With the largest economy in Europe, innovative business culture and manufacturing dominance, highly skilled workforce, and 45 preferential international trade agreements, Germany is often a top choice of companies seeking to enter new international markets.
But before you go expanding into Germany, there are several business and regulatory factors to consider.
An overview of the German market
Germany ranks as the fifth-largest economy in the world, with an estimated GDP of $4,319.29 trillion by year’s end. That accounts for nearly 20% of the entire EU GDP.
With a population of 83.2 million, Germany is the largest consumer market in the EU. This large citizenry, combined with the country’s industrial strength and the centralized location, makes it a trade capital with countries around the globe.
At the heart of Germany’s economic power is its industrial output. There are three primary sectors that stand out within the German economy:
1. Automotive. Germany is home to some of the largest car brands in the world, including Volkswagen, Mercedes, BMW and Audi. According to Germany Trade & Invest:
- German manufacturers produced over 16,000,000 vehicles in 2019
- 60% of R&D growth in Europe was created by the automobile sector
- 24% of domestic industry revenue was generated by the automotive industry
- Passenger cars and light commercial vehicle OEM generated a foreign market revenue of almost EUR 282.4 billion
2. Mechanical engineering. One in 10 mechanical engineering products worldwide are produced in Germany. It ranks third among the world’s market leaders. Baden-Wüttemberg is the largest manufacturer location, with more than 348,000 employees.
3. Chemical engineering. Germany has the fourth-largest chemical industry in the world behind China, the U.S. and Japan. It had a revenue of EUR 157 billion.
Although there has been steady growth over the past decade, there are some factors that could dampen the future economic outlook of this European country. According to the International Trade Administration, these include:
- Demographic changes and resulting labor bottlenecks
- Regulation of the labor market
- Higher energy prices due to the phase-out of coal and nuclear energy in favor of renewable sources
Why expand to Germany?
Aside from being a competitive marketplace and trade hub nestled in the heart of Europe, there are some key factors that make Germany an enticing destination for companies looking for international expansion. These include:
A highly skilled workforce
Germany has a robust vocational and educational and training system. This helps channel young people into their ideal field from an early age, which helps encourage specialization. The vocational track especially has been a major contributor to the continual output of skilled laborers.
As a member of the EU, Germany is relatively open to exports and third-country import duties, restrictions and prohibitions. It’s bordered by nine other countries:
- The Netherlands
- Czech Republic
This makes it an attractive center of operations for businesses seeking international expansion throughout Europe. Additionally, Germany has multiple EU trade agreements as well as other agreements with countries like the U.S.
Strong IP laws
As a leader in innovation, especially in industrial and automotive engineering, Germany recognizes the importance of intellectual property protections. This European country has robust copyright, patent law and trademark law in order to safeguard a businesses’ valuable assets. It also has strict competition laws that prevent rivals from making false claims about the product.
Compared with other non-native English-speaking countries, a significant percentage of Germany’s population speaks English as a second language. In fact, recent estimates put that figure at approximately 56% of the population. And those percentages are likely even higher in industries like trade and finance.
Challenges of expanding to Germany
Although Germany is an attractive destination for any foreign company seeking to expand, entering this new market isn’t without its challenges. Namely, there are two overarching differences in culture and regulations.
There will be inevitable cultural barriers that make a move to Germany tricky. They include:
- Demand for quality: The German people pride themselves on producing high-quality work and doing so at an efficient clip. They work with an exact precision that tends to make them blunt when it comes to communication and expectations.
- Work-life balance: The average German workweek is much shorter than the typical 40-hour week. There are regulatory caps on the number of hours German employees can work in a day or week, which reflect a cultural emphasis on family time.
- Formal business culture: Because of German efficiency, business relations can be less collegial than workplaces in other countries. They place a value on hierarchical structures, which adds to the formal standardization of the office.
German has stringent labor laws, many of which favor the employee over the employer. This can make HR a challenge for those unfamiliar with the nuances of the country’s statutes and regulations.
Any organization evaluating expansion to Germany would need to consider:
- Employment contracts: These must be given and agreed upon in writing, and they must include details about the type of work, length of work, entitlements, notice periods and other matters related to the job.
- Terminating an employee: Firing an employee is not straightforward, nor can it be done on a whim. Even if you have due cause, the employee must be informed within a certain window of the incident. Also, you must provide a dismissal notice period, which is usually four weeks.
- Sick leave: Employees have the right to receive up to 100% of their salary for up to six weeks. And, if their illness or injury necessitates, that leave can extend past those six weeks.
- Holiday leave: German workers have the right to a generous vacation time and holiday leave package. This includes 20 days of paid leave for employees who work five days a week, and 24 days of paid leave for employees who work six days a week. It also includes more than a dozen federal holidays.
- Employer taxes: Employers in Germany are required to pay corporate taxes, which can be paid at a flat rate, and social taxes. Germany’s social taxes are used to fund public healthcare and retirement care, and employers are responsible for withholding taxes to contribute toward these social benefits.
- Maternity leave: Germany boasts strong parental protections for both the mother and the father. Companies can’t make mothers work in the six weeks before their due date, nor in the eight weeks after birth—and that time is fully compensated. After birth, women have the right to part-time work or full parental leave up until the child turns 3. During that time, the employer must keep the mother’s job available.
HR help as you expand to Germany
Expanding into Germany is a big opportunity for any company looking to increase its global footprint.
But getting started, particularly when it comes to hiring workers, isn’t without its share of difficulties. There are both cultural and regulatory hurdles that you must understand and prepare for.
That’s where a global employment partner, particularly one with local HR expertise, can help guide you as you build your presence in Germany. Learn more about our Germany employer of record solution, which can help ensure a compliant expansion to Germany.