Market For Personal Computers In Germany Essay

, Research Paper

Executive Summary

The goal of this report is to inform US investors about the German market for personal computers. This document outlines many different areas of the German political, economic, and social structures and how they concern the personal computer industry. It provides a clear insight to the German approach to personal computers and the age of information we are now in.

This report was compiled from a variety of resources consisting primarily of government documents, but also of on the research of various market analysts through their publications on the subject. These sources are extremely reliable and provided information vital to the success of a foreign firm in the German market.

The document contains complex analysis that is written in an easy to understand format. The first section provides an overview of the German economy, government, environment, and begins with a glimpse of the German culture. The second half of the report consists of in depth analysis of many business concerns for US investors in Germany, such as: marketing, advertising, taxation, distribution, and product pricing.

The report end with a concise recommendation founded on the aforementioned research.

Part I: A Glimpse of German Political, Economic and Social structure

A. People

The Federal Republic of Germany was solidified in 1990. As a result, it achieved unification of East and West Germany, which had been separated in the aftermath of the Second World War. East and West had previously been divided by their political ideals: democracy in West Germany, and communism in East Germany.

Located in the heart of Western Europe and stretching over 356,910 square miles, Germany has a total population of 82,079,454 making it the largest country in Europe with the exception of Russia. Currently the population is split 40,124,756 males and 41,954,698 females. Between the ages of 15-64 the number of males is 28,688,052 and females stand at 27,532,099 giving the country a sizable work force. The country’s population is expected to grow at a rate of .02% as of a 1998 estimate (this includes migrant peoples.) Germany’s population density is at around 300 people per square kilometer, with roughly 85% living in urban areas. The birth rate in Germany stands at 8.84 births to every 1000 people and the death rate at 10.22 per 1000 persons. Infant mortality rates in the country are low at 5.2 deaths for every 1000 births. Life expectancy in Germany is an average of 76.99 years for men and 80.33 for women.1

People who live in Germany are referred to as German(s). 91.5% of Germans are ethnic Germans while the remainder of the population is divided into these groups: 2.4% Turkish, .7% Italian, .4% Greek, .4% Polish and various other minorities comprise the final 4.6% of the population. (The latter is mainly people fleeing former Yugoslavia as a result of the country’s recent civil war.) 1

Germany is primarily a Christian country. Its population is divided at about 45% Protestants and 37% Catholic. It is typical for one religious preference to prevail in a particular town. 15% of the population is of no religious affiliation.

The language commonly spoken is German, but a small minority of Serbian speaking peoples must be noted. Literacy rates are comparable to US rates at 99% of population (over the age of 15) literate. Germans take pride in their educational system and produce many of the world’s leading engineers.

B. Government and Political Conditions

Following reunification in 1989 the Germans set up a bicameral parliament with two main branches to establish federal authority. The first branch of the legislature is the Lower House or the Bundestag and is the most important house. Members of the Bundestag are elected for four-year terms and select the Chancellor, who is the head of the executive branch of government. The house main responsibility is enacting legislation at the federal level. A two-vote process elects candidates for a position in the Bundestag. Each constituent has two votes. The first vote is for a specific candidate, much like the popular vote in the US. The second vote is cast for a political party in general. The voters tend to vote for a party opposite that of the candidate they chose in the first vote. All the political parties are then allocated a number of seats according to the second vote. This system has helped to equally distribute party power in the government. Currently there are 672 members in the Bundestag, but that number changes every election.2

The second house or the Upper House is the Bundesrat and it consists of representatives from each of Germany’s 16 L?nder or states, much like US states. The Bundesrat’s role is to approve all laws concerning the L?nder. It can also initiate legislation, yet it rarely does, as that is the Bundestag’s main duty.

The federal president is selected by the Bundesrersammlung, a federal convention comprised of the Bundestag and the Lander’s legislature, for a five-year term. While the post of the President is largely a ceremonial position it is a well-respected post.

By using the “two-vote system” of voting the party power is evenly distributed throughout the government. The two biggest political parties in German government are the conservative Christian Democratic Union (CDU) and the liberal Social-Democratic Party (SPD). While these two groups dominate the political stage there are many smaller parties with which to contend. Perhaps, the best known being the neo-Nazis who continually stir up controversy among constituents and government alike.

Germany’s constitution was written in 1949 and applied to all of Germany even before unification. It is much like the United States’ constitution in that it is subject to change and it provides many individual liberties to German citizens. Those liberties include freedom of speech, religion, and press much like the provisions contained within the US’ document.

Germany has an army of approximately 347,000 with 124,000 of them conscripts. Military spending stands at around $49 billion making up 1.5% of the country’s GDP. Germany is a member of NATO and the United Nations and takes an active role in the operations of both.2

C. Economy

Germany is currently the world’s third most powerful economy behind the United States and Japan. While Germany is now a stable, thriving economy many problems are still being addressed from the re-unification of the east and west regions. Since 1990 the eastern region has received approximately $390 billion in subsidies from the west and continues to rely on that money to “catch up” to the west. The subsidies will continue to be given well into the next century at a rate of $100 billion a year.

The recovery in the east is being spurred by the construction industries that make up one-third of the regions industrial output, with growth that is supported by the service sector and manufacturing industries. The eastern economy is in the process of a switch to a service-oriented economy from one previously based on manufacturing.

The west, on the other hand, is an advanced market economy, described by the Germans as a social-market economy, with three times the output of the east. A strong recovery from a long 1992-93 recession began in 1994 and was started in the export sector and soon spilled into the investment and consumption sectors.

Germany has a highly urbanized and skilled work force that is accustomed to high standards of living and a comprehensive welfare system. Even though the country has relatively good work ethic, unemployment is a major concern and stands at approximately 11.4%.1 The government believes that by solving the unemployment problem they can tackle other economic, financial, and social problems.

As a country, Germany trades chiefly with other countries in the EU (European Union), with France being its largest trading partner. The country’s principle imports consist primarily of road vehicles, electric machinery, petroleum products, and clothing. The country’s main exports are in road vehicles, non-electrical machinery, various electrical machinery, and metal and metal products. The country has had a trade surplus for many years now, because of high quality of German goods.

German government is in strong favor of free world trade and against all forms of protectionism. Like many other developed countries in the world today, Germany’s market depends on its ability to export goods freely. One-third of the country’s GDP comes from exports; therefore, free trade is consistent with the well being of the German economy.

Germany’s currency is currently the Deutche Mark (DM), but in 2001 the currency will all shift to the Euro. The Euro will be the currency of the newly formed EU.

D. Environmental Issues

Much like the EPA (Environmental Protection Agency) in the United States, Germany’s environmental policy is looked after by a governmental agency named the Ministry for the Environment, Nature Conservation, and Nuclear Safety. This federal ministry works closely with each of the German states (L?nder) to regulate many aspects of environmental protection.

The most pressing issues in recent years have been efficient energy use and the conservation of depleting natural resources. The most debated concern is energy efficiency.

Germany is convinced that nuclear energy must be eliminated as it is seen as the most damaging of all energy production. A new plan for energy production is being drawn up to put an end to nuclear energy in Germany. Strict legislation is currently being made to increase safety at the 19 nuclear power plants in Germany and to reevaluate final storage of byproducts from production. The target date for finalization of the legislation is scheduled for the year 2030. They also look to cut carbon dioxide emissions nationwide by 25% by the year 2005.

Today the country has 5000 nature reserves and 6000 landscape production areas comprising 25% of the nation’s land. The task of conservation is to safeguard existing natural areas and reduce the strain of pollutants on them. All of this is being done within an EU directive on the conservation of natural habitats.

Waste disposal changed in 1996 with the Closed Substance Cycle and Waste Management Act. The act focuses on recycling to more efficiently use raw materials. Responsibility has been placed on the manufacturers in the form of the Packaging Ordinance that requires producers and distributors of packaging materials to take the products back and reuse them. The cost of the process is added to the price of the good.2

E. Economic Trends and Outlooks

As Germany approaches the next millennium things look fairly stable for the country’s economy. With a new, more liberal in control of the government the country can expect reforms throughout the economy. These reforms are viewed favorably by many analysts as necessary in order to continue economic stability.

The reforms largely come under a new government initiative being called, “Future Program 2000.” This program seeks to curb economic difficulties by consolidating the budget, providing growth incentives and structural reform, creating more jobs, and getting a handle on the ever-growing government debt.

One of the primary concerns of this new program must be job creation. While Germany can boast a highly skilled work force many people who have not been trained have fallen by the wayside and are unemployed. Therefore, in order to keep unemployment low the government will have to institute more training programs for people without any training or with training for jobs that have been eliminated because of technological advances. In 1997 the unemployment rate was at a record high in Germany at 11.4 percent, but in 1998 that number dropped to about 11.1 percent. The reason for the drop were proactive labor policies by the new government, which did, in fact, include better training for unemployed people. In the years to come the unemployment rate is expected to drop and will most likely be below 11 percent next year.

Another major point in the government’s reform is the federal budget. Government expenses have been piling up quite substantially since the recession of 1992-93. The new government is working to reduce government spending by DM 30 billion. The effect is that government spending will be lower in 2000 than in 1999 by 1.5 percent. The country’s deficit will also be lowered to DM 49.5 billion, 1.2 percent of the GDP. The strict cuts will be made in all areas of the federal government with the largest cuts coming from the labor ministry. This will include lowering pension payments, and lowering unemployment benefits (a very controversial issue for the fact that Germany has one of the best social security/welfare systems in the world, many changes are not welcome in the public’s eye.)

Taxation is one more area that the government is investigating for change. The change that is most concerning is the corporate income tax rate. The government is planning to cut the taxes as low as 25 percent. After the cuts businesses should expect to pay 35-38 percent in federal and municipal taxes. Compared to federal tax on corporations in the US (35 percent) the German rate is beginning to look quite favorable to investors.

Income tax will also be taking on some reform. This will come by way of cuts in family taxes, in the form of special deductions for each child in the household. The cuts are scheduled to come in two phases both to be complete by the year 2001.

These tax cuts, both business and income, will serve to increase buying power. Any product that is in high demand should see increases in sales as a result, especially products in the family market.

Overall, the German economy can best be summed up by the rate of growth in GDP. In 1999 the nation’s GDP growth was said to be drop to about 1.5 percent, but in 2000 it should grow at a rate of about 2.5 percent. As you can see the German economy is going through several minor reforms as a result of a new governmental power. Because of these reforms the economy will begin to come out of its current slump and rise to comfortable levels in all sectors as 2000 arrives.

F. Principal Growth Sectors

Considering that Germany’s economy is stable it appears to be an attractive place for investment, secure at least. The country is a highly developed country that is comparable to the US in many respects. This is an advanced nation that affords many of the inputs that are needed to make a business successful.

The most prominent sector of growth in the past has been industry. Germany industry has always been on the cutting edge of many areas of industry. In the automobile industry they have established themselves as superb innovators and craftsmen. German automobile production has done so well that they are now the third largest manufacturers of the product. Other examples of excellence in industry can be seen in the chemical and mechanical engineering sectors. Recently, however, the industrial sector has declined significantly in its contribution to the gross value added to the nation by all economic sectors, falling form a mark of 51.7 percent in 1970 to only 32.8 percent in 1997. On the other hand the service sectors have increased their contribution making it 37.3 percent in 1997.

While Germany will always be a leader in industry the country is making a move in a different direction now. Again with the year 2000 in mind the German is calling for an initiative named “Germany 21.” The focus of this push is for Germany to “catch-up” in the areas of communications, and information and technology (IT). They will be taking measures to coordinate the framework for the information society, widely increase accessibility to the Internet, and create programs to educate people about the information age. This goal of bringing Germany into the information age has already had effects on sectors relating to communications and technologies as they continue to grow rapid speeds.

Although the growth in the areas of communications, and IT is not equaled in Germany one other sector has seen excellent growth: franchising. In 1997 there were only 598 franchise systems, but by 1998 there were 625. In all there were some 5,000 franchise outlets in existence at the end of 1998 and some 6,000 expected to open in 1999.

G. Government Role in the Economy

The Germans have a “social market” economy that is considered to be a free market economy. Government works hand in hand with businesses and labor to decide what the best course of action is on a wide range of issues. Even though the government in Germany does let free market principles reign, they have been extremely involved in business and industrial activities. State ownership is still seen and subsidies are given in large numbers. The government has been in the process of privatization for quite some time in order to help ease the burden of re-unification.

The federal government’s major focus as always is to maintain economic growth. In order to do this they are trying to create a more competitive Germany, and to continue bringing the eastern part of the country up to speed with the western. The latter becoming a bigger concern each year that money pours into its still stagnant economy.

Competition is being achieved to help lighten the burden of public budgets and to afford citizen more efficient service. The German government believes that all this can be attained only if small and medium-sized businesses get involved in the economy. Innovation must be encouraged and they recognize that ideas are lost when only a few are allowed to create them. For this reason the government is easing the small-firms accessibility to venture capital. They are also making it easier for inventions to go from R&D to the marketplace.

The problem that eastern Germany presents is a problem that effects all aspects of the country’s economy. In 1990 when the country of Germany was re-united the democratic West Germany was burdened with all of the totalitarian East Germany’s economic difficulties. Almost total reengineering of the East was needed to build it up to the western standard. To do all of these things the government has called for total cooperation on the part of every German citizen.

The key to restructuring the East at first was privatization. Privatization was carried out by a new government agency called the Treuhandanstalt (Trust Agency) with much success. The Trust Agency is still working to sell off all the businesses in the east. Along with privatization they successfully rebuilt the infrastructure to almost equal proportion to the west.

H. Infrastructure

The German infrastructure consists of a strong network of the latest technology and is thoroughly suited for the cutting edge of business. The nation’s roads, railroads, and communications are second to none the world over. However, there are some imbalances in the size of the infrastructure in the east and west.

The infamous autobahn is one of the most recognizable superhighways in the world. People and goods being transported along these highways are capable of reaching anyplace in Germany quickly. Much of a Germany is also accessible by rail, with a total of 43,966 kilometers of track across the country.

In the east the infrastructure is not as extensive as the west. The government believes that a strong network of transport and communications is vital to improving the economic conditions in the east. Large portions of the $100 billion in subsidies to the east are spent on improving telephone lines and improving roads. Since re-unification major strides have been made in refurbishing the eastern infrastructure. These incredible changes resulted in the fastest modernization of a nation in European history.

Part II: Marketing, Trade and, Investment: Personal Computers

A. Distribution and Sales Channels

Foreign suppliers in Germany are free to choose the distributor that they feel best suit their needs. There are no regulations that require certain distributors be used for your product. Direct and indirect distribution is used, but in the case of personal computers a direct approach may be the best choice (this will be discussed later in the report.)

For products like industrial goods it is most common for firms to sell indirectly. This is to say that due to the high cost of entering the industrial goods market, it is more cost effective to display products through a supplier already in the market. Your product can be distributed through an independent trader (wholesalers, importers, and retailers) or through independent dealers (commercial representatives, exclusive representatives.) There are also companies specifically designed to buy imported goods and sell them to distributors and dealers. These companies tend to deal in goods as opposed to economic or geographic regions.

Similarly to the US, wholesalers and retailers play a large role in the import sector. A great portion of these firm’s dealings are in the consumer goods sector. In fact, over half of imported consumer goods are moved using supermarkets, mail orders, and department stores.

The next option for the indirect method is the independent dealers. Foreign companies that do not wish to set up a branch in Germany use these. These firms are cost-effective and allow small and medium-size businesses access to the market.

Indirect methods are less expensive in some cases, but if the wrong dealer/trader is chosen it can be detrimental to the company’s market position. A supplier looking to sell in Germany must be sure of the firm’s reputation and its capability to distribute to the entire country.

Lastly, direct distribution seems the best option for the personal computer market, primarily because of German perception of American firms. Germans feel the US firms operate using a, “You bought it, now it’s your problem,” philosophy. They tend to believe that Americans are here today gone tomorrow. US firms have the reputation of only exporting to Germany if sales at home are stagnant and then if leaving the market when sales back home pick up. This doesn’t agree with what Germans expect from a firm. They expect to be able to maintain contact with the company for technical assistance and support.

A computer being a large purchase and often times requiring support and/or help for the consumer it is in your company’s best interest to deal directly with your customers. This would allow clients to buy and receive help from your retail stores and web sites. One example of this is the Dell Computer Company whose market share has increased significantly. Their mix of web site and telephone sales has given them a market share growth rate of 70% for 1998.

B. Advertising and Trade Promotion

Marketing a product in Germany is done much like marketing a product in any other developed nation. To make a product known, it is best to present it through a strong advertising campaign and through trade fairs. The major difference in Germany, that must be considered, is its lack of a single business center. The industry and population of the nation are both evenly distributed across the countryside. To successfully market a product in Germany is to have an advertising and trade plan that will appeal to everyone throughout the entire country.

Advertising, in most cases, is considered a proper method to promote your product. There are many more rules in German advertising than in the US, although. These regulations come in the form of judicial rules and voluntary guidelines that were established by the major firms in advertising. The legal rules were enacted at the turn of the 20th century and are modified periodically. Rules such as these basically enable competitors to file suit if another firm “violates good manners.” Another item to be noted is that some advertising techniques, such as offering premiums, are not legal like they are in the US. It is wise for a firm to discuss any advertising plans it may have with an advertising agency, to avoid any legal problems.

Trade fairs offer a business a cost-effective, highly profitable medium to promote their product. The practice of trade fairs actually originated from Germany in the Middle Ages, so it is not surprising that Germans put a lot of stock into them. Germans view the fairs as a place for continuous business and a firm should come ready to sell their product. German fairs are also an excellent place to keep up with the competition and encounter new technologies. Trade fairs are seen by the citizens of Germany to be the most effective gauge of product quality and base many purchasing decisions on them. Many foreign visitors attend the fairs, too, and often this leads to sales that are non-German. For example, the German fair named CeBIT, is the largest computer and telecommunications fair in the world and attracts firms from around the globe. With prospects like these, it is obvious that to succeed in Germany one must participate in these fairs.3

C. Product Pricing

In 1998, the price of a personal computer fully equipped with a 17″ monitor sells for less than DM 2,500 ($1,470), and a PC equip with a 15″ monitor costs about DM 1,600 ($940) sometimes less.

In 1997, 36 percent of all PCs sold in Germany were in the range of DM 2,700 ($1,588) and DM 3,600 ($2,118); 33 percent were in the range of DM 1,800 ($1,059) to DM 2,700 ($1,588). Only two percent were in the price category below DM 1,800 ($1,059). (The pricing information is based on the 1997 exchange rate of US $1 = DM 1.7. The estimated inflation growth rate is under 2 percent for 1998 and 1999.) 4

D. Customer Service and Support

Service and support to customers should be a high priority for any business, but that is especially true for those in the business of personal computers. Computers present a wide array of potential problems to the average person. The fact is many customers who aren’t persistent computer users may have trouble performing the simplest tasks. Many of this type of customer should be anticipated and a plan of adequate service and support should be planned accordingly.

Excellent service should also be a concern because German clients will demand it. German customers expect to be able to reach their dealer with ease and to have their problems and concerns dealt with in a timely manner. The average German consumer does not always buy the less expensive good; instead they may choose quality of service over cheaper price. Therefore, in order to beat the competition it is absolutely necessary to “delight the customer.”

F. Protecting Products against Intellectual Property Rights Violations

Germany legally recognizes all patents, trademarks and copyrights. Enforcement of intellectual property law is rapid and just. Fines for intellectual property laws are usually at or above the cost of purchasing a license. 5 Germany is also a member of the World Intellectual Property Organization (WIPO), as well as complying with many international agreements concerning the protection of intellectual property.

The German government is currently making great strides to curb software piracy. Even though piracy is not a major issue in Germany they are taking a stand to stop any illegal activity that may be going on. The federal governments commitment under the intellectual property rights portion (TRIPS) of the Uruguay Round has further reduced concerns about the level of software piracy. In 1993, Germany set into motion an EU directive for software copyrighting and education for the public on the subject of piracy.6

It is important that the IPR laws in Germany are as well founded as they are. This will assure the software manufacturers that selling their product to a PC dealer in Germany is secure. This allows a firm selling PCs to give the best operational software with their computers, and at the best price possible.

G. Trade Barriers

There are few formal barriers to trade in Germany, with the exception of a small number of EU restrictions that are in place only to strengthen the bond between countries within the economic union. The biggest problems exporters encounter when entering the market are “ingrained consumer behaviors,” and, “intense competition prevailing in German product and services markets.”7 These can make it hard for a company to gain a portion of the market share.

Import restrictions on computer hardware and software are non-existent. The import of hardware (HS-group 8471), software and magnetic tape storage devices (customs tariff no. 85244010) is duty free. A 2.1 percent duty is levied on CD ROMs (customs tariff no. 85243100) and diskettes (customs tariff no. 85243200) imported into the European Union. An import turnover tax of 16 percent is applied to the value of the object on which the software is recorded, either a tape, diskette or laser disc. The tax is later passed on to the end user as value added tax. 4

No more formal barriers for trade exist, but complex administrative policies that are not designed to discriminate, sometimes work against foreign businesses. Many of these policies also seem to offer low level protection to domestic firms. These regulations do not present many difficulties to the import of PCs, but nevertheless should be considered.

H. Openness to Foreign Investment

The government in Germany welcomes foreign investment and has no regu

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1999. Available from http://www.odci.gov/cia/publications/factbook/gm.html

2 Foreign Affairs Division of the Press and Information Office of the Federal

Government (Germany). “Facts About Germany,” (1998). Accessed 10 October

1999. Available from

http://www.bundesregierung.de/tatsachen_ueber_deutschland/englisch/index.html.

3 Department of State. Germany: 1998 Country Report On Economic Policy and Trade

Practices (1999). Accessed 30 November 1999. Available from http://www.tradeport.org/ts/countries/germany/market.html.

4 . Lumborg, John T. “Personal Computers,” Industry Sector Analysis (1998). Accessed

29 November 1999. Available from http://www.tradeport.org/ts/countries/germany/isa/isar0019.html.

5 The Economist Intelligence Unit. “Main Report,” Investing, Licensing & Trading in

Germany (1999): 24

6 US Department of State. FY 2000 Country Commercial Guides: Germany (1999).

Accessed 15 November 1999. Available from http://www.state.gov/www/about_state/business/com_guides/index.html.

7 US Department of State. 1998 Country Report on Economic Policy and Trade

Practices: Germany (1999). Accessed 11 November 1999. Available at

http://www.state.gov/www/issues/economic/trade_reports/europe98/germany98.html.