I'm spending a few weeks in Germany, a place I’ve been visiting quite often ever since my early childhood. As always, staying here is the perfect opportunity to read and reflect on this great country. It only helps that The Family has been operating in Germany for almost a year now, exploring the Berlin ecosystem and working with local entrepreneurs. We also recently welcomed Global Founders Capital (Oliver Samwer’s venture capital arm) as an investor, which contributes to deepening our German connection.
From a technology point of view, Germany is an enigma. On the one hand, it is currently standing out as the strongest economy in Europe, with Chancellor Angela Merkel the de facto leader of the Free World. On the other hand, despite exceptions such as Delivery Hero and Zalando, there are hardly any signs of Germany succeeding in tech on a scale comparable to the US, China, and Israel.
The origins of the German economic advantage date back to 1948, when then-finance minister Ludwig Erhard decided to bail out German business assets while wiping out paper money for private savers—an extraordinary decision that would be impracticable today. Erhard's fateful move contributed to much of German industry still being owned by families rather than outside investors. It inspired a unique corporate culture in which, as once remarked by legendary hedge fund manager Julian Robertson, German managers “couldn’t care less about return on equity". Due to the large German banks’ shareholding interest in corporations and the unique role of trade unions and industry associations, Germany keeps on imposing a uniquely long-term view of corporate management.
The local corporate culture explains the unique, clear, strong strategic positioning of the German economy, which rests on three pillars. First, German added value is all about exports (cars, chemical products, machine tools), which require operational effectiveness and differentiation. Second, cost competitiveness is achieved thanks to a combination of strong antitrust policy (which brings the prices down), monetary stability, and low wages. And third, such ongoing pressure would be unbearable for the German workforce if it were not for the incredible level of corporatism in every part of the economy.
Indeed many institutions in the German economy contribute to making life easier for low-paid workers. For one, Germans are global leaders when it comes to discount stores, with retail powerhouses such as Aldi, Lidl, Rewe, and Metro. Even Walmart couldn't compete with those tough German retailers, as noted here by Laetitia Vitaud (my wife, who’s half-German). Also, Germany is uniquely successful at bringing real estate prices down, which makes low wages sustainable for the majority of workers. Finally, Germany excels at protecting its regulated professions, as seen in this other article by Laetitia.
In theory, there are two reasons why Germany should succeed in the transition to the age of ubiquitous computing and networks. First, the German contempt for shareholder value makes it easier to take bold risks over the long term. This is why, by the way, German incumbents shouldn't be ashamed of their efforts at becoming more digital: see the progress made by German car manufacturers with electric and connected cars, or the masterful strategic move that was Bertelsmann’s reinvention of its music subsidiary BMG by way of divestment then rebuilding.
The other reason is that an ageing society with a culture of thrift and operational excellence is uniquely positioned to grow technology-driven, job-intensive proximity services in industries such as retail, healthcare, personal care, hospitality, and last-mile logistics. In practice, German customers (among them the growing proportion of senior citizens) could push up local, fast-growing startups on the German domestic market, then those would turn into global tech giants to create and capture value elsewhere.
Why doesn't it happen? Because the German entrepreneurial ecosystem is not there yet: there’s the lack of venture capital, as well as the many strong incumbents that make life difficult for early-stage startups. Above all, corporatism stands in the way: as much as it provides balance in the German economy, it also creates legal and cultural obstacles for entrepreneurial efforts at discovering new business models.
So let's see what becomes of Germany in the coming years. It could be held back by its adverse, corporatist institutions. Or it could have it all—if only it keeps the best of corporatism while removing the obstacles that limit local entrepreneurs.
If you still have time to read, have a look at the following sources:
In World's Best-Run Economy, House Prices Keep Falling -- Because That's What House Prices Are Supposed To Do, by Eamonn Fingleton (Forbes, February 2014)
Germany’s bizarre version of capitalism—where bosses and workers actually cooperate—is winning, by Matt Philips (Quartz, August 2015)
Freelancers in Germany: Why Global Gig Economy Platforms Find It So Hard to Succeed, by Laetitia Vitaud (Switch Collective, November 2015)
Europe’s biggest economy is rightly worried that digitisation is a threat to its industrial leadership (The Economist, November 2015)
German macroeconomics: The long shadow of Walter Eucken, by Peter Bofinger (VOX, CEPR's Policy Portal, June 2016)
Berlin’s Tech Scene: The Freaks Are Coming (The Economist, September 2016)
The good and bad in Germany’s economic model are strongly linked (The Economist, July 2017)
Germany’s election campaign ignores the country’s deeper challenges (The Economist, August 2017)
The Shortest History of Germany, by James Hawe (February 2017). I highly recommend this book—eye-opening!
Warm regards (from Görlitz, Germany),