States of Flux

Thirty years after German reunification, many regions in eastern Germany are still undergoing structural change. The economy in the West is also changing, for a variety of reasons. On the upside, these developments provide promising opportunities for foreign companies.

March 2020

Structural change can have many faces. It might come rather slowly as a consequence of shifts in a region’s major industry and emerging new technologies. Or it might be more rapid and unexpected, for instance in the aftermath of historic events. The process of change is usually accompanied by severe challenges for the region’s economy and population; but it also offers manifold opportunities to push forward innovative solutions.

The most prominent and far-reaching example of structural change in Ger­many’s recent history probably came about as a result of the country’s reunification three decades ago. The Berlin Wall was a monumental symbol of the division of Germany into two countries: the Federal Republic of Germany (FRG) to the west and the German Democratic Republic (GDR) to the east. The border between the two countries was 1,400km long and “The Wall” ran through the middle of Berlin and stopped GDR citizens from leaving the country.

The “Tiger and Turtle – Magic Mountain” installation is a stroll-on sculpture based on a rollercoaster which can be seen from miles away: It stands on Heinrich Hildebrand Hill in the Angerpark in Duisburg, North Rhine-Westphalia. The landmark was conceived and developed by artists Heike Mutter and Ulrich Genth as part of the “European Capital of Culture RUHR” year in 2010. The hill was once a slag heap owned by the zinc smelting company Sudamin MHD GmbH (which closed in 2005) and is named after a local Duisburg historian. © Martin Kirchner/laif

Civil rights movement

However, the year 1989 was a turning point. The economic situation in the GDR was bleak. Although the country had narrowly escaped an economic collapse at the beginning of the 1980s, the level of debt was still high. Industry fell into decline. There was a lack of many things: Spare parts for cars, color televisions, building materials, and certain foodstuffs were scarcely available to GDR citizens. They gave vent to their dissatisfaction. Led by peace and civil rights activists and committed Christians, more and more people took to the streets to protest against the regime. They demanded freedom of expression and free elections and wanted to be able to travel to the West without restriction.

»Even 30 years after German ­reunification, Germany is still
a country in upheaval.«

Klaus-Heiner Röhl, economist

© Institut der deutschen Wirtschaft Köln e.V.

Berlin’s Iron Curtain is pulled down

On November 9, 1989, this civic movement was suddenly successful: Border crossings from the East to the West were opened. The Wall had fallen. Thousands of Germans from either side fell jubilantly into each other’s arms to celebrate the momentous occasion at the border crossings. Less than a year later (October 3, 1990), Germany was officially reunited.

After reunification, the German Federal Government pushed ahead with the “reconstruction of the East.” It wanted to quickly bring living conditions in eastern Germany in line with standards in the western part of the country. Five new German federal states emerged from the former GDR: Brandenburg, Mecklenburg-Vorpommern, Saxony, Saxony-Anhalt and Thuringia. At the heart of them is Berlin, reinstated as the country’s capital city.

More than 30 years have passed since the fall of the Berlin Wall. During this period, Germany has been transformed in many ways – and it is still changing. “Structural change is actually taking place everywhere, the drivers are manifold,” says Klaus-Heiner Röhl, economist at the German Economic Institute (IW).

The term “structural change” describes the economic, social and political challenges a nation is facing – such as regime change, climate change, digitalization, and even demographic shifts. Nonetheless, companies interested in investing in Germany should take a closer look at regions undergoing transformation, since they usually offer plenty of attractive industrial sites, highly motivated specialists (e.g. university graduates who are often interested in finding work locally) and innovative cooperation partners. The technological structural change associated with digitalization in particular calls for innovative solutions from the industry. In search of those, companies can invest in research and development (R&D) themselves as well as cooperate with regional universities and public research institutes in order to keep pace with technological change. Technology-driven start-ups in particular (often spin-offs of universities and public research institutions) can prove to be positive drivers of structural change in a region.

The German state has a special fund to promote foreign direct investment into those regions most affected by structural change. The different federal states also have their own economic development agencies to promote the local economy and assist potential development partners and investors from within Germany and overseas.

© Paul Langrock/laif

Review

Structural change since The Wall fell

After German reunification, people in eastern Germany began to live a freer life in many ways. For the economy of the former GDR, however, it meant a shock: The socialist economy was abandoned, and market economy principles were introduced. Companies from the former East Germany had to face global competition virtually overnight and operate using a new currency.

The result? Within just two years, many large, previously state-owned companies shrank to small and medium-sized enterprises (or disappeared from the scene completely). The trade networks that had existed between East German companies and other eastern European countries collapsed. While the western German economy experienced a real reunification boom due to an extended sales market, eastern Germany experienced an economic crisis. The traditional industrial economy in the East needed a complete reboot in order to survive in the globalized market economy. In the early years following reunification, eastern Germany had to face severe challenges including an industrial decline, a severe rise in unemployment, and an East-West exodus. However, there have since been massive investments into infrastructure and economic support programs. “Hidden Champions” (SMEs that are successfully competing internationally) have emerged in eastern Germany. The year 2017 also marked a historic turning point, with more people moving from western to eastern Germany for the first time.

The structural change phenomenon

Across the federal states, structural change is well advanced in certain areas and still very much in progress in others. “Each ­region is unique – with different challenges and different opportunities opening up for investment. Potential investors are encouraged to do their research to find the location which is best suited to their success. The experts from GTAI can help you in the process,” says Silke Poppe, Section Director at Germany Trade & Invest (GTAI).

Overall progress has been strong and widespread since German reunification. In 1990, eastern Germany’s economic strength (measured by gross domestic product per capita) was only 43 percent of western Germany’s economic position. By 2018, however, it was up to 75 percent, according to an annual report by the Federal Government. In 2010, the unemployment rate in the eastern German states was still hovering at around 12 percent. By the summer of 2019, however, it was down to 6.9 percent. The rate fell from 6.6 percent to 4.8 percent in the West during the same period. There are several regions in eastern Germany where structural change took root more quickly and was particularly successful after the fall of communism.

Facts & Figures

6.9%

Between 2010 and 2019, the unemployment rate in eastern Germany fell from 12% to 6.9%.

No 2

Leipzig/Halle Airport is the second largest cargo airport in Germany and is open 24/7.

74bn

The eastern German state of Brandenburg’s gross domestic product (GDP) in 2018.

Germany’s “Optics Valley“

Take the city of Jena, where so much has happened since reunification. This relatively small conurbation in the federal state of Thuringia is known as eastern Germany’s “Optics Valley.” Even in the former GDR, Jena was best known for the world-famous, state-owned lens and camera manufacturing company Carl Zeiss. In the 1980s, up to 70,000 people worked in the Zeiss factories. After German reunification, many of them lost their jobs. The company nevertheless continued in a scaled-down form, trading under the name Jenoptik, and has been a prime mover in making Jena a center of the optical industry.

Many former Zeiss employees also went into business for themselves, applying their expert knowledge in the reunified Germany. As a result, many small companies were founded around Jenoptik. In the intervening years, the university city of Jena has developed into a fast-growing hub for the high-tech industry. Many international investors have settled there, including the Swiss ­technology group Feintool, Optics Balzers from Liechtenstein, and the Israeli electronics company Orbotech. “Jena is a good example of how strong research and development, a large number of employees in technical professions, and new technological developments have led to sustainable and measurable innovation successes,” explains economist Röhl.

Still from “The Moon – A Fairytale Under the Stars,” a family show projected onto the Star Theater dome at the Zeiss Planetarium in Jena, Thuringia. The Zeiss STARMASTER can deliver the sharpest stars, astral bodies and other motifs using multiple projectors and LED light sources. Zeiss planetariums around the world showcase the company’s know-how in optoelectronics. © Martin Schutt, dpa picture alliance

Disruption brings positive change

The federal state of Brandenburg has also adapted well to the structural changes of recent decades. At 5.4 percent, the unemployment rate in the state is at its lowest ever level, and GDP almost quadrupled from EUR 20 billion in 1992 to EUR 74 billion in 2018. Exports have also risen sharply. “All the economic data make it quite clear: Brandenburg has mastered a successful structural change,” says Dr. Steffen Kammradt, managing director of the Brandenburg Economic Development Corporation. Today, Brandenburg is one of the top locations for the aviation industry, and the automotive industry is also thriving in the state.

In eastern Germany, the industrial inheritance of the former GDR has been preserved in many instances and has served as a foundation for new developments. In Ludwigsfelde, Brandenburg, for example, the once state-owned Industrial Association for ­Vehicle ­Construction (IFA) company, which used to build trucks during the GDR era, remains operational to this day. Since 1994, the plant has belonged to Daimler and today employs 2,000 people who produce the Mercedes Sprinter model there. The city of Schwedt is another success story: It is home to the PCK oil refinery, which was also once state-owned and is now fully modernized. Today, it supplies oil to the Berlin and Brandenburg area.

The U.S. company Tesla, a heavyweight in the electric mobility sector, has also announced its intention to become active in Brandenburg: The electric car manufacturer’s first European factory is to be built near Berlin. “We will build batteries, drive trains and vehicles there,” explains Tesla CEO Elon Musk.

The positive developments triggered by structural change are evident throughout eastern Germany. Many international companies have settled there, including Pfizer Pharma, Goodyear Dunlop Tires, Ypsomed, GlobalFoundries, Greatview Aseptic Packaging, and Bell Equipment, along with many other small, medium-sized and large companies. According to fDi Markets, a total of 841 investment projects were established in the new federal states during the period 2014 to 2018.

»Young companies accelerate structural change«

The German start-up landscape acts as a catalyst for structural change across the country, says Dr. Robert Hermann, CEO of Germany Trade & Invest.

Why do start-ups play an important role in structural change?

Start-ups fulfill several important functions, for example as input providers for larger, established companies. If such companies acquire the technology of a start-up or integrate it into their value chain, they remain competitive in the long term. Start-ups also have a disruptive effect and solve problems in an unconventional way. This accelerates structural change and creates investment opportunities. Furthermore, they create jobs and career opportunities.

To what extent are regions of structural change a good environment for start-ups?

Where positive structural change is taking place, especially in large cities and conurbations, there is a spirit of optimism and creative entrepreneurship. Many digital and technology start-ups have settled in the Ruhr area. The transition from coal to renewable energies and digitalization is in full swing there. A strong start-up scene has also established itself in Leipzig. There has been a profound structural change there since the beginning of the 1990s – away from the lignite and chemical industry and toward digital service providers.

What makes German start-ups interest­ing for foreign investors?

Investors from abroad can find partners throughout the German start-up landscape. In addition, start-ups are seen as attractive employers in Germany. This creates recruitment potential for foreign companies.

Structural change to the west

In many western regions of Germany, structural change is also a major topic. In the Ruhr area, cities like Essen, Bochum, Gelsenkirchen, and Duisburg were once strongholds of the German coal and steel industry. But today, coal is no longer mined and many steelworks have closed. The closure of an entire branch of industry has had a dramatic effect on the Ruhr region, and economic initiatives and structural policy programs have only borne fruit to a limited extent.

The Ruhr region nevertheless has a lot to offer today, with no less than 22 universities and more than 60 research institutions. “This dense and diverse research landscape makes a major contribution to coping with structural change,” says economist Röhl. Spin-offs from the research carried out at universities and research institutions could notably be capitalized on by investors. The environment has also proved to be fertile ground for innovative start-ups.

The German start-up landscape extends far beyond the Ruhr region, of course. Almost every region hosts a culture of young founders who develop innovative business ideas and creative solutions which could provide answers to the world’s problems. As previously mentioned, start-ups are an essential driving force of structural change in Germany. In 2017, there were around 108,000 founders of start-ups in Germany, compared to the previous year, when there were ‘only’ 93,000. Concluding a recent report by the state-owned bank KfW, chief economist Jörg Zeuner commented: “The German economy needs these dynamic young companies to stay fit for the future. They are often the ones who make new technologies suitable for application and therefore ensure their dissemination.”

»Each region is unique: with different challenges and
opportunities for investment.«

Silke Poppe
GTAI Section Director

Climate change is a major driver

Every day, new collaboration agreements are signed by manufacturers and suppliers across Germany, as solutions to tomorrow’s mobility and transport challenges are discovered. The Stuttgart region in Baden-Württemberg, for example, has become a center for electromobility. All industries working on new, climate-friendly and networked mobility solutions are active in the state’s renowned automobile manufacturers such as Daimler, Audi, Porsche and Mercedes-Benz as well as their suppliers.

Climate change is also driving considerable structural change in the German energy industry. The number of consumers who now demand clean energy in Germany is rising, and the Green Party has made great strides in recent elections. The German Federal Government has been pushing the transition of the country’s energy supply from nuclear and fossil fuels to renewable energies for some years now. In 2022, the last German nuclear power plant is due to go off-grid, while lignite will no longer be mined after 2038. The last hard coal mine in Germany closed its doors in December 2018.

Environmental technology

Germany’s Energiewende (Energy Transition) is an enormous project that will bring about large-scale structural change in industry and across all of the regions, more specifically in the three major lignite mining districts: the Rhenish mining district in North Rhine-Westphalia, the Lusatian district in Brandenburg and Saxony, and the central German mining region in Saxony and Saxony-Anhalt.

Germany is already one of the world leaders in the field of environmental technologies. This position is likely to be consolidated over the coming years. With the help of public funding, 20 Reallabore der Energiewende (“real-world laboratories for the Energy Transition”), for example at the Energy Park Bad Lauchstädt near Leipzig, will provide scientists and innovative companies with ample opportunity to research new solutions for a clean energy future.

»Foreign investors
can take advantage of various ­incentives according to their needs.«

Saarland: From coal to IT sciences

Regions affected by the coal withdrawal have a lot to learn from the Ruhr area, which already has years of experience of structural change following the disappearance of an entire industry. Saarland has also mastered its exit from the coal and steel industry well. The region’s last hard coal mine closed a few years ago and around 5,000 jobs were lost. The federal state was able to fall back upon its well-networked research landscape in information technology and has since developed into an important location for IT sciences. Several well-known research institutions such as the Max Planck Institute for Software Systems (MPI-SWS) and the Leibniz Institute for New Materials have settled in the state capital Saarbrücken.

Foreign investors interested in locating in Germany, and particularly in regions undergoing structural change, can count on public support. The German Government and the federal states have an economic development framework in place to strengthen local infrastructure and business ecosystems, create jobs, and promote innovation and entrepreneurship. This system is open for all investors, regardless of their country of origin. There are a number of incentive programs for foreign companies meeting certain criteria; they will be assessed according to need and the regions they would like to invest in. These programs include investment grants, promotional loans, and public equity capital.

Benefiting from structural change

The incentives are not mutually exclusive and can be used in combination. Companies who access them can use them to finance various projects such as research and development, personnel development, environmentally relevant projects, and general investments. GTAI helps foreign companies to identify suitable programs for the project and region in question. Its experts provide assistance in setting up a draft project outline, which normally serves as the first step in the R&D incentives application process.

Thirty years after the fall of The Wall, it is now clear that structural change is a phenomenon that is taking place across Germany and is not confined to the eastern states. Structural change takes many forms and its drivers are numerous, for example digital transformation and new climate and environmental protection challenges. The changes that go hand in hand with this state of flux bring exciting opportunities for companies from Germany and abroad. It is worth keeping a close eye on developments and seizing opportunities when they arise.

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