Germany is Europe’s second most populated country and the country with its largest economy. As a member of the European Union (EU), Germany is a key member of the economic, political, and defense of economic and political union. Germany was economically devastated by wars fought in the 20th century ultimately resulting in the division of Germany into the eastern German Democratic Republic (GDR) and western Federal Republic of Germany (FRG), commonly known as East Germany and West Germany in 1949. The democratic FRG joined western economic and security organizations, the EC (now the EU) and NATO, while the communist GDR became a member of the Warsaw Pact. The fall of the USSR and the end of the Cold War allowed for German reunification in 1990. Since then, Germany has used substantial resources to lift eastern productivity and wages to the level of western standards. Germany, whose official name is Bundesrepublik Deutschland, BRD (Federal Republic of Germany, FRG) has a Real GDP of 3.76 trillion (USD), accounting for 28% of Europe’s GDP. Germany’s low unemployment rate and crime, developed infrastructure, and a highly skilled labor force all work to the advantage of the country. Germany’s economy is principally driven by its services sector, that includes the tourism and banking industries, which are responsible for nearly 70% of Germany’s total GDP. Nearly one-third of Germany’s GDP is derived from the manufacturing and construction sectors, that includes automotive, machinery, chemicals, and electronic machinery.
Balance of Payment
The Germany balance of payment is steadily increasing due to a reduction in imports while exports remain stable resulting in a trade surplus.
The European Union (EU), formed in 1951, is currently the world most integrated trade block. Its single Europe-wide market has a single currency (the euro) for regional trading. European Union goods exports to the global market are worth USD 5887 billion and its imports were worth USD 5785 billion during the year 2017. The EU consists of 28-member countries that are Austria, Belgium, Bulgaria, Denmark, Finland, Germany, France, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Romania, Spain, Sweden, United Kingdom, Cyprus, Croatia, Slovakia and Slovenia. European Union is comprised of five EU institutions: the European Parliament, the Council of the EU, the European Commission, and the Court of Justice and Court of Auditors. There are no barriers to trade within the EU.
Germany’s Top 10 Exports
Nearly 60% of Germany’s exports are received by the following countries that are listed from highest dollar value:
1. United States: US$125.9 billion (8.7%)
2. France: $118.6 billion (8.2%)
3. China: $97.6 billion (6.8%)
4. United Kingdom: $94.7 billion (6.6%)
5. Netherlands: $91.4 billion (6.3%)
6. Italy: $73.9 billion (5.1%)
7. Austria: $70.3 billion (4.9%)
8. Poland: $67.3 billion (4.7%)
9. Switzerland: $61.4 billion (4.3%)
10. Belgium: $49.8 billion (3.4%)
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The following export product groups represent the highest dollar value in German global shipments during 2017 (and the chemical industry). The percentage of each export category is presented in terms of overall exports from Germany.
1. Vehicles: US$257.2 billion (17.8% of total exports)
2. Machinery including computers: $245.4 billion (17%)
3. Electrical machinery, equipment: $148.8 billion (10.3%)
4. Pharmaceuticals: $84.1 billion (5.8%)
5. Optical, technical, medical apparatus: $72.8 billion (5%)
6. Plastics, plastic articles: $63.6 billion (4.4%)
7. Aircraft, spacecraft: $41.8 billion (2.9%)
8. Articles of iron or steel: $30.5 billion (2.1%)
9. Mineral fuels including oil: $26.8 billion (1.9%)
10. Iron, steel: $26.4 billion (1.8%)
xx. Chemical industry products (Organic/Inorganic) $33.7 billion
(xx exports for chemicals are separated as organic and inorganic.
The below-listed chart represents the total exports from the above list to Germany’s top 10 export countries.
(0 value used for quantities outside of the top 10 exports for the country
Germany’s Top 10 Imports Roughly 57% of Germany’s imports are received by the following countries that are list at from highest dollar value:
1. China: US $113.6 billion (9.7%)
2. Dutch: $95.4 billion (8.2%)
3. France: $72.4 billion (6.2%)
4. United States: $68.9 billion (5.9%)
5. Italy: $63 billion (5.4%)
6. Poland: $57.7 billion (4.9%)
7. Czech Rep: $ 52.2 billion (4.5%)
8. Switzerland: $52.1.4 billion (4.5%)
9. Austria: $46.1 billion (3.9%)
10. Belgium: $45 billion (3.9%)
The following import product groups represent the highest dollar value in German global shipments during 2017. The percentage of each export category is represented in terms of overall exports from Germany.
1. Machinery including computers: US$148.5 billion (12.7% of total imports)
2. Electrical machinery, equipment: $145.7 billion (12.5%)
3. Vehicles: $123.2billion (10.5%)
4. Mineral fuels including oil: $96.2 billion (8.2%)
5. Pharmaceuticals: $53.6 billion (4.6%)
6. Plastics, plastic articles: $44.4 billion (3.8%)
7. Optical, technical, medical apparatus: $40.3 billion (3.4%)
8. Organic Chemicals: $34.1 billion (2.9%)
9. Iron, steel: $29 billion (2.5%)
10. Articles of iron or steel: $23.3 billion (2%)
The below-listed chart represents the total imports from the above list to Germany’s top 10 import countries.
(0 value used for quantities outside of the top 10 imports for the country)
Germany has had a trade surplus since 1952, largely due to strong exports of vehicles and machinery. In 2017, the largest trade surpluses were recorded with the US, the UK, France, Austria, Spain, Sweden, and the UAE; while the main trade deficits were with China, Vietnam, Norway, Russia, the Netherlands, Ireland, and the Czech Republic. The chart below Germany’s balance of trade from 2013 to 2018.
Foreign Direct Investment
Germany is considered as an attractive country for foreign direct investment (FDI), with the World Bank ranking it 20th out 190 countries in its 2018 Doing Business Report. The World Investment Report ranks 11th in the world in terms of inflow. The Netherlands, Luxembourg, and the United States represent nearly 50% of Germany’s FDI stock. Three-quarters of FDI investments are oriented towards the professional, scientific and technical services and the finance and insurance industry.
Source: UNCTAD, Latest available data.
FDI STOCKS BY COUNTRY AND INDUSTRY
Germany as part of the EU applies a Common External Tariff (CET) that on average is currently near 4%.
Germany’s non-tariff barriers can be divided into three categories: Countries, individuals, and goods. Countries can be restricted by embargos, individual restrictions can be placed on individual companies, groups (terrorist ties), or persons. Goods may need additional documentation for control and monitoring purposes such as agriculture, medical products, narcotics, hazardous chemicals, explosives, iron steel products, waste, and rough diamonds. These barriers are considered “technical barriers” that include health and safety requirements as well as packaging and labeling requirements.
German Chemical Industry
Germany’s chemical industry sector is it’s fourth-largest in its country, trailing the German automobile, mechanical engineering, and metal industries. Germany is Europe’s leader in chemical sales and exports, providing 70% of the chemicals to the region with 60% provided to EU countries making it the largest provider of chemicals in Europe. Germany is third in the world for chemical exports trailing China and the United States in the worldwide export of chemicals. Germany’s chemical industry supports its other business sectors within the country as well as business sectors in Europe. The German chemical industry supplies European manufactures in machinery, vehicle, minerals, pharmaceutical, plastic, medical equipment, and metals industries. This cohesive relationship is one of the reasons that German has the strongest economy in Europe. Over the span of 50 years (1960-2010) the German chemical industry grew 14-fold, with an annual increase of revenue nominal at 5.4% (real 3%). Between 1990-2015, the industry was able to decrease its use of nuclear energy by one-third and increase its use of renewable energy from 2% to19%. This European leader has a pivotal role in meeting the worlds market demand for chemicals.
The global market for chemicals was approximately 3634 billion euro in revenue for 2017. China having the largest market currently has approximately 40% of the market followed by the United States (15%), Germany (4%), and Japan (3.8%). The Chinese market is larger than the European and North American market together. The export market for chemicals was approximately 431.5 billion euro in revenue for 2017. China’s revenue from export was 4.8 billion euro equaling 13.2% of the market followed by the United States at 42.89 billion euro and 9.9%, Germany with 29.74 billion euro and 6.9%, and Japan with 19.85 billion euro and 4.6% of the export market. Germany’s chemical industry consists of more than 3600 companies in which 87% employ less than 100 employees, 17% employ less than 1000 employees, and 2% employ more than 1000 employees. The companies within the German chemical industry collective function as an association, collective have greater economic and political power. There are more than 333000 employees in the industry that services more than 5 million customers in Europe. The chemical industry can be divided into organic and inorganic as a whole with roughly three-quarters of the chemicals being produced being organic. Germany’s chemical industry is segmented into 5 segments: petrochemicals, fine and specialty chemicals, polymers, inorganic basic chemicals, and detergent and care products.
The lion share of chemicals purchased is for basic chemicals, followed by life sciences, specialty chemicals, and consumer products. Basic chemicals are used for manufacturing purposes with polymer and plastics accounting for a substantial quantity of these chemicals. Life sciences include the use of chemicals for pharmaceutical, vitamins, animal health products, foods, and pesticides. Specialty chemicals are generally used for industrial and institutional cleaning products, adhesives, and coatings. Consumer products would be chemical used for a myriad of use in everyday living. The wealthiest countries tend to have a higher per capita consumption. China has the largest market but is a net importer of chemicals. Seventy percent of Germany’s chemical production is absorbed in Europe, with 17% exported to Asia, 7% exported to NAFTA, 3% exported to Latin America, and the remaining 3% to the rest of the world.
Related and Supporting Industries
Verband der Chemischen Industrie e. V. translated the German chemical industry association (VCI) represents the politico-economic interests of over 1,600 German chemical companies and German subsidiaries of foreign enterprises. The VCI is the voice of the industry and functions as the point of contact with, government officials, other industries, and the media. VCI represents over 90% of the entire German chemical industry thereby giving it substantial political clout. VCI headquarters is located in Frankfurt, Germany with liaison offices to the German federal parliament and government in Berlin and the European institutions in Brussels. VCI maintains 8 regional associations with the member companies organized 30 sector groups and sector associations. More than 40 executive committees work to guide the direction of the VCI. The presidential council, who works in an honorary capacity, shapes the association’s policy in cooperation with the VCI executive management. The VCI has a networking platform for R&D, companies, and government within the region. This is facilitated by the composition of the companies within the industry. The industries over 1600 companies are primarily clustered within regions of the country designated “Chemical Parks.” These 30 chemical parks (sector groups) are located primarily near waterways. The industry also has strategic alliances with sites in Europe, Asia, and the United States, linking the industry to customers abroad. The chemical parks offer a wide range of service that is customizable to the needs of the investor, whether domestic or foreign, regarded as the “plug and play” production process. Investors benefit from flexible business models, shared site overhead, and increased cost efficiency with sites that can be purchased or leased. The industry is constantly being improved through large expenditures in R&D amounting to nearly 84 billion euro in 2014. The lion share of 54 billion euro (70%) was contributed by companies within the industry, while 14.3 billion euro was contributed by the government, and the remainder came from research organizations. The expenditure on R&D is typically above other industries within the EU and exceeds the United States for this industry. The country’s chemical R;D units employ more than 40,000 with annual expenditures of 3.3 billion euro. Industry and institutional R;D work collaboratively with the focus to improve the industry. Max-Planck Society, the Frauenhofer Gesellschaft, the Helmholtz Association, and the Leibniz Association are four globally renown, publicly funded, non-university research organizations that work conduct research within the industry and within the chemical cluster network infrastructure. The focus on R;D by the collective companies within the industry, government support, and university and research organization contributions ensures that the industry will continually be at the cutting edge of innovation.
The German infrastructure is one of the most developed in Europe and the location of the chemical parks are structured to take advantage of this reality. Logistically the chemical parks are connected to the autobahn, has access to railways, waterways, seaports (9), and major airports (12). Amounting in a superb infrastructure for export along with its pipeline network. The industry transports 36% of its chemicals annually through this pipeline network amounting to 145 million tons of chemical. The German chemical industry, along with its excellent infrastructure has a highly skilled workforce. There are more than 330,000 employees. German as a country employs a system of training within its industry sectors. This system provides companies within the industry workers according to need by way of vocation or dual training. This allows for persons as young as 16 years of age to specialize in chemical laboratory work, production, or any number of job categories within the industry. This system is supported by accompanying degrees in chemistry, chemical engineering, biochemistry, and other related degrees on the bachelors and master’s graduate level. This system has been essential to the success of the German chemical industry.
Strategy, structure, and rivalry in the industry
Predictions for the chemical industry is that there will be increased globalization affecting the industry as a whole. China process of coal to olefin is powering their industrial chemical industry whose profits have been hindered by the drop in crude oil that has affected other conventional methods of chemical processing. The United States has had a resurgence in their chemical industry ushered on by the shale gas production in the country. India is forecasted to surpass Germany in worldwide exports by 2030, making German then the fourth largest exporter worldwide with Japan in close proximity. The predicted growth in the industry is connected to the prediction in the world economy rising to result from a growing population and middle class in emerging countries. Energy costs are an obstacle in the chemical industry and the potential scarcity of key raw materials. The countries that are able to respond to the speed of innovation, technology (blockchain), and be strategically agile in the future will benefit greatly in the future. The German chemical industry is poised to do just that. However, a global recession has the ability to slow down the growth of the market as chemical sells are tied to global production.
The government of Germany stance is that their industries can only continue to both grow and economic success in Europe and worldwide if there are modern industrial policies. The type of policies that foster an innovation-friendly environment, promotes fair competition domestically and in the international market and safeguards the supply of skilled labor. It is the government position that the innovation capacity of domestic companies should be continuously improved to foster innovation across the board to maintain the countries’ competitive edge in key lead markets. Germany’s government believes that shared knowledge increases the speed of innovation and supports the chemical industry 14.3 billion (euro) in R&D subsidies. The VCI has considerable political clout and has questioned the viability of the current German renewable energy act (EEG). The VCI considers the policy as it is currently structured to be a hindrance to the industries ability to compete in the future as the policy as structured increases energy and raw material cost to the industry. The VCI is looking for the government to continue its long pattern of policies that facilitate efficiency, growth, and innovation within the industry by resolving what they consider to be the industries Achilles heel.
The German chemical industry presents an exceptional opportunity for FDI. The increasing demand, related and supporting industries, factors and conditions, as well as government policies are congruent with Porter’s diamond illustrating this industry is internationally competitive.