurosystem’s nascent Outright Monetary Transaction (OMT) bond purchase program, together with the decisions regarding the establishment of a single supervisory mechanism (SSM) for banks under the aegis of the European Central Bank, served to calm the markets. Added to this, the crisis countries made visible progress towards improving their external position. On balance, financial transactions to and from Germany were partly influenced by countervailing developments during the fairly turbulent first six months of 2012 and the calmer second half of the year.

Portfolio investment

Amid a persistently very low turnover level on account of the crisis, portfolio investment, which as a rule is particularly quick to react to changes in sentiment on the financial markets, saw net capital exports amounting to €65½ billion last year, compared with net capital imports of €27 billion in 2011. The swing in portfolio investment was predominantly attributable to a marked lift in German investment abroad. Domestic investors purchased foreign securities worth €108 billion net (2011: €22½ billion), with a particular emphasis on interest- bearing paper. German investors’ demand for fixed- interest securities from the rest of the euro area picked up again after plummeting in 2011; this led to net purchases in excess of €37 billion in 2012. Given the considerably reduced yields available in Germany, institutional investors, in particular, demonstrated a growing interest in euro- area debt securities. Above all, there was a strong demand in Germany for bonds issued by the European Financial Stability Mechanism (EFSF) (€23½ billion).

By contrast, purchases of foreign currency bonds issued by non- residents were very limited (€6 billion). Net demand was strongest for securities denominated in Danish krone and Swiss francs. Acquisitions of bonds denominated in US or Australian dollars, which had dominated purchasing activity in 2011, amounted to less than €½ billion in each case after deducting the corresponding sales. Prompted by declining risk aversion, domestic investors showed a growing interest in foreign shares. They purchased equities worth €11 billion net in 2012, after offloading foreign shares on balance in 2011. The comparatively favorable share price trend prevailing in many foreign stock markets is likely to have contributed to this turnaround. This is also underlined by the regional breakdown of share purchases. All in all, investors sought to acquire shares in companies domiciled outside the euro area, which were less affected by the crisis within the euro area.

Conversely, Spanish and Italian shares were sold on balance.

Aside from direct exposures to foreign equities, indirect investment in equities through foreign investment (asset management) companies probably also played a key role. In any case, across 2012 as a whole, German investors purchased foreign mutual investment units to the tune of €21½ billion after close to balanced sales and purchases of these instruments in 2011. In the reverse direction, foreign investors acquired German securities worth just over €42 billion in 2012, which was slightly less than in 2011. However, at a volume of €79 billion, purchases of public debt securities – €27 billion worth of which were issued by resolution agencies – once again exceeded the already high net volume of such purchases in the preceding years of the crisis. This underscores how, in view of the further sovereign downgrades of other countries by the big rating agencies, the search for safe havens remained a key criterion for foreign investors. The full year outcome described above is, however, wholly attributable to the buoyant purchasing activity seen in the first five months of 2012, which then lost much of its steam in the second half of the year.

Unlike in the case of public debt securities, cross-border trading in private bonds and notes resulted in net sales and redemptions over the year as a whole (€26 billion). Foreign investors’ restraint in acquiring German private bonds with an original maturity of over one year was, however, not just demand- related but also supply-driven. Structural factors are partly behind this. For example, the outstanding volume of bank debt securities issued by residents has been waning for several years. Last year alone, this figure declined by around €100 billion. International investors also made net disposals of domestic money market paper (€8 billion). However, as with bonds, they drew a clear distinction between public and private issues. Hence, money market paper issued by the Federal government remained very much in demand, whereas privately issued instruments were offloaded by foreign investors (or redeemed) on balance. Cross- border turnover in German shares receded in 2012 as a result of the crisis. Seen over the year as a whole, foreign investors purchased German equities for €1 billion net.

However, this contrasted with an outflow of foreign capital from German mutual funds amounting to just under €4 billion. As a consequence, the capital flow trends recorded in these two segments in 2011 underwent a complete reversal in 2012. Financial derivatives (which are aggregated to form a single item in the balance of payments) showed net capital exports, as in the two preceding years. At €18 billion, the 2012 outflow was somewhat lower than the prior- year level, however.

Direct investment

The financial and sovereign debt crisis, which has now been going on for several years, is clearly impinging on the direct investment account as well. After expanding by one- sixth in 2011, global foreign direct investment (FDI) inflows declined by 18% to US$1½ trillion last year according to UNCTAD estimates.5 UNCTAD attributes this to macroeconomic fragility and policy uncertainty for investors. The impact consequently varied according to country group and region. The developed countries saw a drastic decline in inward direct investment, with a majority of the euro- area countries experiencing particularly sharp falls. By contrast, foreign direct investment flows to the emerging and developing economies, which are at most only indirectly affected by the crisis in Europe and whose growth prospects are comparatively favorable, were only marginally down. On balance, the level of direct investment in developing countries surpassed inward FDI in the developed economies for the first time, according to UNCTAD data. The cross- border direct investment activities of German enterprises abroad and those of nonresident enterprises in Germany developed along different lines in 2012. While German companies increased their foreign direct investment compared with 2011, foreign investors markedly reduced their investment in Germany. All things considered, direct investment flows to and from Germany resulted in net capital outflows of €47 billion in 2012. The net outflow was primarily due to the cross border activities of companies domiciled in Germany.

While the magnitude of their foreign investment (€52 billion) surpassed the 2011 figure, it was still well below the volume recorded in 2010. On the one hand, domestic enterprises supplied their foreign subsidiaries with additional equity capital and strengthened their capital base by reinvesting earnings. On the other hand, German parent companies saw capital inflows in the form of intra- group credit transactions, whereby they borrowed on a large scale from their foreign affiliates (reverse flows). The rising level of direct investment – also during the crisis – underlines the significance for German firms both of foreign business and of maintaining a market presence abroad. In a survey conducted by the Association of German Chambers of Commerce and Industry (DIHK) investigating the motives behind foreign investment, almost half of the respondent companies in 2012 specified the promotion of marketing and customer services as the driving factor.6 While this objective gained in importance compared with 2011, German enterprises were warier of the costly business of establishing production plants outside Germany.

Of late, the acquisition of foreign enterprises played only a minor role in the expansion of German direct investment abroad. In 2012, German direct investment abroad was mainly concentrated on the industrial countries, which accounted for more than two thirds of the total volume. This focus contrasted with the situation in 2011, when the emerging and developing countries were the main target. In the period under review, German direct investors’ interest within the euro area was primarily focused on the Netherlands and Luxembourg. Both of these countries are major locations of international holding companies, meaning that the funds invested there do not have to remain within those countries’ national borders. Within Europe, additional investment was channeled to the United Kingdom. Outside Europe, China was the most sought-after investment location. In terms of volume, German private equity companies proved to be the biggest investors in 2012, followed by the financial sector.

The Automotive Industry in Germany A Century and More of Automotive Excellence

Last year marked the 125th anniversary of the birth of the automobile in Germany. On January 29, 1886, Karl Benz registered his “vehicle powered by a gas engine.” The resulting patent issued is generally considered to be the birth certificate of the automobile as we know it. Also the home of the world’s first four-stroke internal combustion engine, Germany continues to occupy a unique position in the international automotive industry. German OEMs account for 17 percent of global passenger car production. Domestically, the automotive industry remains the country’s most important economic sector – and Europe’s single largest auto market. Germany also hosts the largest concentration of OEM plants in Europe. Annual EUR 19.6 billion commitment to automotive research and development (R&D) is reflected in the creation of new environmentally friendly technologies: conventional drive technologies are being optimized and new modes of driving developed. Around ten new patents are registered each day; making Germany the most innovative auto nation in the world.

The Industry in Numbers

  • The automotive industry is the largest industry sector in Germany. In 2011, the auto sector recorded turnover of EUR 351 billion – around 20 percent of total German industry revenue.
  • German passenger car and light commercial vehicle manufacturers recorded foreign market generated revenue of EUR 194 billion for the year 2011. For the same period, domestic market generated revenue of EUR 80 billion was created.
  • The automobile industry is one of the largest employers in Germany, with a workforce of around 712,500 in 2011.
  • Germany is Europe’s number one automotive market in terms of production and sales; accounting for over 30 percent of all passenger cars manufactured and over 20 percent of all new registrations.
  • Germany also hosts the largest concentration of OEM plants in Europe. There are currently 47 OEM sites which are producing for major auto brands.
  • German automobile manufacturers produced more than 12.9 million vehicles in
    2011 – equivalent to 17 percent of worldwide production.
  • Germany is the European car production leader: some 5.9 million passenger cars (and more than 439,000 trucks and buses) were manufactured in German plants in 2011.
  • Around 77 percent of cars produced in Germany in 2011 were ultimately destined for foreign shores.
  • Germany’s automotive sector is the country’s most innovative industry sector, accounting for 33 percent of total German industry R&D expenditure of EUR 59.2 billion.
  • R&D expenditure for 2011 was EUR 19.6 billion – helping Germany consolidate its globally leading position in the world economy.
  • R&D personnel within the German automobile industry reached a level of just over 89,000 in 2011.
  • In marked contrast to other European countries, Germany’s unit labor costs continue to fall – decreasing by a yearly average of 1.2 and 1.5 percent respectively for the year 2010. In 2011, unit labor costs rose a modest 1.2 percent.

The German Auto Industry – Emerging from the Crisis

In 2009, global economic production fell for the first time in six decades. Global demand for cars fell by four percent, with commercial vehicles hit harder still; recording a nine percent drop in international production. Germany, like most industrialized nations, did not go untouched by the worst international financial crisis in modern times. The German economy has nevertheless proven particularly robust in the face of the turbulence that has hit demand and trade across the globe. As Germany’s key industry, the automotive sector in particular has shown the way out of the international recession. Moreover, the recovery has led to solid growth in the aftermath of the global financial crisis. In 2011 the German automotive industry further affirmed its position as the mainspring for the German national economy. Around one fifth of total sales from the overall manufacturing sector occur in the automotive sector.

During the mid-nineties this share was around 13 percent. As such, the automotive sector is the most important economic sector in Germany. The domestic passenger car and light commercial vehicle market reached record highs in 2011. Combined export and domestic sales in 2011 reached EUR 274 billion (10 percent increase on the previous year). This is equivalent to an eight percent increase on 2007 levels – further proof that the industry has significantly exceed pre-crisis sales levels. The sharp decline in foreign business activity experienced directly after the financial crisis of 2008 has been wholly compensated in 2010. This turnaround was further consolidated in 2011 with an increase of 11 percent.


Renewed Domestic and International Market Demand

Domestic and international market potential for energy efficient passenger cars is huge. The global market is expected to grow by 29 percent annually through 2020. Increased demand in Asian markets in particular has provided an inducement to German automotive export and production levels. In 2011, the German auto industry exported vehicles worth EUR 194 billion. The German industry has already made the necessary investment decisions for future electro-mobility development. During the whole premarket phase, EUR 17 billion will be invested in electro-mobility R&D. This represents a significant contribution to achieving the strived-for lead market and provider position within the segment until the year 2020. This goal is achievable as part of a three-stage process:

  1. Market preparation phase to 2013 – R&D and showcase project focus
  2. Market ramp-up phase to 2017 – energy-efficient vehicle and infrastructure market development focus
  3. Mass market phase to 2020 – sustainable business model focus

The Most Attractive Business Location in Europe

According to the A.T. Kearney Foreign Direct Investment Confidence Index 2012, Germany is the most attractive FDI destination in Europe. Internationally participating business executives also conclude that ongoing investment in sustainable business is an absolute imperative for successful market competition and shareholder satisfaction. The UNCTAD World Investment Report 2011 confirms Germany’s reputation as one of the most attractive business locations in continental Europe. Ernst & Young finds Germany to be the most attractive investment location in Europe in 2012 with its Standort Deutschland 2012 – Der Fels in der Brandung? (A pillar of strength in troubled times?) international manager study. American interview partners also singled out German R&D – and partnerships with German universities and research centers– for specific praise. German R&D excellence is held in such high esteem that a number of US companies have established their own research centers here – many of them with global reach.

The World’s Most Competitive Auto Location

Within the context of the international economic downturn, the German automotive industry has done remarkably well. According to Ernst & Young’s European Automotive Survey 2011 of senior automobile manufacturer and supplier decision makers, Germany is the world’s most competitive automobile production location. In European comparison, Germany has used the global downturn to build on its lead as an investment location.

Auto Industry Value Chain

No other country in Europe can boast a comparable concentration of auto related R&D, design, supply, manufacturing, and assembly facilities. Accordingly, no other country in Europe provides the same market opportunities as those offered by the German auto industry. The auto industry in Germany thrives as a result of the diversity of companies active in the sector: large and medium-sized auto manufacturers alike are to be found in Germany, as are system and module suppliers, not to mention numerous small and medium-sized tier 2 and 3 suppliers. In fact, around 85 percent of auto industry suppliers are medium-sized companies. All of these suppliers provide up to 70 percent of value added within the domestic auto sector – ensuring that the German auto industry remains at the forefront of the competition. Value added is moving to the supplier side, and increasingly also to non-auto industry sectors (e.g. the chemical industry in electro-mobility). Not unsurprisingly, international suppliers are increasingly attracted to Germany as a business location. To date, the world’s ten largest non-German auto industry suppliers have successfully established operations in Germany.

World Innovation Leader

Complete industry value chain presence ensures that new and innovative products are made to the highest possible technological standards. The facts speak for themselves:

  • With an average of 10 patents registered per day, Germany is the world leader in auto industry patents. Around half of these patents are related to environmentally friendly technologies.
  • Companies based in Germany registered the most patents at the European Patent Office for the period 2007-2010.
  • With around 13,000 patents granted at the European Patent Office in 2010, Germany‘s share is about twice as large as that of France and the UK combined.
  • Germany is also the leading European nation in triadic patents (patents registered at the three major global patent offices: the European Patent Office, the United States Patent and Trademark Office, and the Japan Patent Office).

R&D Infrastructure

Germany has the highest concentration of all European automotive OEM and tier 0.5 supplier R&D centers. This makes the country the most important automotive development activity location in Europe. German-based suppliers and service providers profit from close client interaction starting from the pre-development stage. They can take advantage of joint research activities with some of the world’s leading automotive technology research institutes and universities. Numerous innovation clusters integrate industry, science and education in automotive-related areas including mechatronics, microelectronics, mechanical engineering, manufacturing processes, and material sciences.

The World’s Leading Auto R&D Nation

No other industry invests as much in R&D – around EUR 19.6 billion in 2011 alone. As such, the auto industry in Germany accounts for more than one third of the country’s total R&D expenditure. Moreover, auto manufacturers and suppliers located in Germany are among the world’s leading patent applicants. Around 3,650 patents per year make the German auto industry the world patent champion – no other country registers as many auto industry patents.

Public-Private Partnership – Germany’s High-Tech Strategy

As R&D is considered to be among the most important areas for the development of the German economy, industry and the public sector have made a commitment to spend around three percent of national GDP per year on R&D activities. This amounts to approximately EUR 70 billion R&D spending each year. In addition, an unprecedented campaign to foster the advancement of new technologies has been launched by the German government.

Location Factors

World Class People

Germany’s world-class education system ensures that the highest standards are always met. Eighty four percent of the German population have been trained to university entrance level or possess a recognized vocational qualification – above the OECD average of 67 percent. Over 30 percent of German university graduates have a natural sciences or engineering degree background. The mechatronics and automotive engineering disciplines have recorded remarkable growth levels, witnessing a 121 percent leap in student numbers in the past decade alone. The comparatively new mechatronics interdisciplinary program can also boast more than 11,000 students. The auto industry is the most popular career path among engineers, with manufacturers and component suppliers among the preferred employers. The steady flow of mechanical engineers graduating from approximately 100 universities and colleges helps to ensure the continuity of German engineering excellence – a guarantor for the sector’s enduring success.

Competitive Labor Market

High productivity rates and steady wage levels make Germany an attractive investment location. Labor cost increases have been the lowest in Europe in recent years, with a modest annual increase rate of 1.6 percent. German productivity rates are almost ten percent greater than the average of the EU’s 15 core national economies and almost one quarter higher than the OECD average.

Highly flexible working practices such as fixed-term contracts, shift systems, and 24/7 operating permits contribute to enhance Germany’s international competitiveness as a suitable investment location for internationally active businesses.

Competitive Infrastructure and Logistics Edge

Germany’s infrastructure excellence is confirmed by international studies. For example, the 2011-2012 Global Competitiveness Report of the WEF ranked Germany second in global comparison for infrastructure; singling out the country’s extensive and efficient infrastructure for highly efficient transportation of goods for special praise.

Competitive Tax System

Germany offers a competitive tax system providing attractive tax rates for companies. In recent years, the German government has implemented root and branch reforms of the tax system to make the country a more attractive business location. The German tax system allows for differing tax rates in German municipalities. On average, corporate companies face an overall tax burden of less than 30 percent. Significantly lower tax rates are available in certain German municipalities – up to eight percent less. The overall tax burden can therefore be as low as 22.83 percent. This makes Germany’s corporate tax system one of the most competitive tax systems among the major industrialized countries.

Business and Working Culture in Germany

German managers are mostly about cold results. In contrast to the relationship-based cultures of Arabian, African, Latin American or Pacific Asian countries, this results-based culture places huge value on precisely-written agreements and formal contracts. Existing, trusting, human relationships are simply not a pre-requisite when it comes to starting or closing on a business venture in Germany. It’s certainly helpful to have a long-standing relationship with your future business partner, but this pre-business relationship will not matter a jot if the business could be done better somewhere else. Punctuality is a big deal when it comes to setting a standard for doing business with the Germans. Unpunctual business partners are perceived as lacking seriousness, drive and thus credibility. Unexcused lateness should be avoided at all costs. While time is often just a guideline in Arabian or African countries, the Germans tend to plan their business activities down to the second. It means that Germans sometimes take deviations from the timetable as an affront – under certain circumstances it can mean the end of the business relationship.

That said, they are fair with it; you can demand that same relationship with punctuality from the Germans and be just as irritated if they do not adhere. Working days generally begin early in Germany: office hours starting at 8 are not uncommon. This is accompanied by a pretty crushed rush hour between 6 and 8am. Balancing this out though, many workers are already on their way home in the late afternoon – on Fridays, weekends can start as early as 2pm. This working rhythm facilitates getting your own work done early, which is especially recommended when your work depends on the input of others. In general, the ability to schedule a meeting after 4pm is not always guaranteed.

Pragmatism and candor are important in German business practice. German business people do not pull punches and discuss problems as directly as they do positives, leaving you in no uncertain terms as to their position on the subject. Polite sensitivity over difficult subjects is pretty rare, but again, to maximize efficiency, this directness is expected from a German’s business partner as well. German businesspeople love facts and topical presentations. The small talk you find in other business spheres is kept to a minimum in Germany, mainly because it is not seen as something that will bring the business to any meaningful conclusion – another noteworthy aspect of this results-driven culture.
A dependence on Formalism also frequently distinguishes the German business mentality. This is a result of a more conscious determination to play by the rules than you might find anywhere else. Because of this, you end up in a serious, but reliable atmosphere.


German is the official language. Pretty much everybody speaks it, but dialects are a cause of significant differences between regions, especially in terms of pronunciation. Bratwurst (grilled sausage) is ‘Braad Voorrst’ in the north, ‘Broad Washed’ in the south, for example. Most people rely on English for a second language; it’s the recognized international language and is established as such in the country. Foreign visitors should have no problem getting around in English only. At higher levels in German company hierarchies, it’s normal for fluent English to be

English to be demanded for a position.

The most important forms of communication are email and telephone, with fax and post ever rarer and really only for important documents. Emails, letters and missed phone calls should be answered as soon as possible or the initial sender will assume you were uninterested. Many German companies have a rule of responding within 24 or 48 hours, and as with every other rule they adhere to, they expect the same in return.

Your first meeting with your business partner

Formal clothes are expected for a business meeting with a German. With women just as much as men, a conservative choice of business dress will definitely count more in your favor than against you. Along with the usual handshake, make direct eye contact upon greeting and goodbye and do not forget to address your contact with any titles and his surname – e.g., ‘Doctor Schmidt’, rather than just ‘Jürgen’. A quick patter of small talk in subjects that are of major interest may start things off, but you’ll quickly be down to business. In contrast to some Asian countries and North America, Germans prefer to keep a fair personal distance. Touch – excepting handshakes – or standing too close to one another, are both a no-no. Business cards are exchanged at the first meeting, although less formally than in Asia, for example. Unlike the Arabian business world, they are not exchanged at every subsequent meeting either.

Business meeting procedure and important negotiating positions

Wheeling and dealings are carried out in Germany with a maximum of preparation, a clear starting position and precise definitions. Sudden changes in direction are not popular. Trust in one’s own product or service is important and their advantages or features should be quickly and concisely summarized. Oversell or hard sell will not be taken seriously and turned down. Negotiations are formal, detail-based and direct. Germans do not really expect compliments with regard to their service, more they assume that everything is satisfactory in the absence of complaints. Germany is a buyer’s market with a good deal of brand awareness. Quality, design and packaging are just as meaningful as the price. But in contrast even to other European countries, quality of product or service counts for more than price alone. Much more important selling points in Germany are guarantees, services and general ease and quality of maintenance or repair. German businesspeople generally appreciate high-quality products and services punctually – and once again, from the German side things such as payment and contractual obligations will be just as efficiently and punctually delivered. Targets and expectations should be discussed in the first meeting, so as to avoid irritating post-negotiations. These can be avoided by keeping informal minutes, preparing a summary of the meeting or a rough draft of the contract. This draft then forms the basis for subsequent negotiations.

Business dinners

In German restaurants it is not uncommon to just stroll in and sit down. Germans usually don’t drink at lunch and only really do it in the evenings after consulting their guests. Beer and wine are the usual drinks, but open boozing is not acceptable at any time. After everybody’s got their food but before they start eating, you wish all your German friends a ‘guten appetit’ (which basically means ‘good appetite’ – enjoy your meal). You’d normally eat with cutlery, even in restaurants from cultures where cutlery might not be so normal. Tips are generally between 5 and 10%.


Where in other countries the motto is: presents develop a relationship and foster business, the giving of such in Germany is unusual, especially at the first meeting. While perhaps in Asia the relationship to business contacts is built and maintained by certain gifts and other flatteries, they are regarded somewhat more somberly in Germany. You’re a lot better off taking someone out to dinner. But with existing business contacts gift-giving during visits or for celebratory occasions is a lot more normal. The type of gift and packing play a subsidiary role – there are no possible blunders in terms of color or shape, for example. But you should beware that German companies react somewhat sensitively to high-value gifts, and may turn such down fearing being perceived to be accepting a bribe of sorts. This is nothing personal, merely a self-protection against an accusation of corruption from a third party. Most companies have corporate governance compliance officers who regulate employees on how, when and whether to accept gifts.

Private dealings

Private and public spheres of German life are generally well-separated, meaning private invitations from business partners are rare unless you have known your contact for years. To this end, you should also avoid contacting a less than very familiar German business contact any time outside of business hours. But should you be lucky enough to get an invitation to the home of your business partner, flowers for the lady of the house and a bottle of wine are generally the accepted norms, as is, once again, punctuality.

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