Right now, Germany’s likely new chancellor Friedrich Merz is building a new coalition government after his conservative party won the most votes in federal elections.
The new political leadership will be tasked with reviving the ailing economy and prioritizing economic competitiveness.
Germany is the largest economy in Europe. But it is struggling to compete internationally due to regulatory complexity, higher energy and labor costs, deteriorating infrastructure, and an innovation system that is not delivering commercial results.
The So What
The reimagining of Germany as an industrial location will require one of the greatest transformation efforts since the postwar period—and additional investments of around €1.4 trillion by 2030, says Michael Brigl, who is based in Munich and leads BCG’s work in Central Europe.
“Time for action is running out. Germany is experiencing a creeping deindustrialization where companies are increasingly shifting investments and production abroad. And decisions to relocate factories to more competitive locations are not easily reversed.”
Brigl highlights three ways to drive progress:
1. Creating a new framework to be competitive.
Germany was once a hallmark for high-quality manufacturing and engineering excellence, and an industry leader in the automotive, chemicals, and machinery sectors.
Now, however, many of these industries are under significant pressure and Germany is falling behind many of its international competitors.
A successful transformation will mean restoring Germany as a competitive location in order to attract future investments.
This is the most important call to action from the latest BCG study Transformation Paths for Germany as an Industrial Nation which was published in collaboration with the Federation of German Industries and the German Economic Institute.
These are some of the ways this can be achieved:
- Ensuring competitive energy supplies and affordable electricity prices.
- Reducing bureaucracy and streamlining the plethora of rules and regulations.
- Modernizing the country’s infrastructure, and building future transport and energy networks.
- Addressing the looming skills gap.
- Accelerating digitalization and doubling down on the widespread adoption of AI.
2. Securing the existing industrial base... and targeting future technologies.
Germany’s existing industrial base is crucial to the economy and jobs. As such, it is a priority to make sure it will be future proof. Keeping basic material sectors—such as chemicals and plastics, steel and metal, glass, ceramics, and building materials—in the country, is essential to maintain the long-established, integrated value chains that are a key strength of the economy.
In addition, new technologies need to be applied to existing operating models. This includes doubling down on tech investments to advance industrial AI, especially in robotics and sensorics.
At the same time as reinvigorating existing industries, Germany also has an excellent foundation to create new industrial value: There is a strong domestic market, many companies with a high level of technological expertise, and good research institutions.
Germany should push ahead with new and emerging opportunities in deep tech, including artificial intelligence and quantum computing, climate technologies such as nuclear fusion and carbon capture, and future mobility, such as autonomous driving and space technology.
3. Reigniting effective innovation.
Germany has a well-established innovation ecosystem, including world-leading R&D institutions and universities.
But that potential is often not being translated into commercial success and scale, and patents need to become products more frequently.
To course correct this trend, stronger cooperation between universities and companies should be encouraged, along with greater incentives for scientists to move innovations into industry. Building powerful ecosystems in deep tech will be critical to scaling innovation faster.
Germany could also benefit from more business-friendly policies for entrepreneurs. At present, company and startup failures are particularly costly, as legal, regulatory, and social factors complicate the process. This prevents investment and drives startups abroad to find better conditions.
Now What
To drive the necessary transformation will require a bold, collective, and rapid collaboration between politics, business, science, and society.
“It must once again be attractive for companies to invest in Germany. With far-reaching reforms and a willingness to shape a new growth agenda, Germany can regain its leadership as an industrial and innovation powerhouse,” Brigl says.
