The Declining Competitiveness of Germany
Germany’s economic standing has been steadily declining, with studies indicating a sharp drop in competitiveness. Even the domestic industrial sector views its position increasingly negatively. High-profile companies such as Volkswagen, Bosch, Ford, and Thyssenkrupp have announced massive job cuts for their German manufacturing facilities, while insolvencies are becoming more frequent as well. The case of German saw manufacturer Stihl, who is openly eying Switzerland for a new facility rather than Germany, is a recent example of investor concerns leading to potential business relocations.
According to the 2024 IMD World Competitiveness Ranking, Germany has dropped two places from the previous year, ranking 24th out of 67. Just two years ago, Germany was 15th, and a decade ago, it was as high as 6th. Meanwhile, Singapore, Switzerland, and Denmark lead the ranking, highlighting the growing gap between Germany and its competitors.
The industrial sector itself acknowledges this decline. According to a frequently published survey by the Ifo Institute – one of the leading German economic think tanks- Germany’s industrial competitiveness has deteriorated at an unprecedented rate since the survey began in 1994.
International Trends and Investment Shifts
Germany contributes 5% to the global GDP while accounting for just 1% of the world population. Its economic model is built on global trade, connectivity, and high export surpluses. However, recent trends are causing concern:
- The comparative advantages of German manufacturing in global markets are diminishing.
- Traditional trade patterns are shifting, creating uncertainty that leaves many companies unsure how to proceed. This hesitation delays investments and hampers economic development, as firms wait for clearer direction in an evolving global landscape.
- Shrinking growth dynamics in one of the most important export markets – China, lead to a reduction in exports
- The latest DIHK economic survey reveals that most companies anticipate declining exports.
- The United States, Germany’s key trade partner, is sending worrying trade policy signals.
- The U.S. Inflation Reduction Act (IRA) is attracting investments, including from German companies, while Southern Europe is also becoming increasingly competitive, with France and Italy outperforming Germany in several economic aspects.
- Over 35,000 foreign companies operate in Germany, but foreign direct investments (FDI) have been declining.
- According to the OCO GLOBAL OUTLOOK, North America and Asia-Pacific are attracting more global investments, while Western Europe is experiencing a significant downturn across multiple industries.
- Some significant investments in Germany have been announced but put on hold, such as Intel (Saxony-Anholt), Northvolt (Schleswig-Holstein), and Wolfspeed (Saarland)
Key Barriers to Investment in Germany
Several factors are contributing to Germany’s declining appeal to domestic and foreign investors:
- High Energy Prices: Germany’s energy costs are significantly higher than other industrialized nations, affecting its global competitiveness.
- Aging Infrastructure: Decades of underinvestment have led to deteriorating roads, bridges, rail networks, and educational institutions. The collapse of the Dresden bridge and the urgent need for railway investments exemplify this issue.
- Excessive Bureaucracy: While sometimes a perception issue, companies frequently report excessive regulatory constraints with long processing times.
- Labor Costs & Skilled Worker Shortages: Labor costs in Germany exceed the European average, with an hourly rate of €41.30 in 2023 compared to the EU average of €31.80. Additionally, the retirement of the baby boomer generation will further strain the labor market.
- Increasing Global Competition: High-quality industrial products from China are intensifying market pressures. A notable example is the shrinking competitiveness of the German automotive industry compared to Chinese e-vehicle manufacturers.
Despite the current challenges, Germany remains a global economic powerhouse with a strong foundation in innovation, technology, and skilled labor. While competitiveness has faced setbacks, this also presents a crucial opportunity for transformation. By embracing international collaboration, fostering investment-friendly policies, and leveraging its highly skilled workforce, Germany can reposition itself as a leader in sustainable and future-oriented industries. Strategic investments in digitalization, green technologies, and infrastructure will not only boost economic resilience but also create new avenues for growth and prosperity.
At OCO Global, we actively support companies and governments in navigating this evolving landscape. Through targeted internationalization strategies, we help our clients unlock new market opportunities, attract investment, and drive industrial transformation. The below is a snapshot of recent project examples in the context of industrial transformation through internationalization:
Case Study 1: Location benchmarking and site evaluation for North American manufacturing company
A recent mandate was a location benchmarking for a North American chemical company. Being under enormous cost pressure, the company was looking for alternatives to its German production site. OCO delivered the following services:
Site selection: Benchmarking the German production site with alternative locations across Western and Eastern Europe
Talent Analysis: Special focus was laid on talent as the primary location factor
Business Case: Development of a 20-year business case with three scenarios (main vs. optimistic vs pessimistic)
In this case, the company ultimately decided to reinvest in its German site, as uncertainties at alternative locations were deemed even greater. This includes a transformative upgrade of the existing location and sharpening of production processes.
Case Study 2: Market diversification strategy for German Mittelstand Automotive Supplier
Another project exemplifying OCO’s expertise in industrial transformation is our collaboration with a German Mittelstand Automotive Supplier. This case highlights the challenges facing the broader automotive supply industry, which must explore new market applications to remain competitive.
- Diversification Strategy: Identifying industrial applications beyond the automotive sector, including e-mobility, medical technology, and consumer electronics.
- International Market Analysis: Assessing potential global sales opportunities for future expansion.
- Ongoing Business Development Support: Since 2021, OCO has assisted this client in identifying potential partners and customers, establishing connections, and facilitating business opportunities with major new potential buyers and business partners.
The company has successfully embraced industrial transformation in exploring alternative routes to new market segments, strengthening its competitive position compared to other competitors.
Case Study 3: Regional transformation strategy for public economic development agency
In a recent initiative, OCO Global collaborated with a German regional transformation initiative to develop a comprehensive strategy aimed at guiding the region’s automotive and supplier industry through the challenges of digital transformation and platform economy integration. This project underscores OCO’s commitment to facilitating regional industrial evolution in response to global economic shifts.
Strategy Development: Creation of a detailed strategy for the region, focusing on transitioning towards a platform-based economy within the automotive sector. This involved a thorough analysis of current industry trends, regional strengths, and potential international growth areas to ensure a resilient and future-ready industrial base.
Stakeholder Coordination: Recognizing the importance of collaborative efforts, OCO facilitated coordination among various stakeholders, including local businesses, educational institutions, and governmental bodies. This collective approach ensured the strategy was comprehensive and aligned with all parties’ interests.
Implementation Roadmap: A clear roadmap was developed, outlining short-term and long-term actions required to achieve the strategic objectives. This roadmap serves as a guide for the region to navigate the complexities of industrial transformation effectively and connect with international networks with similar challenges and matching economic structures.
Through this partnership, the region is now equipped with a robust framework to manage its industrial transformation, ensuring sustained competitiveness and economic prosperity in the evolving global landscape.
Conclusion & Policy Recommendations
Germany’s economic landscape is at a crossroads. While the country faces significant challenges – ranging from high energy costs and labor expenses to declining FDI – its strengths in innovation, legal stability, and green technologies offer pathways for renewal:
- Innovation Leadership: Germany remains one of the world’s top innovation hubs. In 2022, investments in research and development reached a record €121 billion, as reported in the latest “Federal Report on Research & Innovation.”
- Political Stability & Legal Reliability: A stable political system and strong legal framework continue to be critical factors in Germany’s economic resilience as they allow for long-term and sustainable planning.
- Leadership in Green Technologies: Germany is at the forefront of green technology development in Europe. According to the TÜV Association, over 50% of relevant EU patents in 2022 originated in Germany.
- Digitizing the manufacturing sector: given the unique specialization of the German manufacturing sector (e.g., in the machinery and equipment sector) with companies still dominating the global market in specific segments, there are use cases in the digitalization and the use of AI in the manufacturing sector allowing for an enormous boost on productivity and efficiency.
- All other location factors as summarized by GTAI (see link in sources below)
Strategic industrial policies and international collaboration will be crucial to reversing Germany’s economic decline and securing its future competitiveness. Businesses must broaden their horizons beyond the U.S. and China. In an increasingly complex global landscape, firms must explore alternative markets and diversify into new industry segments to build resilience and seize emerging opportunities.
From a public sector perspective, policymakers play a crucial role in facilitating this transition. Governments should focus on proactive strategy development, creating supportive framework conditions that enable businesses to innovate and expand internationally. This includes fostering a business-friendly regulatory environment, investing in workforce development, boosting digitalization, and providing targeted incentives for diversification and internationalization. Investment Attraction strategies must be sharp and precise to reach the target audience. Germany can strengthen its economic foundations and secure long-term, sustainable growth by aligning industrial policy with corporate transformation efforts.
OCO Global has its finger firmly on the pulse of these international transformation, and we’d love to share that expertise with you.
Sources :
https://www.ocoglobal.com/general/oco-global-outlook-2025/
https://www.bundesbericht-forschung-innovation.de/
https://www.ey.com/en_gl/foreign-direct-investment-surveys/ey-europe-attractiveness-survey
https://www.tuev-verband.de/pressemitteilungen/greentech-chancen-fuer-globale-fuehrungsrolle
