Germany is increasingly losing its standing as a major industrial nation. The reasons for this are complex, but include a shortage of skilled workers and a lack of courage to make the right decisions and then implement them consistently, says Olaf Hendrik Szangolies, Partner at Odgers Berndtson. The use of new technologies can help to avoid losing touch with innovation even more.
If you want to know how Germany is now perceived on the international stage, just take a look at the rhetoric during our Chancellor Olaf Scholz’s last trip to China. A generous Chinese Prime Minister Li Qiang announced that China is willing to import more high-quality German products. In return, import restrictions would of course be lifted, as beef and apples from Germany are highly valued in China. In return, Li hopes that Germany will allow Chinese “-thighech products” into the country.
The agricultural state Germany and the high-tech giant China. Food versus computer chips and electric cars. This does not fit in at all with Germany’s self-image, the land of poets and thinkers, the great automotive nation with its engineering skills that have made “made in Germany” an international brand. However, this is increasingly becoming the case. Germany has long since lost its international leadership role – or former leadership role, if you prefer – in research, development and innovation in many areas. And Germany’s international reputation has slipped accordingly.
Automotive industry: one-eyed among the blind
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Unfortunately, the best example of this is the backbone of the German economy, the automotive industry. In this industry, what is increasingly becoming a reality in other sectors is becoming particularly clear: Production capacities are being planned outside Germany – and not only by German companies. Germany is also becoming less and less attractive as a business and production location for international corporations.
Experts such as automotive guru Ferdinand Dudenhöffer cite Germany’s reluctance to invest in the future as one of the reasons for this. He warned Deutsche Welle in December last year: “We are cutting back. Investments are being postponed and investments are being made in China. The budget problems and the lack of a federal budget are exacerbating the problem. So Germany is at a standstill. And things will get really tough after 2025, when the Chinese will dominate the global market for electric cars.” According to the automotive expert, the big players will then be in China “and Germany will be hopeless”.
The author does not assume that the development will be so rapid. The Germans will still have a say in this, even if the current product portfolio of German OEMs (in China) is rather difficult to sell. Compared to other – established and traditional – OEMs, however, German OEMs are at least “the one-eyed among the blind”. Unfortunately, this is not enough to be successful worldwide in the long term.
Germany is becoming less attractive as a business location
It is by no means just the German automotive industry that is struggling to catch up internationally. The European Commission has already analyzed 2023, the International Monetary Fund (IMF) and the OECD 2024 that Germany will remain one of the laggards in terms of economic growth compared to other developed economies.
And the Economic Experts Survey from last fall shows that Germany has become substantially less attractive as a business location over the last ten years. Politicians must create more favorable framework conditions here. Without a significant reduction in bureaucracy, a reduction in energy prices and a reduction in corporate taxes, it will not work. Employers, employees, politicians – we now need the much-vaunted “Germany Pact”.
The crux of the matter is that Germany’s social model, i.e. our welfare state, is extremely expensive to finance. We spend hundreds of billions on it. What is positive on the one hand and reflects the prosperity in the country, must on the other hand be generated with the products and services produced in this country. If the global demand for “made in Germany” falls, our social model will also be at risk in the long term, as can already be seen in the current federal budget.
Innovation is “people business”
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Conversely, this means that we as a business location must continue to be highly innovative in order to be able to sell products – beyond food – on international markets. And to do this, we still need a sufficiently high number of production sites in Germany. It is important to bear in mind that a research and development department or engineering department cannot be operated effectively in a vacuum at the headquarters of a German corporation or medium-sized company. A direct line to local production is absolutely essential.
And here, at the latest, it is clear that innovative strength is always also “people business”. Because if the automotive industry and other branches of industry continue to relocate production facilities and plants abroad, the development departments will inevitably have to follow suit. The decisive either or question is therefore: will we continue to lose innovative strength in the coming years or will we succeed in making production in the country so attractive again that relocation abroad is no longer necessary?
Skills for the AI revolution
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AI is an interesting buzzword in this context because it is currently triggering minor and major revolutions in all branches of industry. Germany is facing the challenge of a lack of AI experts, data engineers and programmers to draw new innovative strength from these new technologies. However, this supposed weakness can also become a real driver if companies recognize the importance of training and further education in this area.
Those who succeed in making their own workforce at least partially fit(ter) in terms of technology can then use these new skills in a targeted manner to secure their own competitiveness. Artificial intelligence can already be used today to write software and code, i.e. to support a comparatively thin workforce in these areas too. What is needed here are quick, bold decisions and their implementation by our entrepreneurs!
Making a virtue out of necessity
What we are definitely noticing these days: The pressure is continuously increasing. And that can certainly be seen as a positive thing. Because the greater the pressure, the greater the need to change something. And if the international perception of Germany’s economic and innovative strength shows one thing, it is that change is urgently needed. As we all know, necessity is the mother of invention and with the help of new technologies, we have a unique opportunity to support scarce resources with the help of AI, software and robotics in such a way that the remaining skilled workers can be deployed in a targeted manner.
This can also help to bring more production back into the country – and establish a transfer of knowledge. Namely, whenever employees of a German company develop innovations or patents abroad. Ideally, these are then secured in Germany so that the company and thus the German economy can benefit from them. There are only very isolated problems with knowledge. Now is the time to leave the mental comfort zone and put things into practice.
New paths must be taken and “simply” tried and tested. “Fail fast” and applying the 80/20 rule instead of perfect German engineering. Initial applications of AI in industry are certainly promising. But we still need more courage and “more horsepower on the road faster”! And then we will be pleasantly surprised by where this narrow path on which we are walking today will develop over the course of the journey.
Olaf Hendrik Szangolies is Partner Odgers Berndtson Manufacturing / Technology, Head of German Automotive and Mobility Practice and has been working for Odgers Berndtson in the Frankfurt office since 2015. He advises companies on filling executive positions in the manufacturing industry, primarily in the automotive, commercial vehicle and supplier industries and in the technology sector.
