Is German industry migrating to the US? – DW – 18/03/2023

German companies love America. According to the German-American Chamber of Commerce, around 5,600 of them have invested in the American market. As of September 2022, that’s an investment volume of nearly $650 billion (€605 billion). And it is not only large companies such as Siemens, Volkswagen or Linde that are currently looking to strengthen their involvement in the US – in some cases even building completely new production facilities.

“There are various reasons for that,” says Dirk Dohse, who heads the research center for innovation and international competition at the Kiel Institute for the World Economy (IfW). “One is the rise in geopolitical tensions. Many German companies see the US as a ‘safe haven.’ Other reasons are the relatively low energy costs and the very generous subsidies given under the Inflation Reduction Act.”

The Inflation Reduction Act attracts companies

The Inflation Reduction Act (IRA) is a multi-billion dollar subsidy program initiated by the US government under President Joe Biden. Despite its name, the goal is not so much to reduce inflation as climate protection. There is about $430 billion in the IRA pool, of which $370 billion is earmarked for the promotion of carbon-saving technologies, with the rest designated to go to health care.

Joe Biden’s Inflation Reduction Act seeks to bring investment back to the United StatesPhoto: Andrew Harnik/AP

However, the subsidies and tax credits are linked to the fact that the companies that benefit from them either use American products or manufacture their own products in the USA. Thus, for example, the buyer of an American electric car with a battery that was also manufactured in the USA would receive a premium of about 7,500 dollars. Wind turbines or solar parks with American components will also be supported. From a US perspective, primary products from countries with which the US has a free trade agreement, such as Mexico or Canada, are also acceptable.

Companies are already responding

The US government’s support plans under the IRA have already resulted in delays of electric car batteries in Germany, or the threat of them being stopped altogether – for example Tesla in Grünheide near Berlin or the Swedish company Northvolt, which has planned to build a factory in Heide, Schleswig – Holstein, but will now probably invest in the USA first.

Should Germany then be worried about its status as a production location? “It is true that the manufacturing sector’s share of total value added in Germany has been declining since 2016,” says Dirk Dohse of the IfW. “However, we also start at a high level. I don’t see deindustrialisation happening throughout the country.”

There’s a Tesla factory just outside Berlin, but the US wants jobs to move homeImage: Patrick Pleul/dpa/picture alliance

Chancellor Olaf Scholz and the President of the European Commission, Ursula von der Leyen, have already addressed the US President Joe Biden and warned that the lavish American subsidies could lead to a distortion of competition for European companies compared to their American rivals. .

Soon after, it was announced that Brussels intends to counter the IRA with its own green program for industry and will also give EU countries more freedom to provide their own subsidies.

Danger of a “supplement spiral”

Economists believe that a confrontation like this would be a dangerous step. “I don’t think we should get into a race for subsidies,” says Dohse. “At the end of the day, this is taxpayers’ money. We have to think carefully about whether this is going to pay off for society in the long term.”

Amazon is one of the American companies with the highest turnover in GermanyPhoto: Stefan Ziese/Zoonar/image alliance

It was, he said, extremely disappointing when innovative companies, such as those working in “green technologies”, which have been cultivated, sustained and nurtured with German or European taxpayers’ money, are then lured to the United States by the subsidies available to them . “But throwing more taxpayers’ money at them is not the solution,” says Dohse. He suggests that one approach to consider would be to link individual federal grant programs for young businesses to some degree of loyalty to location.

Germany as a location: praise and criticism

So if many German companies are investing more in the US to take advantage of the IRA subsidies, how do internationally active US companies rate Germany as a business location?

“Europe’s largest economy remains an important and attractive location for many American companies,” Simone Menne, the president of the American Chamber of Commerce in Germany (AmCham Germany), told DW. “Its many highly educated skilled workers, dense infrastructure networks, first-class technical colleges and universities, great political stability, strong presence in the EU market and other factors are important arguments for investing in Germany.”

The American car manufacturer Ford is based in the West German city of ColognePicture: Oliver Berg/dpa/image alliance

However, the annual Transatlantic Business Barometer, whose latest issue was published on March 16, is less optimistic. According to this AmCham Germany survey of American companies in Germany, the country’s 2023 location rating fell for the third year in a row.

In last year’s Business Barometer survey, 59% of American companies in Germany rated their location as “good or very good.” In 2023, that number dropped to 34%. There is praise for the quality of the workforce (94%), supplier network (68%) and research and development (68%). However, only 38% of US companies expected Germany to improve as a location over the next three or four years, compared to 43% in 2022.

High energy prices are a deterrent

However, it is also the case that many of the surveyed American companies in Germany in 2022 reported an increase in revenue (68%), number of employees (42%) and investments (42%). 53% of respondents expect their revenue to increase by 2023, and the same number said they would expand their operations over the next three to four years.

The disadvantages they see in Germany are the cost of labour, the digital infrastructure and a lack of skilled labour. However, they reserved their strongest criticism for the high energy prices, even compared to other countries, and even before Russia instigated the war in Ukraine.

Apple CEO Tim Cook at the company’s engineering center in Munich, where they are planning new investmentsImage: Apple/dpa/picture alliance

“They play an important role in location decisions, especially with energy-intensive companies,” says AmCham president, Simone Menne. Germany must therefore be even more convincing in other ways, she says. It must improve its offer by securing skilled workers, reducing bureaucracy and expanding digitalisation. “This will not only be useful for securing investment from the United States,” says Menne.

IfW economist Dirk Dohse points to a decision by the American technology giant Apple: It is spending another billion euros to expand its chip design center in Munich. “If Germany invests wisely in research, education and infrastructure instead of wasting taxpayers’ money on subsidies, it will remain an attractive place for foreign investors in the future,” Dohse believes.

This article is translated from German.

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