Investing In Germany
Market Entry Strategy
The most successful market entrants are those that offer innovative products featuring high quality and modern styling. Germans are responsive to the innovation and high technology evident in U.S. products, such as computers, computer software, electronic components, health care and medical devices, synthetic materials, and automotive technology. Germany boasts one of the highest Internet access rates in the EU and new products in the multi-media, high tech, and service areas offer great potential as increasing numbers of Germans join the Internet generation. Certain agricultural products also represent good export prospects for U.S. producers. Price will not necessarily be the determining factor for the German buyer, given the German market’s demand for quality. The German market is as decentralized and diverse as the U.S. market, with interests and tastes that differ dramatically from German state to German state. Successful market strategies take into account regional differences as part of a strong national market presence. Experienced representation is a major asset to any market strategy given that the primary competitors for most American products are domestic firms with established presence. U.S. firms can overcome such stiff competition by offering high quality products, services at competitive prices, and sales back-up, as well as establishing a local network of support. For investors, Germany’s relatively high marginal tax rates and complicated tax laws may constitute an obstacle, although deductions, allowances and write-offs help to move effective tax rates to more internationally competitive levels.
Using an Agent or Distributor
To a far greater degree than its neighbors in Europe, Germany's population and industry are decentralized and their locations spread throughout much of the country. Major cities and businesses dot the countryside in a landscape that features no one single predominant business center. Often U.S. companies hope to cover Europe from a single European base, or even through periodic visits from the United States. The German commercial customer at the same time expects to be able to pick up the telephone, talk to his or her dealer, and have replacement parts or service work immediately available. American exporters should avoid appointing distributors with impossibly large geographic areas, without firm commitments regarding parts inventories or service capabilities, and without agreements on dealer mark-ups. Success in the German market, as elsewhere around the world, requires long-term commitment to market development and sales back up, especially if U.S. companies are to overcome the geographic handicap with respect to European competitors. Germans at times perceive U.S. suppliers as tending to process a U.S. domestic order before taking care of an export sale, or being quick to bypass a local distributor to deal directly with its customer. Some German entrepreneurs with selective experience with U.S. companies are skeptical about their long-term commitment and after-sales support. American firms entering Germany today are generally aware of the factors that make for a successful export relationship and are ready to establish a credible support network. Nevertheless, U.S. firms should be ready to address any lingering doubts from prospective German clients/partners.
If a manufacturer wishes to distribute its products abroad by itself, an independent distribution company must usually be established. This step entails not only considerable expense, but also requires extensive organization and control. Medium-sized manufacturing companies, in particular, therefore, tend to engage sales intermediaries to work independently a certain market. The most important types of distribution intermediaries are commercial agents, distributors, and franchisees. While the law on commercial agents has been revised and harmonized among the European Union member states based on an European Commission Directive, Germany still lacks a codified distributor and franchising law. For EU directives and legislation relevant for selling U.S. products in the European Union, please see the Country Commercial Guide of the U.S. Mission to the European Union available at http://export.gov/mrktresearch. Commercial Agents Agency Agreement An agency agreement need not be concluded in writing and can arise informally, verbally or even tacitly. There are, however, two exceptions to this rule: a del credere agreement, under which the commercial agent guarantees the fulfillment of liabilities arising from a transaction, must be concluded in writing, as must a post-contractual agreement regulating exclusively.
To attract a talented consultant or salesperson, a firm will need an impressive track record. Germans, in particular, are hesitant to participate in start-up ventures. Claim to Remuneration The remuneration of a commercial agent may consist of either performance-related commission, fixed remuneration, or a combination thereof (a so-called guaranteed commission). In addition to remuneration for the arrangement and conclusion of sales activities, a commercial agent may also be entitled to a commission for other activities, such as collections, assumption of liability, warehousing, and after-sales service. Distribution A distributor is always a dealer, i.e., he or she buys and sells in his or her own name and for his or her own account. The distributor undertakes to vouch for the sale of the contractual products on an ongoing basis. He or she often also assumes the obligation to maintain a warehouse, a stock of spare parts or even a repair service. Exclusivity Clause A territorial protection or exclusivity clause is often included in distribution agreements. Pursuant to EU competition law, such clauses, however, are allowed to a limited extent only. They prevent a manufacturer from engaging other distributors in a certain contractual region or from conducting transactions directly. It is not unusual for a manufacturer to reserve the right to supply certain major customers with whom business relations already exist before concluding the distribution agreement.
For a distributor, exclusivity usually means that only he or she may purchase the same or similar products from the manufacturer for sale in the contractual region. Exclusivity clauses are generally agreed to when the manufacturer’s product is protected by a patent. Under an exclusive distribution arrangement, a product may or may not receive the attention it deserves. It could become nothing more than a line item in a hefty catalogue. Without someone on the ground to initiate demand, it is unlikely that a new product will sell on its own. Competitive Restrictions Objections based on EU and German competition law may be raised against distribution agreements if exclusivity or a territorial protection, non-competition, resale price maintenance, or other restrictive clauses are included. Distribution systems between non-competing companies are widely covered by the Block Exemption Regulation for Vertical Restraints, which applies to products and services in all industries, except for motor vehicle distribution and technology transfer. The Block Exemption Regulation exempts all types of vertical restraints on competition from the general prohibition, unless the share of the supplier, or for exclusive purchase agreements, of the buyer of the relevant market is not higher than 30%. Some particularly restrictive clauses are “blacklisted”; agreements providing for such restrictions do not benefit from the exemption, such as minimum or fixed resale price maintenance or restrictions regarding the territory in which the buyer may sell the products. Non-competition clauses, which also include exclusive purchasing agreements, are exempted only for a limited time. Special rules apply to agreements between competitors and to post-contractual non-competition agreements. Agreements that are not covered by the Block Exemption, for instance because the market share threshold is passed, must be reported to the Commission of the European Union to apply for a single exemption or a comfort letter. German law prohibits resale price maintenance and resale maintenance of terms and conditions. In general, exclusivity or tying agreements can be practiced unless the competent competition authority prohibits the parties from doing so.
Establishing an Office
If a potential investor intends to form a relationship or entity beyond a strategic alliance with an existing German business on a contractual basis, German law allows a broad variety of business forms. Since corporate, tax, and trade law (containing the provisions regarding partnerships and sole proprietorships) are codified in German Federal law, the actual place of business or incorporation is not a factor in choosing the business vehicle (except for the local trade tax burden). GmbH The GmbH (Gesellschaft mit beschränkter Haftung - limited liability corporation) is the corporate entity most commonly used for business enterprises in Germany. The structure of a GmbH is relatively straightforward and flexible. It is designed for private businesses (no IPO possible) with a clear and stable shareholder structure looking for full liability protection of their shareholders. The liability of a GmbH is limited to the value of its assets including its share capital. For detailed information on the different German business vehicles please visit http://www.invest-in-germany.de/.
Franchising
Germany is a mature franchise market in which local entrepreneurs have developed sophisticated concepts. A high concentration of franchising chains in Germany exists in the service sector (45%), trade (37%), building and handcraft (8%), and gastronomy (10%). Industry sources expect the best prospects to be in the areas of training and educational services; express delivery services (all types); theme bistros/restaurants; office management, accounting and tax services; maintenance, cleaning and sanitation services; advertising; telecommunication products and services; energy saving products and services; retail stores (specialized); home care services; and environmental services. U.S. franchisors must be prepared to adapt to required market norms and standards, invest in market research, test market receptivity through pilot projects, and to adjust their concepts to German business practices and consumer tastes. Restrictions to competition in franchise agreements are generally covered by the Block Exemption on Vertical Restraints of 1999 referred to in the preceding chapter "Distributors."
Direct Marketing
German consumers are accustomed to purchasing via catalog and have become more receptive to shopping on Internet platforms. More than 80% of German enterprises use direct marketing to sell their products and services. The most frequently used formats are email and Internet marketing (65%), telephone marketing (31%), direct mail (24%) and inserts in publications with a response element (18%). Trading companies, manufacturers, and service companies spend more than EUR 30 billion on direct marketing with mailing expenditures clearly in the lead, followed by inserts with response elements, and telephone marketing. Direct marketing agencies currently employ 48,000, a number which is expected to grow over the next years. It is important to know the pitfalls of using direct marketing as a selling tool in Germany. Data protection and privacy laws are stringent, and consumer protection guidelines and competitive advertising are also highly regulated. Companies should consult with a lawyer before raising, storing or processing any sort of data in Germany. Other potential challenges regard the laws pertaining to unfair competition and rebates.
Joint Ventures & Licensing
Joint Ventures Dealing with joint ventures ranks among the most difficult jobs under German competition law. In Germany, joint venture legislation falls under the purview of the Federal Cartel Office (Bundeskartellamt: http://www.bundeskartellamt.de). The law requires that a joint venture must exercise “genuine entrepreneurial” activities. Under German law, this means: Organizations which merely carry out auxiliary functions, such as purchasing or distribution on behalf of the parents, are not considered joint ventures; and Joint ventures must have at their disposal sufficient assets and personnel to carry out their activities. The Bundeskartellamt is required to prohibit a merger if it is "expected to create or strengthen a dominant position.” Market dominance is defined as an undertaking, which either has no competitors or is not exposed to any substantial competition or has a paramount market position in relation to its competitors. Licensing German antitrust law does not, in the absence of a dominant market position, restrict the owner’s freedom to use her/his industrial property rights, including the exploitation of a patented innovation.
Selling to the Government
Selling to German government entities is not an easy process. Although there has been a delay in implementing some facets of the EU Utility Directive, German government procurement is formally non-discriminatory and compliant with the GATT Agreement on Government Procurement and the European Community's procurement directives. That said, it is a major challenge to compete head-to-head with major German or other EU suppliers who have established long-term ties with purchasing entities.
Distribution & Sales Channels
Distribution channels are varied and similar to the United States. There are certain restrictions, however, concerning multi-level networking systems, i.e., so-called snowball or pyramid distribution systems. More information: http://www.wettbewerbszentrale.de/.
Selling Factors & Techniques
Success in the German market, as elsewhere around the world, requires long-term commitment to market development and sales backup, especially if U.S. companies are to overcome the geographic handicap with respect to European competitors. Germans at times perceive U.S. suppliers as tending to process a U.S. domestic order before taking care of an export sale, or being quick to bypass a local distributor to deal directly with its customer. Some German entrepreneurs with selective experience with U.S. companies are skeptical about their long-term commitment and after-sales support. U.S. firms entering Germany today are generally aware of the factors that make for a successful export relationship and are ready to establish a credible support network. However, U.S. firms should be ready to address any lingering doubts from prospective German clients/partners.
Electronic Commerce
Germany is the European leader in Internet commerce and is among the world’s most sophisticated markets, totaling EUR 320 billion in 2005. Internet commerce is expected to grow to EUR 694 billion by 2009. The use of the Internet by individuals and businesses in Germany is continuing to expand: about 63%, or 51.9 million Germans were online in 2005 and this percentage is expected to grow to 79.7% by the end of 2007. The number of Germans accessing the Internet via broadband is expected to increase from 12.6 million subscribers in June 2006 to 22.4 million in 2010. Business-to-business (B2B) commerce accounted for EUR 289 billion in 2005 and is projected to grow to EUR 580 billion by 2009. Germany holds the highest market share for both B2B and B2C commerce in Europe. Business-to-Consumer (B2C) commerce accounted for EUR 32 billion in 2005 and forecasts expect it to reach EUR 114 billion in 2009. Only about 3% of German retail transactions were online sales in 2005. B2C - Fifty percent of German adults realized at least one shopping transaction via the Internet in 2005. Favorite B2C products are books, tickets for airlines and trains, hotel reservations and music. Growing online sales are expected for consumer electronics, pharmaceuticals and package tours. Retailers without "physical" retail stores or those lacking brand recognition sometimes encounter difficulties when trying to win the trust of German customers. Besides trust, price and product diversity are the most important competitive factors. B2B - Almost all German small and medium-sized businesses have Internet access.
Online transactions such as e-procurement are growing and Customer and Partner Relationship Management are becoming increasingly important. Most e-commerce strategies focus on quick return on investment. Revenues of industry- or company- specific marketplaces, such as SupplyOn in the automotive industry, are growing. Major users of B2B solutions are the automotive, retail, energy, and pharmaceutical/chemical production industries. Financial Services - Germans are heavy users of banking and financial sites and increasingly trust online banking services. Fifty-seven percent of German Internet users did online banking in 2005. E-Government - Germany offers a good number of e-government services. Since August 2005, more than 440 Internet-capable services of German federal agencies can be used online. The German federal and of state governments, backed by national associations and local authorities, adopted a joint strategy called “Deutschland-Online” in 2003. On the basis of successful joint projects, they are intensifying their efforts in e-Government (http://www.deutschland-online.de). The central German government online procurement website e-Vergabe is available at http://www.e-vergabe.bund.de. In July 2003, the European Union (EU) started applying Value Added Tax (VAT) to sales by non-EU based companies of Electronically Supplied Services (ESS) to EU-based, non-business customers. U.S. companies that are covered by the rule change must collect and submit VAT to EU tax authorities. European Council Directive 2002/38/EC changed the EU rules for charging Value Added Tax. The U.S. businesses mainly affected by this rule are those that are based in the United States and selling ESS to EU-based, non-business customers or to businesses that are EU-based and selling ESS to customers outside the EU who no longer need to charge VAT on these transactions. There are a number of compliance options for businesses. The Directive created a special scheme that simplifies registering with each Member State. The Directive allows companies to register with a single VAT authority of their choice. Companies have to charge different rates of VAT according to where their customers are based, but VAT reports and returns are submitted to just one authority. The VAT authority responsible for providing the single point of registration service is then responsible for reallocating the collected revenue among the other EU VAT authorities.
Trade Promotion & Advertising
Trade Fairs Few countries in the world can match Germany when it comes to leading international trade fairs. Such a reputation should be no surprise given that the trade fair concept was born in Germany during the Middle Ages. Today, Germany hosts a major world-class trade event in virtually every industry sector, attracting buyers from around the world. Trade fairs thrive in Germany because they are true business events where contracts are negotiated and deals are consummated. The U.S. exhibitors at German fairs should be prepared to take full advantage of the business opportunities presented at these events. While U.S. exhibitors and visitors can conclude transactions, all attendees can use major German trade fairs to conduct market research, see what their worldwide competition is doing, and test pricing strategies. Finally, German fairs attract buyers from throughout the world, allowing U.S. exhibitors to conduct business here with buyers from across Europe, Asia, Africa, Latin America, as well as with other U.S. companies. German trade fairs, in general, attract impressive numbers of visitors and exhibitors. This reality confirms the conviction that there is no other venue where an American company can get so much product exposure for its marketing dollar.
Trade fairs also provide a U.S. company interested in entering Germany with the opportunity to research its market and the potential of its product properly before making a business decision. Website: http://www.buyusa.gov/germany/en/events.html Showcase Europe Responding to the international nature of German trade shows, the U.S. Commercial Service has a broad-ranging program entitled “Showcase Europe” designed to support U.S. business interests in the expanded European Union. Focused on high priority sectors such as aerospace; energy; medical equipment, including drugs and pharmaceuticals; telecommunications and information technologies; environmental technologies and equipment; and travel and tourism, “Showcase Europe” provides contacts, market information, and commercial guidance for the entire European market region. What makes these programs effective and unique is that they are conducted by trade specialists who regularly work at U.S. embassies and consulates around Europe, but come together at selected trade fairs for the sole purpose of supporting U.S. firms. "Showcase Europe" programs also address trade policy and other business concerns, such as intellectual property rights and other market impediments to U.S. companies, which are common across Europe. Website: http://www.buyusa.gov/europe/. Showcase Global Only recently, U.S. Commercial Service Germany has started to expand “Showcase Europe” into a true “Showcase Global” program, which is designed to promote the presence of U.S. companies at selected trade fairs in Germany globally, through the Commercial Service’s worldwide network. Please visit our website at http://www.buyusa.gov/germany/en/ for more information on Commercial Service Germany’s activities at trade fairs.
Advertising In addition to exhibiting at major German trade fairs, advertising plays a central role in most companies’ broad-based marketing programs. Regulation of advertising in Germany is a mix between basic rules and voluntary guidelines developed by the major industry associations. The “Law Against Unfair Competition” established legal rules at the beginning of the 20th Century. Although it has been modified over time, this law continues to be valid today. The law allows suits to be brought if advertising "violates accepted mores." Many advertising practices that are common in the United States, such as offering premiums, are not allowed in Germany. Any planned advertising campaigns should be discussed with a potential business partner or an advertising agency in Germany. Following is the address of the German association of advertising agencies: Gesamtverband Kommunikationsagenturen e.V. (German Association of Advertising Agencies) Friedensstr. 11 60311 Frankfurt a.M. Telephone: [49][69] 2560080 Telefax: [49][69] 236883 http://www.gwa.de There are numerous technical or specialized periodicals that deal with all aspects of technology and doing business in Germany. In addition, Germany has a well-developed array of newspapers and magazines which offer the opportunity to gather information and advertise products and services.
Pricing
Germany has become more price-conscious, especially in consumer goods areas. Consequently, price is increasing in importance as a competitive factor, but quality, timely delivery and service remain equally important, especially in business-to-business relations.
Sales Service & Customer
The German commercial customer expects to be able to pick up the telephone, talk to his or her dealer, and have replacement parts or service work immediately available. American exporters should avoid appointing distributors with impossibly large geographic areas, without firm commitments regarding parts inventories or service capabilities, and without agreements on dealer mark-ups.
Protecting Your Intellectual Property
The EU’s legislative framework for copyright protection consists of a series of Directives covering areas such as the legal protection of computer programs, the duration of protection of authors’ rights and neighboring rights, and the legal protection of databases. Almost all Member States have fully implemented the rules into national law, and, the Commission is now focusing on ensuring that the framework is enforced accurately and consistently across the EU.
The on-line copyright Directive (2001/29/EC) addresses the vexing problem of protecting rights holders in the online environment while protecting the interests of users, ISPs and hardware manufacturers. It guarantees authors’ exclusive reproduction rights with a single mandatory exception for technical copies (to allow caching), and an exhaustive list of other exceptions that individual Member States can select and include in national legislation. This list is meant to reflect different cultural and legal traditions, and includes private copying "on condition right holders receive fair compensation:" http://ec.europa.eu/internal_market/copyright/index_en.htm.
Patents (Patent) are issued for technical inventions, which are new, involve an inventive step, and are susceptible to a commercial application. The term of protection is 20 years, commencing with the filing date. The pertinent legal source is the Patent Act of 1981 (Patentgesetz, PatentG), which has adapted the former German Patent Act to the European Patent Convention. The EU countries, including Germany, have a "first to file" approach to patent applications, as compared to the "first to invent" system followed in the United States. This situation makes early filing a top priority for innovative companies. Unfortunately, it is not yet possible to file for a single EU-wide patent that would be administered and enforced like the Community Trademark (see below). For the moment, the most effective way for a company to secure a patent across a range of EU national markets is to use the services of the European Patent Office (EPO) in Munich. It offers a one-stop-shop that enables rights holders to get a bundle of national patents using a single application. However, these national patents have to be validated, maintained, and litigated separately in each member state. EPO’s web site is http://www.european-patent-office.org : http://ec.europa.eu/internal_market/indprop/index_en.htm. /
Trademarks (“Marken”) are signs that serve to distinguish the goods and/or services of one enterprise from those of another. They enable their holders to build up, expand, and maintain a market position. Trademarks are regulated by the German Trademark Act, which covers both trademarks that are used although not registered, as well as registered trademarks. The Trademark Act further provides protection of commercial designations (trade names and other company designations, such as titles, and the trading name of works, e.g., for films and books). A German trademark is registered for ten years, after which the term can be extended for another ten-year term. Additional fees become due if the extension fee is not paid in a timely fashion. The EU-wide Community Trademark (CTM) can be obtained via a single language application to the Office of Harmonization in the Internal Market (OHIM) in Alicante, Spain. It lasts ten years and is renewable indefinitely. For companies looking to protect trademarks in three or more EU countries, the CTM is a more cost-effective option than registering separate national trademarks. On October 1, 2004, the European Commission acceded to the World Intellectual Property Organization (WIPO) Madrid Protocol. The accession of the Madrid Protocol establishes a link between the Madrid Protocol system, administered by WIPO, and the Community Trademark system, administered by OHIM. As of October 1, 2004, Community Trademark applicants and holders are allowed to apply for international protection of their trademarks through the filing of an international application under the Madrid Protocol. Conversely, holders of international registrations under the Madrid Protocol will be entitled to apply for protection of their trademarks under the Community Trademark system: http://oami.eu.int/en/default.htmhttp://www.wipo.int/madrid/en.
A utility model (“Gebrauchsmuster”) is a registered right to technical inventions (e.g., for equipment, technical devices, chemical substances, electrical switches, etc.). Unlike a patent, protection by utility model is not possible or appropriate for processes such as production or assessment. A design patent (“Geschmacksmuster”) is used to protect the coloring and shape of two-dimensional or three-dimensional commercial products intended to appeal to the eye. Designs The EU adopted a regulation introducing a single Community system for the protection of designs in December 2001. The regulation provides for two types of design protection, directly applicable in each EU member state: the registered Community design and the unregistered Community design. Under the registered Community design system, holders of eligible designs can use an inexpensive procedure to register them with the EU’s Office for Harmonization in the Internal Market (OHIM), based in Alicante, Spain. They will then be granted exclusive rights to use the designs anywhere in the EU for up to twenty-five years. Unregistered Community designs that meet the Regulation’s requirements are automatically protected for three years from the date of disclosure of the design to the public http://oami.eu.int/en/design/default.htm.
The German Copyright Act (“Urheberrechtsgesetz”) grants someone who creates an original work expression the right to control how that work is used. On July 1, 2002, after lengthy and public discussion, the Copyright Act was amended to improve an author’s rights for reasonable compensation, as well as an author’s contractual position vis a vis the industry exploiting the author’s works. Literary works, musical arrangements, graphic works, audio-visual works, compilations thereof and other works are all covered by copyright. The act expressly mentions computer programs and databases. German copyright has no formal requirements. Registration is not required. Copyright protection is limited to 70 years after the death of the author. European Trademarks Since 1996, it has been possible to register Community Trademarks at the Office for Harmonization in the Internal Market, Alicante, Spain (http://oami.europa.eu/). This step often makes sense if an enterprise seeks protection not only in one country, but in at least three or four EU member states of the European Union.
The Community Trademark offers financial advantages in addition to other significant advantages. For example, the use of a Community Trademark in only one member state is sufficient to meet the requirement of use for the entire territory of the European Union. It is advisable to consider use of both community and single country protection systems simultaneously. European Patent Law The European Patent Convention, in force in Germany since 1976, provides for a single, centralized and uniform procedure for granting patents in all or part of the contracting or extension States (i.e., all Member States of the European Union, in addition to Monaco, Switzerland, Albania, and Macedonia). Once a European patent has been granted, the convention stipulates that the European patent assumes the character of individual national patents of the Member States, subject to the authority of the respective States. Patents so derived enjoy the same protection as a national patent. Further information on protecting your intellectual property in Germany and elsewhere in the EU is available from the German Trademark and Patent Office at http://www.dpma.de.
Due Diligence
Companies interested in taking over German firms should always conduct their own due diligence before entering into business ventures. One of the Commercial Service Programs, the International Company Profile, has been designed to support due diligence processes. All major consulting companies offer due diligence services, and most large U.S. accounting or consulting firms have subsidiaries in Germany.
