KNOWLEDGE BASE Ways To Do Business In Germany
Ways to do Business in Germany
Being aware of the business climate within Germany will help you increase your chances for success. There are also many ways for a company to do business in Germany. We’ve compiled information and resources for you with business options to save you time and money and help you understand what is available to you.
Ease of Doing Business in Germany
In its Doing Business 2017 report, the World Bank Group ranks Germany 17th out of 190 countries for ease of doing business within the country as a small or medium-sized company. Specifically, regulations applying to companies through their life cycle are considered. A high ranking indicates that the German regulatory environment is relatively more conducive to starting and operating a company locally. The World Bank Group ranking takes into consideration the following parameters:
Starting a Business
Dealing with Construction Permits
Protecting Minority Investors
Trading across Borders
With its rank of 17th out of 190 countries, the World Bank Group considers it relatively easy for small and medium-sized companies to do business in Germany.
Doing Business resources
Options for doing business in Germany
Germany has the largest economy in the European Union (EU) and is one of the World’s major economies. It has a high standard of living, a sophisticated business environment, and a strong startup community. As a member of the EU, Germany also provides easy access to the rest of Europe for business expansion. And the EU, as a combined economy, is the second largest in the world behind China. All of these factors make Germany attractive to a large number of businesses.
Every country has different options for allowing companies from foreign countries to do business with their citizen. Depending upon your business type, the speed you want to enter a market, your risk tolerance as well as available funding, some options for doing business in Germany will be more attractive to you than others.
When setting up a business in Germany, it is also important to be familiar with the following areas. You can learn more about the these topics in other sections of Globig:
Following are some of the common ways that people from other countries can do business in Germany.
Direct Exporting: e-commerce, import distributor, sales representative
Direct exporting to another country allows you to retain higher control over the export process, earn potentially higher profits, and develop a closer relationship with the buyers and marketplace in the foreign country. It will, however, require more corporate resources, time, and personnel since your company will be evaluating the market, handling the export process, developing the marketing plan, and finding foreign buyers.
E-commerce from your base location via web or mobile phone
Most of the major commerce platforms are prepared to sell in Germany and integrate with a number of payment platforms that take payment in a number of currencies. The process of figuring out what the ‘landed price’ is, meaning that it includes the product cost, packaging, customs and any tariffs that may apply, shipping insurances, currency conversions, and handling fees is fairly straightforward. Understanding the landed price will help you determine what you will need to charge to make a profit as against what the market will bear.
In this business model, you are responsible for marketing, selling, exporting and customer support when you sell internationally. Consumer e-commerce sites and mobile apps should have a country specific internationalized website which is localized for the language and culture for each country. B2B commerce businesses can decide if a country-specific web or mobile offering is necessary, depending upon the product category and market expectations. Even though English is the international language of business, and certainly is for Germany, having a language localized B2B offering may increase your opportunities for doing business abroad. Country-specific SEO and marketing will be required to optimize your e-commerce business.
Often the easiest, fastest, lowest cost and lowest risk options are working with distributors or sales agents. These may not be the ones with the highest return in the long-term but can help you to learn about the market before considering higher risk opportunities.
Import distributors purchase your product so they can then resell it into their local markets to wholesalers, retailers, or both. One reason to consider using import distributors is when you need to store products in the export country and these distributors already have those services set up. Another is that the import distributor already has a network of buyers they can tap into and it’s faster to enter the market.
Sales representatives represent a variety of products from different countries in their local markets for an agreed-upon commission for each sale. They will not purchase your product or warehouse them. The reps can also advise on go-to-market ideas, local advertising, make local sales presentations, and assist with customs clearance.
Indirect Exporting: partnering with local experts
Indirect exporting allows a smaller company to enter a foreign market without the risks and complexities of direct exporting. Partnering with an established company is one of the quicker and more affordable ways to do business in new markets. If the partner has a complementary business to your own and the same target market, the efficiencies could be good for both partners.
On the other hand, you will have less control over the promotion and sale of your product and will have to share in the profits. You will also be relying on your partner to represent and support your product in the way you want, which they may not do.
Export management companies and export trading companies
Export management companies (EMC’s) and Export Trading Companies (ETC’s) work with a variety of companies and are experts in bringing in goods from other countries. They operate like an export division for companies that don’t have their own. They may sell the goods in the name of the producer or in their own name, depending on your agreement.
Using an EMC or ETC provides a quick and low cost market entry with an expert that has experience in Germany and an established customer network. They can also can teach you about the market.
You will have less control over how your product is marketed, sold, and managed, and your partner will be a layer between you and your ultimate customers – so you won’t get any direct feedback. If in the long term you’d like to do business in Germany without a partner, it may be hard to establish yourself against a very powerful partner you’ve helped to build up. They may even take what they’ve learned from you and develop a competing product.
Choose your partners carefully. Make sure they are respected by your target customers and will have a positive impact on your brand. Understand what other brands they are working with to ensure your brand gets the attention you would like it to have, and be aware that if they apply for and own your brand’s trademark, they could also own your business in that market. And finally, know what your liabilities are if they run into legal or financial troubles.
With this approach, you are essentially selling your product to be re-packaged and sold as someone else’s. They assume all of the risks and are responsible for sales and accounts. While this can lead to sales that might have otherwise taken too much effort for you to get on your own, it also means that you lose all control for marketing, pricing, promotion, and support.
Contractual Strategies: licensing abroad and franchising
In this scenario, Company A (you) from one country will create an agreement with Company B from another country to transfer to Company B the right to manufacture or distribute Company A’s (your) product or service, in a foreign country for a set amount of time and money. Company A can also license to Company B the right to use their intellectual property (IP) including patents, trademarks, and other IP, give their company name, technology, and technological know-how, design and/or business methods.
Licensing has some of the same advantages as with EMC’s. Licensing allows for a quick and easy entry into foreign markets and offers a lower financial risk for both companies since they are working together with each providing their expertise. It can mean a higher return on R&D, and avoiding tariffs and customs fees, as well as shipping costs for physical goods.
There are some risks to this approach. Company A will depend on Company B’s performance, including their quality control, pricing, marketing, support, and manufacturing. Company A can also be limiting its expansion prospects in the future and may find that Company B is ultimately a competitor. And Company A may lose intellectual property through this arrangement. The host country may even prevent export at some time in the future.
Licensing requirements vary around the world and it is essential that you find international legal experts who can help you draft your licensing agreement in order to comply with any country’s regulations and to ensure that your IP is protected. Globig provides a number of vetted vendors who can help you with your legal and accounting needs should you decide to pursue licensing abroad.
Trademark law is very different in each country. You can learn about Trademark Law in Germany through Globig. It is important to note that you must appoint an attorney in Germany or an attorney established in the EU to act on your (your company’s) behalf if you do not reside in Germany.
Make sure you have all trademarking completed in each market being considered well in advance of going into that new market.
Franchising is another type of licensing agreement that offers a highly standardized and tested model for creating a business. Franchising is often the choice for new entrepreneurs since they can license a well-known brand with a tested plan and more support from the brand that is licensing the franchise. A lot of restaurants and other service businesses use the franchise model because it allows both the original franchisor and franchisee to share costs for starting businesses.
Franchisees have some control over the operations but often the regulations are well established in advance and require compliance. Especially for famous brands, franchises can be revoked if franchisees don’t comply. In exchange for a paid franchise license, the franchisee will be provided product resources, designs, training, operations and marketing support.
If your product or service can be franchised and you are comfortable with this kind of arrangement, it is an option to consider.
Advantages to franchising include lower market entry risks for both licensor and licensee in terms of costs, legal ramifications, and political risks. It has the advantage of having a proven business model that mitigates some of the unknowns for starting a new business. There are also economies of scale with owners and multiple franchisees ordering supplies together.
Disadvantages to franchising include the fact that both parties have less control than if they each created a new business on their own. Licensees have lower risks, but also lower profits since they are paying for the license and often share revenue with the licensor. And franchisees are often inexperienced and can harm the original brand if they don’t do a good job.
The German franchising industry has been growing more rapidly than the overall economy for years, and in 2011, it recorded gains of nearly 10 percent. Moreover, the German government fully supports franchising as an engine that drives the establishment of businesses and livelihoods in Germany.
Equity strategies: acquiring a company; joint venture; wholly-owned subsidiary; setting up your own business
Acquiring a company or establishing a joint venture
Germany does allow mergers and acquisitions. Since these are complicated transactions, we highly recommend your working with your legal, banking, and tax resources to understand the impact on your business. If you are going into a country that has regulations around foreigners buying into companies, make sure you have an option to reverse your transaction if the government does not approve.
Acquiring an existing company
This is a big opportunity as well as a significant risk. Many mergers never achieve their projected financial and market goals for a variety of reasons. Acquiring a new company requires significant investment of financial, stock, and staffing resources. There are cultural challenges, language differences, redundancies, and synergy inefficiencies integrating not only different business types but also different countries. Your management may be distracted by all of the integration issues and actually fall down on their current responsibilities.
If you can reduce the total costs of running both companies and create more value for the new combined entity, you are taking advantage of a situation where the pieces you are putting together are worth more than they were on their own. Be very aware of what it will take to succeed so that you maximize your chances for success.
When you acquire an existing company, you are removing a competitor and buying a skilled workforce, existing contracts, and a current market of customers. You’ll have an established entity and understood tax expectations along with a revenue stream. You also gain an understanding of the culture and business landscape for the new country.
Even when you buy another company in your own country, there are challenges when combining the two workforces. Be aware of the insecurity and fear of the unknown for both employee groups. There are cultural and language differences to overcome, and there may be a disconnect between brands and target markets. Integrations are challenging, especially when technology bases for sharing resources are inconsistent. (Do you use the same ERP system? The same CRM?) There could be tax and legal challenges. All of these issues can be a drain on existing financial and staffing resources, and it may take a long time to realize synergies.
Acquiring a company requires significant consideration before moving forward. It’s also important to understand the laws and regulations for foreign entities to buy an existing company in any country. Globig provides vetted Merger & Acquisition specialists, as well as Legal and Financial experts, for a number of countries in its Marketplace.
Establishing a joint venture
A joint venture is established when two or more separate companies agree to undertake a specific task or business enterprise for a finite time while retaining their own distinct identities. They each share in the expenses and any profits.
Companies that are complementary to each other may offer significant strategic advantages by working together, and are good candidates for considering a joint venture. Joint ventures are most interesting when the two companies have similar long-term strategic goals, yet are not competitive in their markets. By combining forces, the companies are able to create one stronger company to compete against market leaders and leverage each other’s assets.
Companies with complementary strategies share the risk and can be stronger when combined. A joint venture can lower costs and may reduce regulatory issues. Speed to market is increased and there are opportunities to compete against market leaders.
Just as with acquiring another company, it can be hard to combine two cultures, and there can be lack of clarity in business issues such as ownership rights, control, length of term, pricing, profit sharing, which may result in legal battles. You also have risks associated with sharing proprietary knowledge and resources. And since it’s a limited-term relationship, the gains may not be timed with the structure.
Wholly-owned subsidiary or setting up your own business
The most high-risk, high cost, and also high reward option is to truly build up your company in another country. When you invest directly into Germany, your company will retain full ownership and sole responsibility for all aspects of the business.
Each country has its own requirements for allowing foreign-owned companies to set up business within their borders. Be sure you understand the requirements for Germany. Globig provides a list of vetted legal and financial vendors, along with other areas of expertise, who can help you understand the subtleties for Germany.
This is often the best long-term strategy. You are able to build the company with the culture and goals you establish. You have the highest level of control over your product and brand, and develop your own direct relationships with the marketplace. A wholly-owned subsidiary provides the opportunity for the highest ROI of all of your options.
Clearly, this approach requires a long-term mindset for seeing results. A high investment is required, which can be taxing on the organization. This slower entry into the market could result in additional taxation and more regulatory compliance requirements.
You have many options for doing business in Germany and the startup climate is healthy and growing. From Berlin, to Munich, to Hamburg and beyond - resources abound to help you get started, to integrate into the community, and to set up your business.
The German government (Federal Ministry of Economics and Energy) provides information and assistance on setting up a business in Germany. In most German cities, the Industrie- und Handelskammern ((IHK) Chamber of Commerce) provides English-language advice on setting up a business. Here is a list of IHKs in larger German cities:
KNOWLEDGE BASE Ways To Do Business In Germany