Germany is the go-to country for foreign investors who want to gain access to the European market. That has been underscored not only by some high-profile industrial takeovers this year, but by new figures from consultancy EY, obtained by Handelsblatt.
The research showed foreign companies invested in 946 projects in Germany last year, 9 percent more than in 2014, itself a record year. They created 17,000 new jobs in the process.
The mega-deals have been streaming in of late, led in particular by China. A group led by state-owned China National Chemical Corp bought German industrial machinery maker KraussMaffei. Then Shanghai Electric agreed to buy at least a quarter of German technology group Manz in a deal that could lead to a full takeover.
The list goes on. Demag Cranes, a highly profitable maker of cranes that was bought by U.S. rival Terex five years ago, is now being sold to Finnish competitor Konecranes. And on Tuesday it was announced that French company SEB would acquire German kitchenware maker WMF.
But the interest isn’t confined to corporate acquisitions. Firms are also investing billions of euros in German locations.
IBM, for example, has located its new Watson supercomputer in Munich, where 1,000 developers, programmers and designers are working on the Internet of Things. The U.S. giant plans to invest €2.75 billion, or $3.08 billion, in the site, its biggest European investment in two decades.
“Germany is scoring points because it’s a big market, has a stable investment environment and very good domestic growth.”
And Japanese conglomerate Mitsubishi Electric in March opened its Germany headquarters office in Ratingen near the western city of Düsseldorf in a bid to take part in Germany’s green energy revolution. A total of 750 employees are working at the 16,000 square-meter site.
It’s part of a new trend by foreign companies to set up their own factories and offices in Germany to secure access to the European market.
More than 500 people are employed in a new retail center built by Dutch investor Stable International near the eastern city of Leipzig. Japanese software group Fujitsu employs 330 people at its regional headquarters in Neckarsulm, southern Germany.
“Germany is one of the world’s most attractive locations,” said Hubert Barth, the incoming head of EY in Germany.
Almost seven out of 10 company managers, or 69 percent, named Germany as one of three top investment locations in Europe, according to a survey conducted by EY among 735 international companies. The United Kingdom with 43 percent and France with 36 percent came a distant second and third.
That mirrors the economic performance of the three countries. Germany has been delivering solid growth since the financial crisis of 2008 and 2009. Britain was hit very hard by the crisis, though its growth has been outpacing Germany since 2012. France has stagnated since the crisis and was only able to grow at more than 1 percent for the first time last year.
The United Kingdom was the only country last year to attract more projects than Germany — 1,065 against 946 — thanks to its cultural ties and shared language with the United States, which was the biggest investor by far in Germany and Europe. When American firms want to invest in Europe, they tend to favor Britain as a bridgehead for the continent.
U.S. firms were the biggest investors in Germany last year with 192 projects followed by Switzerland with 99 and China with 74. Germany’s most populous state, North Rhine-Westphalia, home to the Ruhr industrial region, has been attracting a particularly high number of Chinese companies, with 950 now operating there.
“Germany is scoring points because it’s a big market, has a stable investment environment and very good domestic growth,” said Achim Hartig of Germany Trade & Invest, the government’s foreign trade and inward investment agency.
But it’s not all good news. Germany performs less well on costs and flexibility.
The country is also helped by its central location and dense road and rail network linking it with the rest of Europe. Germany has come top in the World Bank’s Logistics Performance Index in recent years.
And the outlook remains good, with almost one in two company managers, or 46 percent, predicting that Germany will become increasingly attractive, according to the EY survey. Only one in 10 expects conditions to deteriorate.
Meanwhile the proportion of foreign companies that want to leave Germany fell to 8 percent, its lowest level since the survey was first conducted in 2005.
But it’s not all good news. Germany performs less well on costs and flexibility, with only 37 percent of managers calling the labor costs in Germany attractive — a 13 point decline from the previous year. The same applies to the assessment of how flexible labor law is with a 13 percentage point decline, and to company taxation, where the rating went down 11 points.
Other studies confirm this negative view. The World Bank’s latest Global Competitiveness Report cited tax law, tax levels and restrictive labor laws in Germany as major impediments to its competitiveness. Its non-wage labor costs are especially high by international comparison.
A study by the Organisation for Economic Cooperation and Development called “Taxing Wages 2015“ showed that of €100 earned by a single-person household in Germany, €49.30 is taken by tax and social contributions, leaving disposable income of just €50.70. That’s the third-highest level in the OECD behind Belgium and Austria.
In the U.S., less than a third, or 31.6 percent, goes in taxes and contributions. In Britain, the most popular European country for foreign investment, it’s just 31.1 percent.
Intriguingly, foreign investment last year rose sharply in Poland and Russia, with increases of 60 and 61 percent in the number of foreign investment projects.
Russia, hit by an economic downturn and Western sanctions over the Ukraine crisis, attracted an astonishing 201 projects, with German investors making up the largest percentage with 36 ventures.
Pump manufacturer Wilo is sticking to its plans to complete a new plant in Noginsk, 50 kilometers east of Moscow, this year, and consumer products group Henkel is continuing to invest in Russia, its fourth-biggest market. It operates 9 factories there.
The move makes business sense because firms can circumvent sanctions by opening their own production sites in Russia. In addition, the Russian government favors domestically manufactured products in its procurement programs, and foreign investors are entitled to subsidies.