Introduction
The automobile industry in Germany began in 1886, with the registration of the first vehicle powered by a gas engine. Nowadays, the sector has experienced tremendous expansion and global recognition. Germany is the leader in European vehicle sales and production, accounting for about 25% of produced passenger cars (Krzywdzinski, 2020). The country has more than 35 original equipment manufacturing (OEM) locations responsible for the increased market share in Western Europe, exceeding 40% (Krzywdzinski, 2020). Germany’s car sector is one of the most powerful and dependable in the global vehicle market, with world-renowned automotive brands such as BMW, Mercedes-Benz, and Audi, among others. Currently, the company has been established in more than 150 nations. The German car industry is one of the most successful in the world. It is the fourth largest worldwide manufacturer in car production, after only Japan, the United States, and China.
The automobile industry in Germany is the country’s most important manufacturing. The sector is Europe’s top market and manufacturer, a worldwide export powerhouse, and a driver of transportation innovation (Schülke et al., 2017). The German automobile industry’s competitive edge as a prominent export trade force is its concentration on higher-priced car segments. The German automotive industry has overrun 65% of the luxurious automotive market (Schülke et al., 2017). In 2018, German car engineers built only 15% of their small vehicles in Germany but 97% of their premium models in other countries (Schülke et al., 2017). Nonetheless, industry analysts expect that the manufacturing quality of foreign factories will improve in the future, and corporations will extend their production and international trade flows overseas. This essay aims to explain the different theories that illustrate the trade flows of automobiles into and out of Germany. It will analyze the consequences of international trade theory and government trade policy for the automotive industry’s trading prospects. Finally, the article will examine the prospects for inbound and outbound FDI into and out of Germany for automobiles.
Background
History of the Automobile Industry in Germany
Germany is considered the birthplace of the modern automobile industry. The first German vehicle, built in 1885, set a precedent for the German automobile revolution worldwide (Krzywdzinski, 2020). German entrepreneurs have invested substantially in immaculate engineering, luxury, performance, and elegance to define the automobile they have created since the beginning (Krzywdzinski, 2020). Benz’s revolutionary notion inspired the development of the modern automobile. In the early 1900s, Germany produced about a thousand vehicles every year. A decade and a half later, BMW was created, and they began vehicle manufacture a few years later.
Germans have built on their original automobile manufacturing experience to become world leaders in producing several of the world’s top luxury vehicle brands. Even though the earliest German car was built more than a century ago, the technology used in its creation remains a world leader in the automobile business (Schülke et al., 2017). The automotive manufacturing sector in Germany is still driven by innovation, speed, luxury, and elegance. With current technology, a wealth of top-tier personnel, and engineering knowledge, every automobile model produced in Germany today has something fresh and distinctive.
Ferry Porsche, a great sports car aficionado, sought to develop a car that would meet all of the specifications of a sports car. Porsche launched the ever-popular Porsche 365 in 1984, revolutionizing the sports vehicle sector (Krzywdzinski, 2020). The Porsche 365 was inspired by the Volkswagen Beetle; hence, the engine was placed at the back. To this day, Porsche has elected to keep the engine in the back of the car, a unique design.
International Trade Theory of Automotive in Germany
International trade in Germany has been progressive, much like the nation’s history. Various issues must be recognized to improve the understanding of international trade in Germany. Germany’s expertise in the automobile industry improves its ability to trade with many nations because it is one of the largest European countries and borders several countries, making it easier to reach the surrounding countries (Krugman, 2018). Germany’s natural resource wealth has fueled the rise of its metal and manufacturing industries. However, the country has a well-established system that has assisted in improving and expanding its foreign trade.
The majority of European automobile businesses’ trading takes place within the EU. With around 38 manufacturers supplying goods, the European market is very competitive. The success of the European car industry is mainly due to its strong control of the sophisticated and diverse market (Krugman, 2018). The automobile home market in Germany is characterized by persistent buyer uncertainty and relies mainly on the restoration of current vehicles. However, because the home market is a high-wage country, people are willing to pay a premium for luxury items.
On the other hand, the legislative structure considerably impacts the domestic market. Due to slowing development in the domestic market, Germany’s automakers have concentrated on boosting the relevance of international markets. Germany’s automobiles do well in all market segments, with global market shares of more than 25% for vehicles and buses (Lyttle, 2022). Additionally, Germany is the world’s leading exporter of buses. As a result of the global trend toward luxurious automobiles, Germany exports most of them to oversea markets.
The trade market category will develop substantially faster in the coming decades than the entire passenger automobile segment because of the rising international demands for high-value, luxury small and compact automobiles and premium SUVs (Krugman, 2018). The German automobile industry is a world leader in producing premium vehicles. Almost all German and German-based manufacturers have produced or intend to release new premium-segment automobiles. The knowledge built on the country’s automotive manufacturing heritage will help Germany maintain its position as a major worldwide automotive manufacturing site.
In Germany, the automotive industry is the largest sector in the country. Therefore, the importation and exportation of automobiles significantly influence the German labor force and the wage structure in the manufacturing sector (Krugman, 2018). Germany has raised its international trade ratio like no other country over the previous 25 years, nearly doubling it from 50% in 2001 to over 85% in 2020 (Lyttle, 2022). On the one hand, this shows Europe’s largest economy’s significant economic success. On the other hand, it emphasizes Germany’s reliance on global transformation. However, this well-known association is not the sole reason studying foreign commerce is crucial. It is also important to note that imports negatively affect the country’s economy, such as person unemployment growth and earnings fall.
It is critical to note that imported products increase individual unemployment in the manufacturing business while also placing downward pressure on wages. The major sectors of the manufacturing industry are dispersed differently across Germany’s numerous regions. As a result, positive and negative impacts severely affect several German states with a high concentration of specific industrial industries.
Despite the negative consequences, shutting off imports from the regions under consideration is not a viable strategy. An export-oriented economy such as Germany relies on free frontiers in international trade. Overall, trade with the nations analyzed here improves the German economy. Other regions compensate for the unfavorable regional impacts. Similarly, the numbers provided here do not account for the benefits of imports from developing countries, such as price reductions and indirect effects through economic activities.
Increased German exports to these countries might mitigate the wage and employment-cutting consequences of imports from the emerging economies investigated here (Krugman, 2018). Enhancing the competitiveness of German enterprises, for example, by growing investments, would also be critical. Improving access to markets in emerging countries, for example, by expanding direct investment in such countries, might also be beneficial.
Government Trade Policies Impacting Automobiles
The Germany Competition Authority (FCO) is responsible for enacting and overseeing trade policies for automobiles in Germany in conjunction with EU regulations. As Germany is a member state of the EU, exports from Germany are subject to EU export regulations (Yildirim et al., 2021). According to the European Commission, “the competitiveness of the automobile sector, as well as the European economy, is dependent on a clear and cost-effective regulatory framework” (Yildirim et al., 2021). Many rules were enacted in response to accidents, pollutants, or noise to encourage competition and a better bargain for customers. Motoring, on the other hand, is a significant source of revenue for all Member States. A variety of tax devices are available to “guarantee large budgetary collections from private and commercial road users.”
Prospects for FDI in Germany
Automotive encompasses a wide range of subsectors in addition to the production of automobiles and modes of transportation. For example, other parts and accessories for motor vehicles were Germany’s top subsector over the two years from 2019 to 2020, accounting for 348 FDI (Coan, 2022). FDI projects in passenger vehicle production accounted for 25% of all projects in the automotive industry, ranking second with 350 projects. Net-zero targets have increased investor interest in transportation electrification, as seen by automotive electrical and electronic equipment and electric and hybrid cars occupying the third and fourth positions in the subsector table, respectively.
FDI in the automobile sector increased in 2021 but has yet to return to pre-Covid levels. Unsurprisingly, FDI figures reveal that Germany was the world’s most significant investor in the automobile sector in 2019 and 2020 (Lyttle, 2022). Despite a drop in activity in the industry in 2020, the government invested in 345 outbound FDI projects. While FDI inflows increased by 14.2% year on year in 2021, activity in the automotive FDI industry has yet to recover to pre-pandemic levels (Lyttle, 2022). Because of macroeconomic and geopolitical difficulties, raw material and labor prices will continue to climb in 2022, making automobile manufacturing more difficult. However, the push toward an energy transition and the existing expansion of the electric car sector is expected to generate the most significant prospects for automotive firms.
Conclusion
International automobile commerce is a significant element of Germany’s income streams since the country has invested in technology, manufacturing, and using natural resources to improve automobile manufacturing. The presence of natural resources, the right location, historical settings, advantages encircling German culture, and many other reasons have enhanced international trade in Germany. Germany knows how to capitalize on its potential and establish strong corporate foundations for the car industry, ensuring that its employees are unaffected even during economic downturns. Therefore, understanding international business factors will increase one’s understanding of Germany and how it conducts its economic ties.
References
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Krugman, P. R. (2018). International trade: Theory and Policy. Pearson.
Krzywdzinski, M. (2020). Automation, digitalization, and changes in occupational structures in the automobile industry in Germany, the United States, and Japan: a brief history from the early 1990s until 2018.
Lyttle, C. (2022). How did Germany topple the US and become the leading destination country for FDI in 2021? Investment Monitor. Web.
Naudé, W., & Nagler, P. (2017). Technological Innovation and Inclusive Growth in Germany. Available at SSRN 3088958.
Schülke, A., Haddad, P., Jang, S., & Renneckendorf, M. (2017). Germany’s External Trade Development: A Case of the German Automotive Industry. In Business Analytics and Cyber Security Management in Organizations (pp. 106-118). IGI Global.
Yildirim, A., Basedow, R., Fiorini, M., & Hoekman, B. (2021). EU Trade and Non‐Trade Objectives: New Survey Evidence on Policy Design and Effectiveness. JCMS: Journal of Common Market Studies, 59(3), 556-568.