Germany Essay, Research Paper
We are a car maker with an interest in doing business in Germany. We know that we have to do a lot of research before we take the plunge and open a plant in Germany. We’ve researched the following topics on Germany; national context, role of economic geography, the cultural environment, legal environment, legal environment, it’s relationship with the United States, international trade, economic evolution and economic policies and strategies. This was a streneous task however we arrived to the conclusion that it would be profitable to do business in Germany.
Germany is the world’s third largest economy. While the German economy
currently is experiencing high unemployment and slow growth, the country’s
economic strength has been the subject of world renown since the end of
World War II. Germany is one of the founding members of the European
Union (EU), a North Atlantic Treaty Alliance (NATO) member, and a
member of the Group of Seven (G-7) industrialized nations and the General
Agreement on Tariffs and Trade (GATT)/World Trade Organization (WTO).
It joined the common European currency, the euro, on January 1, 1999, and
Frankfurt is the seat of the European Central Bank.
Germany consumes about 2.9 million barrels per day of oil, nearly all
of which it imports, making Germany the third-largest oil importer in the
world. German oil imports come primarily from (in decreasing order of
magnitude) Russia, Norway, the United Kingdom, and OPEC (Libya, Saudi
Arabia, Nigeria, Algeria). German imports from Russia have remained
unchanged in recent years. However, OPEC’s share of German imports has
decreased, while the share of North Sea oil from Norway and the United
Kingdom has increased. Germany produces around 61,000 bbl/d of crude
oil, much of which comes from the North Sea.
In Germany, about three-quarters of the price of gasoline is made up of
taxes, compared to around one-third in the United States. The pump price
for gasoline is about three times higher in Germany than the United States.
Gasoline consumption (and overall oil consumption) have declined slightly
since 1995. Between 1992 and 1997, the number of German gasoline stations
decreased (despite a rise in the number of stations in the former East
Under a law which took effect on April 15, 1998, Germany’s strategic oil
inventory agency EBV is required to hold a 90-day emergency stockpile of
oil, up from 80 days previously. In late August 1999, the German government
planned to offer a tender for over 31 million barrels of sour crude oil in
response to increased crude prices. No further action was reported on this
tender as of October 1999.
Refining costs more in Germany than other countries in Europe, as Germany
levies eco-taxes. High costs have initiated a wave of consolidation and some
closures. Overall refining capacity has increased due to the opening of the Elf
Mider refinery in the former East Germany. The Elf Mider facility was the
first new refinery to be built in Europe in over a decade.
Germany produces very little natural gas, and satisfies most of its demand
through imports. Almost one-third of Germany’s gas imports come from
Russia. The other main sources of imports are the Netherlands (about 24%)
and Norway (about 20%). Gas consumption accounts for about 20% of total
energy consumption in Germany. This share is expected to rise over the next
decade, especially for electric power generation as nuclear power is phased
out. Gas currently fuels only about 10% of German electricity.
Ruhrgas remains Germany’s dominant natural gas transmission company,
holding 60% of the German natural gas market. Years of Ruhrgas’s
monopolistic control of Germany’s gas market have left Germany with a
highly developed gas infrastructure. Ruhrgas is currently involved in laying
pipes to connect Poland to the German system in order to increase imports
of Russian gas via Poland, a project that could be completed in late 2001.
Ruhrgas has also bought stock in Russia’s Gazprom, in an effort to facilitate
closer relations between the two companies in anticipation of future increases
in German demand for gas.
Competition in the market has developed slowly. Ruhrgas’s main competitor,
Wingas, was formed in 1990 by a joint venture between BASF’s Wintershall
and Russia’s Gazprom. At the end of 1997, Wingas had become Germany’s
sixth largest company. Now, with its own domestic pipelines and links to
export supply lines, Wingas has gained market share, while Ruhrgas’s share
has decreased. Wingas is in the second stage of a pipeline construction
project that will connect Russia’s Yamal Peninsula to the German network,
which is expected to increase further the Wingas market share. The retail gas
market is expected to be fully opened, allowing consumer choice among
suppliers and brands, in December 1999.
Germany is in the process of developing its first offshore gas field in the
North Sea. There are two reservoirs with over 450 billion cubic feet plus
condensate, which will be connected to the German mainland via a new
pipeline. Gas is expected to start moving through the new pipelines in early
2000. The new pipeline will be built with excess capacity, in anticipation of
finding additional reserves on the new route into Germany. The project is
being undertaken by the Deutsches Nordseekonsortium (German North Sea
Consortium), which is made up of Wintershall (40%), BEB Erdgas und
Erdoel (40%), BASF (12%), and RWE-DEA (7%), and it is being
coordinated by Wintershall.
German companies also are involved in gas projects outside Germany. For
instance, the German company Lurgi has signed a seven-year agreement with
state-owned Turkmengas to develop pipelines and a processing plant
enabling Turkmenistan to export its natural gas. Germany’s Siemens Power
Generation Group won a contract to supply, install, and operate three gas
turbine units in Egypt.
Coal is Germany’s only major domestic fuel source. Over 75% of German
coal is used for electricity generation, and coal makes up over 50% of
electricity generation. Hard coal production is expensive in Germany, relative
to production costs in other major coal producers, because German coal is
deep underground. Hard coal production has remained a robust industry
only through heavy subsidization, which now is coming to an end. Lignite, or
“brown coal”, production, however, is inexpensive in Germany. Germany is
the world’s largest lignite producer, with about one-fifth of global output.
In March 1997, the German government, the mining industry, and the unions
reached an agreement on the future structure of subsidies to the German hard
coal industry. Subsidies to the industry are to be reduced from over DM10
billion ($5.5 billion) in 1997 to DM5.5 billion ($3 billion) by 2005. The
agreement called for closure of 7-8 of Germany’s 19 hard coal mines (14 of
which are in operation as of October 1999), resulting in an estimated decline
in employment from 76,000 miners in 1997 to 36,000 by 2005.
Decreasing coal production has brought about changes in the organization of
the industry. Two of the major producers, Saarbergen and Ruhrkohle
Bergbau, merged to form Deutsche Steinkohle (DSK), which accounts for
96% of German production. DSK is part of the larger RAG group, which
intends to diversify its holdings and focus less on coal as the sector shrinks
in coming years.
As domestic production declines, Germany is emerging as a significant coal
importer. Coal imports rose a reported 20% in 1997 and another 15% in
1998. Main suppliers are South Africa and Poland, with further supplies
coming from Colombia, Australia, and the United States.
Germany’s lignite production is separate from hard coal production. Lignite
was the most important fuel in the former East Germany. Since reunification,
wasteful and environmentally damaging mining methods practiced during
Communist rule have been reformed. The industry also has been privatized.
Lignite production in Germany fell by almost 75% between 1989 and 1996,
mostly in the former East Germany. Rheinbraun, a subsidiary of RWE, is
responsible for 85% of German lignite production. Most of its lignite is used
to produce electricity in RWE’s five power generation plants.
German companies also are involved in coal projects outside of Germany.
RAG owns shares in the Burton Coal Project and the German Creek coal
mine, both in Australia. Ruhrkohle International Mining, part of DSK and
RAG, recently bought the U.S. coal company Cyprus Amax, which made
RAG the world’s second-largest privately-owned coal producer. The
acquisition of Cyprus Amax increased RAG’s oversees coal production
from about 10 million metric tons per year (about 9 million short tons) to
about 72 million metric tons per year (65 million short tons).
Germany is Europe’s largest electricity market. Generation is fueled by coal
(54%), nuclear power (29%), natural gas (10%), hydro (4%), and oil (less
than 2%). The industry is undergoing dramatic changes in fuel mix and in
organization. Efforts continue to phase out nuclear power and to increase
reliance on renewable energy sources, most notably wind power. The
German power market was liberalized in April 1998, and the ramifications of
this change are still developing.
Germany had the most expensive electricity in Europe before liberalization,
and it remains the most fragmented market with over 900 utilities. Industrial
power prices have dropped between 30% and 40% since April 1998 (with
residential prices currently following suit), and mergers are now sweeping the
industry. An estimated third of all German power companies are considering
mergers or joint ventures. The largest of the potential mergers is between
Viag and Veba, two of the eight major grid operators. A merger of the two
would create Germany’s largest power company, a distinction currently held
by RWE. Details of the deal are still under negotiation as of October 1999.
Smaller companies and new entrants to the market complain that the market
is not yet completely liberalized, as the major grid operators and regional
supply companies make it difficult for consumers to change suppliers. U.S.-
based Enron, for instance, claims that the current grid access agreement does
not allow it to offer competitively priced electricity.
Electricity is clearly on the path toward commoditization. Companies are
advertising their new energy packages for residential consumers, and
marketing is becoming a key element of energy companies’ strategies as
“price wars” drive down residential prices. Spot markets have developed,
whereas prior to liberalization long-term contracts were the norm. New power
exchanges are planned for Frankfurt, Hanover, Dusseldorf, Leipzig and
Berlin, and the development of a futures market is underway.
Currently Germany ranks fourth worldwide in installed nuclear capacity,
behind the United States, France, and Japan. Germany’s nuclear plants
comprise about 30% of Germany’s electric generation capacity, and about
29% of actual generation.
Nuclear power has become controversial since the September 1998 elections.
The Greens, the environmental party that is part of the ruling alliance voted
into power in the 1998 elections, are staunchly opposed to the continued use
of nuclear power. Chancellor Schroeder had decided to end close all 19
nuclear reactors in 2005, but he has since rescinded his position. The
government now plans to phase out the use of nuclear power beginning in
There are few economically viable alternatives to quickly replace such a
significant portion of the fuel mix, especially in the wake of the liberalization
of the industry. Over the longer term, however, high costs (high fixed costs,
long depreciation periods and long annual operating times) associated with
nuclear generation could work to decrease nuclear generation’s role in
Germany’s power sector. Nuclear installations currently are initiating
programs to reduce production costs and waste disposal costs in order to
become more competitive in the deregulated, extremely price-sensitive
Germany has a strong commitment to protecting its environment
*germe.html*. It has actively promoted the use of renewable energy, both
under the Kohl government with the Electricity Feed Law, and now under
Schroeder’s government with eco-taxes. In Germany’s eco-tax regime,
energy tax (energy taxes are slated to increase 10% over the next three years)
revenue is used to fund renewable projects. As a result, Germany is the
largest producer and consumer of wind energy *germe.html*in the world. A
full 1% of electricity is generated by wind power. Hydro-power is the second
largest renewable source, followed by biomass and solar power.
The growth rate of wind power has accelerated in recent years (it grew 30%
in 1997). Over the past 10 years, more than 5,000 modern electric-generating
windmills have been installed, mainly along the windy North Sea coast. Wind
is expected to produce 3.5% of electricity by 2010. In one region (Schleswig
Holstein), 10% of electricity now is generated from wind.
Individual German municipalities also are developing solar power potential.
In Berlin, the Energie 2000 program aims to increase solar power use. City
officials and the area’s power firm, Bewag AG, are investing $22.5 million
between 1997 and 2000 to support solar energy projects, and 44 potential
solar installation sites already have been identified. Meanwhile, Germany
plans to build two major plants to manufacture solar energy collectors, and
aims to build sufficient capacity to meet one-third of world solar technology