Green technology Germany's best bet to remain industrial leader – industry association
Green and digital technologies provide a “big opportunity” for German industry at a time when it is struggling to secure its place in the global transition to climate neutrality, said industry association BDI in a report [summary in English]. Technologies that bring benefits regarding climate action, as well as those in digitalisation and health, will create a market worth about 15 trillion euros annually by 2030, said the report, which was written by Boston Consulting Group (BCG) and the German Economic Institute (IW). It found that Germany is well placed to create new industrial value within it, particularly in the areas of climate technologies, industrial automation and healthcare.
Germany would have to transform large parts of its economy to “continue its history as a successful industrialised nation,” said the report. For example, the country would have to lay the foundations for new global technology leadership with a strong European domestic market for e-cars, a competitive battery value chain, and investments in digitalisation and software expertise. “Whether the German industrial centre will continue to grow in the future depends largely on the success of German companies in these future markets,” said the report. However, the country faces competition from regions where governments have “strong industrial policy.”
“The transformation in Germany is progressing too slowly and not to the extent required,” said Siegfried Russwurm, president of the BDI. “In order to make the business location internationally competitive and achieve the green and digital transformation, the government must rethink its industrial policy agenda,” he added. Otherwise, he warned, Germany would face “gradual deindustrialisation”.
The BDI called for a greater focus on supply security and cost efficiency in the transformation of the electricity system, and targeted support for certain industry consumers. They said the government must incentivise the market ramp-up of green hydrogen and synthetic fuels based on it through better regulation, and support further innovation by providing more funding for research and development. It also has to spur domestic demand by setting the right framework conditions for consumers to choose green technologies over their fossil fuel alternatives, and push for free trade at the global level, for example by supporting free trade agreements.
The German government and the European Union have increasingly focussed on policies to ensure that domestic industries remain competitive during the transition towards greenhouse gas neutrality. Re-elected European Commission president, Ursula von der Leyen, has promised a “Clean Industrial Deal” within the first 100 days of her second term in office. Germany’s economy ministry presented an industry strategy in 2023, and launched auctions for pioneering industry decarbonisation subsidies, while also setting up many other support schemes.
Competitive energy prices, better planning and approval procedures are prerequisites for securing the industrial base – BCG
The BDI said that significant additional investments by 2030 are necessary to ensure Germany remains an attractive, competitive business location, and that a large part of these would have to be public funds. Higher energy prices, more bureaucracy, a lack of investments and skilled workers, and higher taxes compared to other countries have burdened industry in the country, the association added.
The German government coalition under chancellor Olaf Scholz has acknowledged the need to ramp up investments in the energy transition and decarbonisation and decided to provide dozens of billions of euros through the Climate and Transformation Fund (CFD) to finance key measures in these areas. However, a lawsuit led by the opposition in late 2023 led the country's highest court to rule that large parts of these funds had been booked unlawfully and violated the country's constitutional limit on new government debt, which forced Scholz's coalition to cut expenses across the board to present a viable budget. The country has since discussed the option to loosen debt limit rules, but parts of the coalition government oppose such a step.
Europe’s biggest economy still has a large industrial base. Industry companies are responsible for about one fifth of gross value added and employ 16 percent of workers in the country, said the BDI. German industry has supported the move to climate neutrality for years on the basis that it benefits the economy. The BDI’s landmark 2018 report, Climate Paths for Germany, presented a turning point in industry’s stance on climate action, which until then had generally been skeptical of the country’s energy transition.
High energy prices – especially during and after the energy crisis, which in 2022 was fuelled by Russia’s war against Ukraine – as well as the necessary investments to transform crucial industrial production methods have, however, remained an issue for the sector. In a 2021 update to the climate paths report, the BDI called on the incoming government to start the “greatest transformation in Germany's history”.
“Competitive energy prices, fast planning and approval procedures and a modernised and expanded infrastructure – from hydrogen networks to transport and digitalisation – are prerequisites for securing the industrial base,” said Michael Hüther, president of economic research institue IW. He called for adopting joint European solutions wherever possible.
The BDI said that industry decarbonisation in line with the target of climate neutrality by 2045 today remained possible from a technological perspective, but that the government’s timeline for implementation became “less realistic each day.” It said that an improper transformation would lead to lower gross value added than today, while a successful transition with growth in future markets would guarantee an increase.
Germany well positioned in several growth markets
While the situation for German industry is challenging, there are opportunities in the transition to climate neutrality. “If we set the right course today, the best days of our industry could still be ahead of us,” said Michael Brigl, managing director and senior partner at consultancy BCG.
Germany and Europe’s car industries are currently struggling as competition from China and the U.S. on electric mobility increasingly puts pressure on carmakers to catch up in the transformation.
The BDI said the basic chemicals sector faces some of the biggest changes, as it is very energy-intensive and export-oriented. The sector is under pressure due to carbon pricing, the switch to renewables, and finding new suppliers of fossil fuels like gas. The report said Germany could import more of its energy-intensive basic chemicals, instead of producing them in the country – but ensure that later processing happened in the country.
However, Germany remains well positioned for leading businesses in many future markets, such as the auto industry, said the report. In addition, Europe's pioneering role in international climate protection could help establish a strong domestic market, particularly for many climate technologies in and around Germany.
The country is particularly strong in fields like intelligent electricity grid technologies, electrolysers to produce green hydrogen, heat pumps, and electric mobility. Markets for wind energy, grid technologies and hydrogen, for example, could grow to 850 billion euros by 2030, and Germany is in a good position to once again become a pioneer in the energy transition, said BDI.
At the same time, labour union representatives have warned that cheap competition from China could become a major challenge for future industry sectors such as solar panels, wind energy, or electric vehicles where state support is said to give Chinese manufacturers an edge.
To strengthen Germany’s position in these markets, the government should make the country more attractive as a business location and consider incentives for new domestic production capacity in the most important sectors, such as heat pumps, batteries, and offshore wind power.
“Many decisions on business locations that will characterise the structures of these sectors for many years to come will be made in this decade,” said the report.
Reaction to Draghi report: Strengthening competitiveness must be top priority of incoming EU Commission – BDI
The BDI’s report comes just a day after the former European Central Bank chief and Italian prime minister, Mario Draghi, presented his long-anticipated report on EU competitiveness. He said the European Union needs far more coordinated industrial policy, more rapid decisions and massive investment if it wants to keep pace economically with rivals the United States and China, reported Reuters. Draghi said the proposals outlined in his report would require minimum annual additional investment of 750-800 billion euros a year, which he recognised as "massive investment needs unseen for half a century in Europe."
BDI head Russwurm said Draghi’s report essentially represented the European version of the key points of today’s report.
In an e-mailed statement, the association’s managing director Tanja Gönner welcomed Draghi’s report, saying that the “strengthening the competitiveness of the European economy has to be a top priority for the EU over the next five years.” “In the new legislative period, the European Union needs to make just as big an impact on industrial and economic policy as it did on climate policy in the last period, including a ‘Clean Industrial Deal’,” said Gönner.
Economy minister Robert Habeck said that both the BDI and the Draghi report showed that "a lot is on the line."
"Germany is an industrial economy and should remain so, from basic materials to high-tech industry," he said. While the government had already introduced policy to ensure growth, more had to be done. "That is why I think it is a good suggestion from the BDI to create clearly defined special funds," said Habeck. To achieve this, all democratic parties had to be prepared to "forge a new economic and financial policy consensus," he said.
Brussels-based journalist Dave Keating commented that Germany has been a major blocking force on many of the recommendation Draghi now included in his report, such as joint debt and relaxed competition rules, or a true EU defence policy.
