The perfect German market entry strategy: What is the best way to enter Germany?
Germany is the largest economy in the EU and has a population of 84 million, so it’s an obvious territory for market expansion. However, numbers don't tell the whole story. Although there are plenty of positive factors for German market entry, there are also some major potential pitfalls.
These include significant bureaucratic overhead, relatively low digital acceptance (especially in banking and finance) and strong resistance to change on the part of consumers.
Such hurdles can be overcome, but if you're considering a German market entry, proper background research is essential. It's simply not possible to take an existing business model from another country and transpose it onto the German market. As many companies have found in the past (including large firms such as Walmart), that way lies certain failure.
In this article we'll explain the best way to enter the German market, by first defining what makes Germany unique and then identifying the best market entry strategies.
The German Market: Numbers and Figures
Germany is the largest country in the EU by population (over 84 million people) and one of the largest economies in the world. According to the IMF, it currently ranks fourth in nominal GDP terms after the US, China and Japan.
Germany has a labour force of 42 million, of which almost three-quarters work in the service industry, nearly a quarter in industry and a little over one percent in agriculture.
It has one of the highest trade surpluses in the world, a reflection of its status as a net exporter. More than 40% of national output is accounted for by exports, including vehicles, machinery, chemical goods, pharmaceuticals and electronics.
Who are Germany's trading partners?
More than half of Germany's exports are within the European Union, especially to France. The USA accounts for just under 9%, China almost 8% and the UK just under 5%. These countries are also the ones with which Germany trades the most in terms of imports.
Why does Germany export so much?
Germany has been a net exporter for more than a century, and the primary reason for that has remained constant: industrial manufacturing. The country has a highly-skilled, unionised and motivated industrial workforce; strong links between university research departments and industry; good access to raw materials; and an international reputation for quality manufacturing, for example in the luxury car market.
What is the market system in Germany: Is it a free or a social market economy?
Germany's market system is a social market economy. It can be described as a halfway compromise between a fully socialist economic system and a laissez-faire (anything goes) capitalist free market.
The German state doesn't own the means of production as it would in a socialist system. On the other hand, it does attempt to provide fair distribution of goods and services, as well as strong unionisation and a supportive welfare system, none of which would be present under fully free-market capitalism.
Does Germany have any trade barriers?
In theory, Germany's trade barriers are the same as those of the EU. In practice, this is not quite the case: sometimes the German government uses 'gold-plated' versions of EU trade regulations. In other words, the requirements for trading in and with Germany can be more stringent than those for the EU as a whole.
That said, Germany often has one of the loudest voices raised in the EU parliament against tariffs and other market interventions. Being a significant net exporter, the tariffs and protections that do exist are largely to protect local businesses from unfair import competition.
The sheer weight of German bureaucracy could be seen as a trade barrier. It's not discriminatory, since it applies equally to German businesses, but it takes time, effort and money for any business to maintain compliance. The amount of paperwork, tax laws and business legislation can be daunting to non-German companies seeking market entry.
How competitive is the German market?
According to the World Economic Forum, Germany ranks as the third most competitive national economy after the USA and Singapore. This ranking is composed of factors such as infrastructure, ICT adoption, stability, health, market size and business dynamism. It also takes into account innovation and human resource factors. By this measure, German market entry is an appealing proposition for international businesses.
What are the competitive barriers to entry in Germany?
The complex bureaucracy, which exists at state as well as federal level, can be a major barrier. The International Finance Corporation ranks Germany in 114th place globally in terms of the ease of starting a business, mainly for this reason.
For example, registering commercial property is a multi-agency operation that can take 40 days or more to complete. Also, the business notarisation process or business licenses can take weeks, which can be challenging for newcomers. Some businesses may even find themselves paying 14 different taxes, with nine or more tax reporting dates per year.
This can all seem impractical to businesspeople from other countries, and the system will likely improve in the long run due to the digitalisation efforts of the German coalition. Still, in the short run, the system will likely remain. Germans are meticulous about paperwork and following rules, and accepting this cultural code might make it easier to do business locally.
“The German start-up ecosystem, in particular the FinTech space, has progressed a lot in the last few years. [...] With a deep bench of talent and continuous investor appetite, I expect to see great businesses come out of the country in the years to come.”
What are the challenges of doing business in Germany?
Once you've managed to navigate the time-consuming bureaucracy successfully and set up your business in Germany, there are other challenges to consider. Some are cultural, some practical.
For example, hierarchy is important to German workers, as is respect in the workplace. Experience is valued greatly, almost to the point of reverence, and Germans tend to use formal language when addressing each other at work. This is changing in some sectors - particularly start-ups, which tend to have a more relaxed, international culture - but any new market entry that ignores German cultural quirks is unlikely to succeed.
To make matters more complicated, Germany is a federation of 16 states. Each state has its own cultural and legal peculiarities and its own dialect. Thorough understanding of these differences is essential. One size does not fit all in Germany.
Where banking and fintech is concerned, Germans have a deserved reputation for reticence and caution. Privacy is a national obsession, and Germans hate giving away their personal data at all, let alone for free. This is one reason why cash use in Germany is higher than in almost any other EU country: it is perceived as being less traceable by authorities. One consequence to this is the relatively slow take-up of fintech solutions by Germans.
These cultural behaviours are logical consequences of a history that has included two major periods of authoritarianism in the last century, especially for those living in the east of the country. The challenges are not insurmountable for German market entrants but one thing is vital: you must earn the trust of your customers. It won't be given to you for free.
Practical challenges include a level of inflation since early 2022 that has significantly reduced people's disposable income. Energy inflation has been particularly high, which has hit the manufacturing industry hard and put a squeeze on exports too.
How do I choose a country for a market entry: Why enter the German market?
Competitiveness, a skilled and productive workforce, a relatively stable economy, good communication links, a central EU location and a large consumer base: all of these are reasons to enter the German market. If that's not enough, there are business investment support programs at the state and federal level. These range from grants and loans to rebates on R&D costs. Practical support for start-ups and new market entrants is improving.
German market access simplified: Strategies and methods
There are several routes to German market access, each with its own pros and cons. Some strategies provide greater legal protection but also greater liability. Some methods are simpler in the short term but less effective in the long term. It’s important to choose the strategies and methods that will work for you.
What are the standard international market entry strategies?
Companies seeking German market entry have a range of generic strategies available. These include:
1. exporting into Germany from another territory via a German branch office
2. opening a wholly-owned subsidiary within Germany
3. licensing & franchising
4. partnership or alliance, for example a fintech company forming a partnership with an existing German bank
5. acquisition of an existing business within Germany
There’s no right or wrong way to enter the German market, and each approach has advantages and disadvantages.
For example, a local branch office may be less tightly regulated and taxed than a wholly-owned subsidiary. However, the parent company of the local branch office would have legal liability for all of its actions in Germany, which is not usually the case with a wholly-owned subsidiary. Acquisition can be a fast way into the market but it means inheriting the existing business’s structure and customer perceptions.
There’s no perfect strategy, which is why a custom solution is the best option, based on thorough research, preparation and design thinking.
What are best methods of entry to foreign market?
The standard market entry strategies mentioned above can be found in various resources; however, these generic methodologies are either known by everyone with access to the internet (including your competitors) or are too costly and time-consuming. The best method of entry to a foreign market should be unique. It can be only determined using design thinking and agile methodologies, studying the strengths and the weaknesses of the particular company, and creating campaigns based on business analysis and market research.
Personalised and data-backed market entry strategies are proven more successful in markets with particular business cultures, such as Germany. In addition, personalised market entry strategies will likely prepare the management for the target market and lower the entry barriers. Here’s how business owners can prepare for market entry:
(1) The research-based approach: The first step of market entry preparation requires the company owners to assess the various aspects of the market entry. For instance, companies interested in entering the German market should answer the following questions:
· Why are we entering the German market? Did we exhaust all local (home market) growth possibilities? Do we have any potential customers, investors, or talents (employees, managers) we can resort to in Germany?
· When is the best time to enter the market, from the German market and our point of view? Do we have sufficient resources (financial capital, human resources, energy, and support)?
· Who is our target customer? Is this customer persona any different from our home market personas? What do they need?
· Where should we settle and why? Does this area’s demographics reflect our customer personas?
· How should we enter the market?
To answer the last question, companies should invest in market and competitor research to learn more about their target markets (e.g. the German market) and companies with similar reach. Once the market research is complete, companies should approach potential customers and partners and collect feedback. Company owners are recommended to enlist the help of local experts and consultants for support during the expansion preparation process. The language and cultural barriers can be hard to overcome, and the research process can be misleading due to a lack of market information.
Although the initial research phase requires some time and effort, once the relevant market and user data are collected, it is possible to create an expansion strategy that is effective immediately and very economical (due to targeting).
(2) The Quick Testing Approach (Localization): If certain factors create a timing-related pressure for market entry, start-ups in particular tend to lean towards less time-consuming market entry tactics. In this case, company owners must invest in localization to create a prompt digital presence and collect feedback quickly.
Localization is the process of adapting the website or the product to the target market from a language or cultural point of view. Localization aims to create a native and local feeling for websites and products using market-specific cultural elements, marketing adaptations, and compliance. Localization goes beyond website translation and requires bridging business and industry know-how with marketing strategies and cultural expertise.
Companies with limited time and budgets (e.g. due to investor pressure or product roadmaps) can localise their products in a few weeks and start collecting user data.
Which is the easiest market to enter?
The easiest market to enter is the one which you are best prepared to enter. There’s no ideal German market because competition exists in every business sector. Each market has its own challenges and perks and they should be studied on a case-by-case basis, taking into account the product or service being offered, the customer profile and the regional characteristics.
What will make market entry easier is a knowledge of local business customs, understanding of the local customer base, strict adherence to rules and regulations, and a determination to treat the German market as unique – because it is. Companies that do their homework and understand the challenges faced by German market entry are far more likely to succeed than those that don’t.
In which market is entry difficult?
Some markets will be more difficult to enter because of high barriers in terms of cost or incumbent suppliers. For example, the luxury vehicle market is dominated by several major German companies, so new market entry would be extremely prohibitive, not least in financial terms. But this is an exception. Germany’s large and thriving Mittelstand (SME) sector is proof that there are niches everywhere, and that market entry is possible with the right preparation. The difficulty factor of German market entry depends almost entirely on the amount of planning carried out beforehand.
Every German market has its own pros and cons, so they should be evaluated on a case-by-case basis, bearing in mind the existing market dynamics, local needs and customer profiles.
How to market in Germany: What is the best way to advertise?
Germans tend to be fiercely loyal to a particular brand or supplier, and are not easily persuaded to change. Giveaways, freebies, short-term offers and flashy marketing won't work the way they do in some other countries. Germans tend to be suspicious of such promotional campaigns and distrustful of the motivations of companies behind them. On the plus side, this means that once you’ve won the loyalty of a German customer, they are likely to stick with your company through thick and thin. To win that loyalty, honest is the best policy. Germans do not quickly forgive deceptive advertising campaigns, and will boycott your company if its products or services fail to live up to expectations.
Germans want to know the actual benefits of your product or service before buying, so that they can make an informed choice. They’re less swayed by lifestyle aspirations than other nations, and more pragmatic in their choices. Pricing is important, but more important is the quality of a product or service. Germans understand the false economy of buying cheap, poor quality items.
It’s also important to be compliant with all relevant regulations. Comparison websites exist for customers in all market sectors, and they judge companies based on compliance as well as other factors. You should also have qualified and knowledgeable customer service representatives. If you don’t, word will quickly spread amongst your potential customer base.
In short, the best way to advertise to your German market is to be as honest as possible. Don’t just tell potential customers that your product or service is better; explain why it’s better.
Instead of using the expensive and generally known advertisement channels, you can advertise via channels your competitors are unaware of and create campaigns that reach your target customers directly. Contact us to learn more.
How to learn more about German market entry strategies?
To learn more about the best methods and strategies for German market entry, especially concerning (Fin)Tech companies, download the Contextual Solutions report about the German FinTech market.
