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Country Commercial Guides FY 2000: Germany Report prepared by U.S. Embassy Bonn, released July 1999 Note*

CHAPTER I. EXECUTIVE SUMMARY

This Country Commercial Guide (CCG) presents a comprehensive look at Germany's commercial environment, using economic, political and market analysis. The CCGs were established by recommendation of the Trade Promotion Coordinating Committee (TPCC), a multi-agency task force, to consolidate various reporting documents prepared for the U.S. business community. Country Commercial Guides are prepared annually at U.S. embassies through the combined efforts of several U.S. government agencies.

The political and economic situation in Germany has changed significantly, with the new SPD/Greens coalition government replacing the 16-year-old Kohl government in the September 1998 national elections, and the implementation of the European Monetary Union on January 1, 1999. Despite the modest structural reforms implemented by the former Kohl government, many German experts recognize the need for more reforms in the areas of business taxation, mandatory pension and health system. Labor market rigidity and persistent high levels of unemployment, rising government debt as a result of international competition, a graying population, and continued transfers to eastern Germany are among the problems the new government has to address. However, the SPD won the elections largely with an anti-business economic program that clearly carried the handwriting of former Finance Minister Oskar Lafontaine who in defending a keynesian demand-oriented policy course was much closer to the left wing of the SPD than the business-oriented Chancellor Schröder. With the abrupt departure of Lafontaine and the arrival of the new Finance Minister Hans Eichel, the German government was moving towards a more pragmatic view of the needs for business-friendly policies. Although the government has not taken bold action on structural reforms yet, the proposed Federal budget 2000 and the other parts of the "Future Program 2000" indicate a good start in making German industry more competitive through the reduction of business taxes and labor costs.

Real GDP growth in 1997 and 1998 was 1.8 and 2.3% respectively. The German economy is forecast to slow to 1.5% in 1999, picking-up to around 2.5% in 2000. The economic slowing in 1999 will be largely the result of the slowdown in German exports that began in mid-1998 in response to the financial crisis in Russia, Asia and South America. A recovery of German export markets, improvement in private consumption and a robust investment in equipment will be the main factors behind the projected rebound in the second half of 1999 and through 2000. The German labor market situation, however, will remain difficult, especially in eastern Germany. Job creation in all of Germany has almost come to a halt and although overall unemployment is expected to drop by around 200,000 on average in 1999 primarily due to demographic reasons and the implementation of a special youth employment program in January 1999. For the year as a whole, the unemployment rate is projected to drop to below 11%, down from 11.1% in 1998 and a record high 11.4% in 1997.

For American companies, the German market, Europe's largest, continues to be attractive in numerous sectors, and remains an important element of any comprehensive export strategy in Europe. While U.S. investors must closely study the bottom line before buying into Germany or expanding their position, they can count on high levels of productivity, a highly skilled labor force, quality engineering, a first-class infrastructure, and a location in the heart of Europe.

Successful market entrants are those that have innovative products featuring high quality and modern styling. Particularly in the consumer goods sectors, Germans appreciate innovation and high technology. New solutions in the multi-media area, and technologies and services which will help more Germans join the Internet generation, offer great potential. U.S. products are especially well regarded when they offer cutting edge technology: computers and computer software, electronic components, health care and medical devices, synthetics and automotive technology. Price will not always be the determining factor for the German buyer, even for inputs in the intermediate stages of production, where the manufacturer cares deeply about his own product and service reputation.

Approaching the German market, exporters must recognize the country for what it is: a decentralized collection of states and regions as diverse as those in the United States. Bavarian and Rhineland tastes, for example, differ distinctively. An American company seeking sales in Germany must ensure that its marketing strategy takes these differences into account and should choose a distributor with country-wide capability, often necessitating several regional locations. Too often, U.S. exporters seek to service their clients from a single European location, or even directly from the United States. After initial entry into the German or European market, this is likely to be inadequate, especially recognizing that the chief competition faced by most American companies are the German domestic firms themselves, with their natural advantage of proximity. Success in the marketplace can be achieved by countering this comparative disadvantage with high quality products and service, at the right price.

Establishing a physical presence in Germany may be the right solution for some firms. German efforts to privatize the energy, telecommunications and transportation sectors are being assessed by numerous American firms because of the attractive opportunities they imply. For investors, the still high marginal tax rates despite modest cuts and complicated tax laws may constitute an obstacle, although deductions, allowances and write-offs help to move effective tax rates to a more internationally competitive level.

Germany presents few formal barriers to U.S. trade or investment interests (with the exception of the EU Common Agricultural Policy). Germany's regulations and bureaucratic procedures, however, can prove a baffling maze, blunting the enthusiasm of U.S. exporters. While not discriminatory in the classic sense, government regulation is often complex and may offer a degree of protection to already-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 do their homework thoroughly and make sure they know precisely which standards apply to their product, and that they obtain timely testing and certification. This is doubly important because, to the extent EU-wide standards are developed, there is a high probability that the existing German standard will form the basis for the eventual European standard.

Further information on Germany and other European markets can be found on the "Showcase Europe" homepage: http://www.sce.doc.gov; this is a comprehensive source for a wide range of market research and business counseling information assembled by the U.S.& Foreign Commercial Service which is designed for U.S. exporters exploring the European marketplace.

Country Commercial Guides are available for U.S. exporters from the National Trade Data Bank's CD-Rom or via the Internet. Please contact Stat-USA at 1-800-Stat-USA for more information. Country Commercial Guides can be accessed via the World Wide Web at http://www.mac.doc.gov. They can also be ordered in hard copy or on diskette from the National Technical Information Service (NTIS) at 1-800-553-NTIS. U.S. exporters seeking general export information/assistance and country-specific commercial information should contact the U.S. Department of Commerce. Trade Information Center by phone at 1-800-USA-TRADE or by fax at (202) 482-4473.