runs the risk of experiencing the most massive loss of prosperity in generations. In the long term, Germany has emerged from earlier global economic upheavals such as the oil price shock of 1973, the bursting of the internet bubble in 2001 or the financial crisis of 2008/2009 in a stronger position. But given the number and severity of the current crises, things could be different this time.
Three strong pillars of the German business model – cheap energy out Russia, security and defense from the United States, growth markets in China – are currently breaking away. If Germany wants to continue the success story that is much admired abroad, far-reaching structural changes are necessary. An economic turning point is needed.
A particular focus is on five areas in which we must change course in order to secure the prosperity that we have achieved in the long term.
Setting the framework with powerful industrial policy
Germany lacks a concerted industrial policy that sets clear investment priorities, ensures access to important resources and enters into targeted trading partnerships. China’s leadership, for example, draws up five-year plans that are being fulfilled with astonishing precision. Among other things, enormous capacities are being invested in the expansion of the New Silk Road and in the development of future technological fields such as artificial intelligence.
All US governments, regardless of party membership, also support the interests of domestic corporations around the world. And sometimes with hard cuffs. “America First” remains the guiding principle even after Trump’s administration.
In a world that is rapidly changing geopolitically, Germany needs to systematically increase its attractiveness. The location policy must be embedded in a European vision. There are approaches, see the EU Commission’s “Green Deal” or the “Chip Act”, which is intended to create incentives for industry to double the world market share of the European semiconductor industry to 20 percent by 2030. A strong, united continent on which everyone pulls together on economic issues is still a prerequisite for German prosperity. In view of the current shortages, this applies to the energy supply as well as to the raw materials sector – especially for the rare earths, where a clear strategy is needed in view of the existing dependencies.
Focus on innovation and technology
The “Made in Germany” brand is in need of reform. Judging by tech giants like Microsoft or Apple typical German business models from the manufacturing and processing industries are significantly undervalued. In conjunction with a powerful industrial policy, Germany should therefore play to its core strengths of innovation and technology. In a world of partial disentanglement of the global economy, sovereignty plays a key role. Not only in semiconductors, but also in quantum computers, in terms of biotechnology and – more recently – armaments, Germany must become more independent in solidarity with Europe.
Industry 4.0 in particular is a key issue in which local companies – from medium-sized companies to corporations – can and must prove their world class. With a view to artificial intelligence, the Internet of Things and also quantum computers, the battle for future competitiveness in the industrial sector must be won. The Metaverse will also present opportunities. However, when it comes to expanding the necessary infrastructure, which includes the 5G network, for example, Germany is still in the middle in a global comparison. Where the connection was missed, it is now a matter of focusing even more intensively on the next generation of technology – and skipping one or the other development stage to do so.
In order to remain a heavyweight in the traditionally important automotive sector, for example, the pioneering role in battery technology is essential, because it accounts for around 40 percent of the added value of electric vehicles. Setting new software standards is at least as important. The gaps to the main attacker Tesla are partly large in these fields, but can (still) be closed. Germany and Europe have the necessary competencies. But partnerships and holdings are also crucial. manufacturer like bmw, Mercedes-Benz and VW show, for example, how to set up the charging infrastructure with the “Ionity” network.
Promote the spirit of entrepreneurship and entrepreneurship
Speaking of making progress: A flourishing start-up culture – paired with a greater willingness to take risks – is of fundamental importance for the long-term transformation of the German economy. However, liquidity is needed to finance growth. Despite all the start-up successes of recent years, the German market for venture capital is comparatively conservative. Of the approximately 500 billion euros in venture capital that flowed into start-ups worldwide in 2020, almost 300 billion euros went to the USA, 100 billion to Europe – and of this only a comparatively small proportion went to Germany. The result: Of the 1,370 unicorns that Bain counted around the world in 2021, 687 were based in the USA and just 37 in Germany.
It weighs heavily that the IPO market in Europe and in Germany is rather underdeveloped. In 2021, the global issue volume was around 600 billion US dollars, in Germany first-time issuers collected only one-sixtieth. That’s why young companies and aspiring unicorns like BioNTech often use the US exchanges. Decisive framework conditions for venture capital investments would have to be redesigned in Germany – for example with regard to tax treatment or the possibility of employee participation – in order to mobilize the sums for the start-up scene that would be necessary for the renewal of the German economy.
Prioritize sustainability across the organization
The great task of present and future generations, to preserve our planet as a living space for billions of people, is also relevant for the German business model of the future. Companies are increasingly being evaluated by stakeholders according to whether they manage to do business responsibly.
Accordingly, sustainability is at the top of nine out of ten CEOs in Germany on their strategic agenda for the next five years – and is therefore at least as important as digitization. For nearly half of the Bain study “From attitude to action – How Germany’s CEOs put their companies on a sustainability course
” From the company bosses surveyed in 2021, it is even more important. Green technologies can thus replace classic products such as cars or machines as the export model of the future. For companies, this is about a fundamental transformation and the long-term direction of development, but ultimately also about a change in behavior. And that, in turn, requires strong leadership from top management.
In the future, sustainability must apply to all functional areas of a company, be it supply chain management, be it production, be it the marketing of products and services. And sustainability must be worthwhile, which is entirely possible. For example, automotive suppliers can use decarbonization projects to cut emissions by up to 50 percent with a positive return on investment. This makes sustainability a key differentiating factor for German industry. Ideally, it also offers the opportunity to become more internationally competitive and profitable.
Defy all imponderables with “Smart Resilience”.
While worldwide sales markets remain indispensable for the German economy, the time window of limitless globalization is closing. The corona pandemic has already shown companies and economies that they have to become more resilient to crises. Now stands out in particular in view of the Ukrainewar and China’s threatening gestures towards Taiwan indicate that the geopolitical situation will remain complex for the foreseeable future.
With that in mind, what is needed is a concept that Bain calls “smart resilience.” Dependencies and fragile supply chains should be fundamentally reconsidered. At the strategic level, the focus is on the long-term orientation of the business portfolio and investments in production sites. At the operational level, supply chains and processes should not only be lean and efficient, but above all robust. The prerequisite for this is consistent transparency across multiple levels and companies, from the preliminary product to the end customer.
The magic word in this context is “traceability”, which of course has to be digitized “traceability”. However, most companies around the world are still in their infancy in this regard, as a 2021 Bain survey for the World Economic Forum revealed. Modern technologies and data usage make processes around the supply chain smarter and more resource-efficient. In this way, more accurate predictions can be made and better scenarios can be developed, which, for example, respond to geopolitical changes more quickly. In terms of sustainability, too, increased traceability is essential if companies want to clearly quantify their CO2 footprint including Scope 3 and prepare themselves adequately for the new supply chain law.
Master the challenge, secure prosperity
The fact is: the German business model needs an update, embedded in a strong Europe. But if the economic reorientation is to be successful, it must be anchored in society on a broad basis. This requires the willingness to make the necessary changes, but also requires openness to the best talent from all over the world and an excellent level of education, especially with regard to the key digital industries. There is no doubt that it is a tour de force. But if it succeeds, the German economy will continue to have international competitive advantages in the future and will be able to avert the danger of a sustained loss of prosperity.
Walter Sinn has been responsible for the activities of Bain & Company in Germany as Managing Partner since 2014 and is a member of the Global Board of Directors. The graduate economist has more than 20 years of consulting experience in important strategic issues such as growth strategies, strategic realignment, efficiency improvement and transformation programs as well as reorganization and post-merger integration.