Foreign Investment in Germany
Foreign investment plays a major part in the nation’s economy: Germany successfully attracts substantial foreign direct investment (FDI) from around the globe. Some forty-five thousand foreign firms do business in Germany providing the economy with jobs for three million people. In the German economy as a whole around a quarter of the total workforce rely on export-driven work.
How easy is it to Do Business in Germany?
The German economy is highly regulated, which is why the International Finance Corporation (IFC), a member of the World Bank Group, placed Germany just 114th out of 190 developed countries in an international ranking indicating their ease of setting up a new business. The IFC’s assessment covers eleven key factors affecting the ease of operating an enterprise within these economies. They rank Germany as follows:
- Resolving Insolvency: 3rd in the world
- Getting Electricity: 5th in the world
- Dealing with Construction Permits: 12th in the world
- Enforcing Contracts: 17th in the world
- Doing Business: 17th in the world
- Getting Credit: 32nd in the world
- Trading Across Borders: 38th in the world
- Paying Taxes: 48th in the world
- Protecting Minority Investors: 53rd in the world
- Registering Property: 79th in the world
- Starting a Business: 114th in the world
Particular Issues with Doing Business in Germany
Business start-ups in Germany face a number of administrative hurdles that need to be overcome before they can start trading. All new businesses are required to register with the appropriate local chamber of industry and commerce, the local office of business and standards, the local commercial register and the relevant professional trade association before they can even operate.
The registering of business property in Germany is a time-consuming process involving obtaining an extract from the German land registry and notarising the transfer agreement before obtaining waiver of pre-emption rights with the local council and then paying transfer tax. The whole process averages forty days to complete.
The taxation regime for businesses in Germany is labyrinthine in its complexity. A business can be subject to up to fourteen different types of tax and there are nine payment cycles in every fiscal year. For companies operating in Germany the system is both time-consuming and challenging in its complexity.
Government fees for imports and exports in Germany are not particularly onerous in the amount charged. However, the documentation required is very extensive. Four different forms are required for each export transaction and five for imports. The whole administrative process averages a week to complete.
Electronic Payment Systems in Germany
Germany’s primary electronic payment method is known as Elektronisches Lastschriftverfahren (ELV). It is an electronic direct debit payment system widely supported by German banks. Companies wishing to trade in Germany need to be aware of this payment method and should gear up their payment systems to accommodate it.
Everyone who opens a personal bank account in Germany is issued with a debit card most commonly known as EC-Karte or Girokarte. These should not be confused with credit cards, which are used by less than a third of German consumers. For online purchases the German customer uses ELV to authorise the retailer to withdraw payment direct from his or her current account. As part of this transaction the customer provides the retailer with their bank account number and other details.
For the retailer the process involves working with a third-party payment gateway company. No check is made by the bank to see if the customer has sufficient funds to complete the purchase, so charge-back costs will later be applied to the customer’s account.
Enabling Your Business to Trade in Germany
As indicated above, the process of setting up your firm to do business in Germany is somewhat bureaucratic and procedure-driven.
Chamber of Industry and Commerce
Your starting point should be the local chamber of industry and commerce where you are required to register your business. To check that the business name you wish to use is still available, you should first check with the register of company names held by the Berlin Chamber of Industry and Commerce. A written enquiry has a charge of twenty-five Euros but advice given over the phone is free. The online registration process should take no more than a working day and there is no charge.
This is the organisation you will need to liaise with in order to notarize your business’s articles and memorandum of association. This process was simplified and made more efficient by the German government’s Act on Modernization of Cost Rules (2. Kostenrechtsmodernisierungsgesetz) in 2013. This act provided the system with more transparency and regulated notarizing costs.
You will be required to deposit a minimum sum of capital in your business bank account. If you wish to establish a GmbH, a company with limited liability in Germany, you will need to deposit at least twenty-five per cent of the initial capital before registration. In cases where the amount would be higher, however, you will need to deposit at least half the minimum capital, in other words at least EUR 12,500 in your bank.
Local Trade Department (Gewerbeamt)
You will need to notify the local office of Business and Standards of your intention to trade. There are particular types of business, such as a restaurant or a broker, who have to apply for a trading permit (Gewerbeerlaubnis) before setting up, although this does not have to be produced when placing a GmbH on the commercial register.
In cases where a permit is not required you simply have to notify the trade department. They will then issue your business with a trading licence (Gewerbeschein). In doing so you also satisfy the requirements of the German national statistical office, which produces figures on national economic performance. Your notification also covers the appropriate Chamber of Industry and Commerce, the local Labour Office, the Social Security and Federal Health Insurance Office.
Professional Association (Berufsgenossenschaft)
You will need to register with the relevant professional trade association. These associations facilitate your business’s occupational accident insurance and registration should take place within a week of formally establishing your business by notarizing your articles of association. The process of registration is free and takes approximately one working day.
Local Labour Office
German law requires you to notify the Local Labour Office of the establishment of your business. This can be done in writing or over the phone and no fee is charged for the process. Once registered your business will be assigned an eight-digit operating number.
Social Security Office
It is important to register your business with the local social security office so that your employees can qualify for health and social insurance. This includes mandatory health, unemployment, and annuity insurance and there is no charge for your company to register.
Local Tax Office
Within four weeks of starting-up your business, and no more than a month after notarizing your articles of association, you should lodge your completed taxation details with your local tax office.
German Etiquette, Customs, Culture and Business
Germans place great emphasis on thorough planning and preparation: this is as true in business as it is in every other sphere of German life. Having planned and scheduled their work, German business people do not appreciate sudden changes and deviations from what has been agreed. Work is a serious business in Germany; although Germans enjoy fun and relaxation as much as anyone else, work is not the place for frivolity and they like to keep work and other areas of life rigidly separated.
To do business in Germany one has to understand a number of key areas of the German approach to commerce:
Your German colleagues will be extremely offended if you turn up late for a meeting. In fact the norm is to arrive a little early, especially for important meetings. If you are inadvertently delayed, such as by travel disruption, it is important to ring ahead to explain.
Focus on the task
Your meetings with German colleagues should be structured and all about the task rather than allow it to drift off into very general discussions.
Structures and rules
German economic success is built on clear guidelines, regulations, rules, processes and procedures. Written agreements and contracts are the norm rather than purely verbal commitments.
Reliability and avoidance of uncertainty
Germans like to avoid any uncertainty in business transactions and value consistency and reliability in their dealings.
Separation of private and public spheres
Unlike the current trend in Anglo-American business, home and the workplace are still seen as entirely distinct realms in Germany. One should understand this distinction when doing business with German colleagues.
Directness of communication
German business communication is invariably direct and frank. UK and American business people who are accustomed to often using indirect hints and non-verbal clues may find this approach a little abrupt, but German managers feel it gives all concerned better clarity and less room for misunderstandings.
Understanding the German Culture
Germany has a highly civilised culture and a consistently strong economy. The German way of doing things is not so much about national stereotypes, but is about the ways of doing business that Germans feel comfortable with and that they find works for them. Foreign businesses looking to trade in Germany should take careful account of this cultural context.
How Not to Enter the German Market: The Example of Walmart
The failure of Walmart in Germany is a notable example of how not to go about taking your company into the German market. Walmart’s mistakes provide a lesson from which we can all learn.
In the late 1990s Walmart based its entry into the German market on a series of strategic business acquisitions. They acquired the twenty-one stores of the well-known Wertkauf chain in December 1997 paying an estimated $1.04 billion for a chain with annual revenues of €1.2 billion. Then in 1998 Walmart purchased seventy-four hypermarkets belonging to Spar Handels AG, the German arm of France’s Intermarché group. The chain had revenues of €850 million and Walmart paid €560 million.
Despite this promising foothold in the German market things quickly went wrong for Walmart. Their mistakes fell into several key areas:
Entry by Acquisition
Walmart entered the German market by means of two major acquisitions. The first, the Werkauf chain, was an inspired strategic move. Werkauf had prime locations, good sales and a capable management team. The later acquisition of a number of hypermarkets from Spar Handels AG, on the other hand, was anything but a shrewd move. Spar’s stores were mainly situated in less well-off inner city areas and the majority were desperately in need of upgrading. Furthermore, most of the stores acquired were on a leasehold basis so Walmart did not even gain the real estate. Even worse for Walmart was the fact that turnover per square metre was amongst the worst in the German retail market.
Management by 'hubris and clash of cultures'
An authoritative report by the University of Bremen highlighted the problems caused by the blinkered attitude of Walmart’s US managers that they refer to as ‘hubris and clash of cultures’. Walmart’s American senior executives who were assigned to manage the operation in Germany had little or no knowledge of German business culture, refused to learn German and ignored the advice of the German senior managers they had taken on board as part of their acquisition process.
Walmart quickly lost large numbers of their German store managers and supervisory staff who took jobs elsewhere because they were unhappy with the American company’s management style. These key staff cited low wages and alleged poor quality produce as their primary reasons for leaving. Managers were also unhappy with the US practice of moving managers on to another store every year or two.
The approach by which Walmart had achieved success in the United States and elsewhere did not fit in with the culture of Germany. Industry and commerce in Germany, like much of continental Europe, is highly-unionised. German trades unions exercise enormous power both in the workplace and in the political sphere. However, Walmart, in common with many American companies, is a strictly non-union employer.
When faced with mounting employee costs in Germany Walmart’s answer, as it would be in the US, was to start laying-off staff. However, they were taken by surprise by the heavy cost of making employees redundant in the highly-regulated German economy and their financial difficulties were exacerbated.
A failure of strategy
A strategy of ruthlessly undercutting competitors with their ‘everyday low prices’ guarantee had worked for Walmart in every other market. To the company’s consternation the strategy back-fired in Germany. Walmart’s major German competitors, such as Aldi and Lidl, hit back and cut their own prices even more drastically. Furthermore, a number of German newspapers and consumer organisations analysed Walmart’s ‘everyday low prices’ promise and publicly concluded that it was meaningless.
German consumers did not like Walmart’s US-style approach to customer service either. They found the in-store ‘greeters’ and staff constantly approaching customers to guide them far more intrusive than they were used to. Walmart found that their usual customer service approach was ineffective in Germany and was very expensive in terms of staffing costs.
Walmart had succeeded in the US by being one of the first retailers to offer customers a 24/7 retail experience. With legislative restrictions on opening hours, however, they could not launch this strategy into the German market.
Infringements of German laws and regulations
Walmart wilfully failed to comply with a number of rules and regulations of Germany’s highly-regulated retail market. This was largely because of the company’s unwillingness to adapt to German culture and their refusal to consider abandoning strategies that had been so successful elsewhere. The result of these repeated infringements was a continuing cycle of heavy fines and negative publicity. Amongst the areas of legislation where Walmart fell foul were:
- Breaches of German antitrust legislation through their discounting strategy;
- Failures to comply with the requirements to publish financial information; and
- Failure to institute a deposit/refund strategy for the plastic and metal drinks containers on sale in their stores.
By failing to follow the kind of basic, common-sense rules for doing business in Germany, the ones that we have discussed in this piece, Walmart entered the new millennium with mounting year-on-year losses in their German operation. In July 2006 they conceded defeat by selling-off their 85 German hypermarkets to a local competitor, Metro. In doing so they sustained a loss of nearly one billion dollars. Walmart are an efficient, highly successful multi-national company. However, by failing to take account of the nature of the German market, they came badly unstuck in that country.
- Ranking of economies – Doing Business – World Bank Group
- Top 10 challenges of doing business in Germany – TMF Group
- Starting a Business in Germany – Doing Business – World Bank Group
- Why did Wal-Mart fail in Germany? – The Tim Channel
- Failure of Walmart in Germany – Assignments Box
- Business etiquette in Germany: punctuality, gift giving and Corporate Social Responsibility – Business Culture
- Understanding German Business Culture | Working in Germany | Expatica Germany