Road Map for International Companies Wanting to Enter the German Market
If you're looking to expand your company internationally, one of the very best markets to start a business is Germany.
What Makes Germany Such an Attractive Market?
Perhaps the most important reason for considering setting up a company in Germany is that it's ranked the number one market in Europe, and number four worldwide. There are over 45,000 foreign companies already established here, accounting for a workforce of around 3 million, which equates to 25% of jobs functioning in the export sector.
International Finance Corporation Findings
Germany scores so highly as a country for doing business because of a number of factors. The IFC states the following world rankings out of 190 countries for various aspects of operating as a business in Germany:
Ease of doing business: 17th
Ease of starting a business: 114th
Ease of dealing with construction permits: 12th
Ease of accessing electricity: 5th
Ease of registering property: 79th
Ease of obtaining credit: 32nd
Ease of protecting minority investors: 53th
Ease of paying taxes: 48th
Ease of trading across borders: 38th
Ease of enforcing contracts: 17th
Ease of resolving insolvency: 3rd
It's immediately obvious that for all but one factor, Germany ranks at least in the top 50% of countries and for several aspects, in the top 25%.
But one particular ranking stands out rather starkly: the ease of starting a business. Germany ranks 114 out of 190. This makes it clear that although operating in Germany, and even navigating some of the necessary steps in getting established are relatively easy, the actual process of starting up in the country is not easy at all.
So let's unpack this a little.
Germany is a Federalist Country
For historical reasons, Germany is a federalist country, consisting of 16 separate states (Länder), each with its own parliament, constitution and government. Many local areas of legislation fall to the federal authorities, so it's important to know the local rules and regulations of the area where you want to set up your company. However, there are some general regulations which apply to all circumstances.
What are the Difficulties with Entering the German Market?
Understanding some of the difficulties associated with business incorporation in Germany goes a long way towards achieving success.
Germany has some unique aspects to its financial systems, which will have a significant impact on your trading procedures. If your business operations require you to take payment from customers, you should make sure you understand how the German system of electronic money transfers works.
Although credit cards are in common use among businesses around the world, they are not common in Germany. Only around a third of the population own credit cards, and most prefer not to use them for online transactions.
Debit cards are usually issued when opening a bank account in Germany. They are known as a Girokarte or EC-Karte.
ELV (Elektronisches Lastschrift Verfahren) is an electronic direct debit payment system. Customers supply their banking details (e.g. bank account number, security information), which your company passes to a third party gateway authorised to withdraw money directly from their bank accounts. Payment gateways which work with ELV include WorldPay, Netbanx, and Skrill.
However, as the gateway does not check the customer's account balance before processing the transaction, chargeback may occur. Some experts consider that ELV transactions carry more risk than traditional credit and debit cards, but naturally that risk needs to be weighed against the universality of the system in Germany, and the possibility of losing customers who prefer to use this method of payment.
Legal Steps to Take before Starting up your Operations
Part of the difficulty with starting up your operations in Germany lies in the series of legal steps you need to take before you can begin trading.
Starting up a business
Company formation in Germany can be tricky and it’s important to liaise with a number of local and national bodies. These include: the local commercial register, the local office of business and standards, and the professional association of your trade.
The process of registering property can be somewhat complex and time consuming. You must first obtain an extract from the Land Registry, then notarise the transfer agreement, prior to obtaining a waiver of pre-emption rights with the municipality, followed by paying transfer tax. Completion of all this takes an average of around 40 days.
Picking your way through the complexities of the German financial system is renowned for its difficulty, so take time to understand the exact requirements and factor this into your start-up planning.
Up to 14 separate tax payments may be payable, so find out which apply to your business.
Nine tax payments are required annually, taking an estimated 107 hours to complete. In addition, corporate tax payments and VAT could consume a considerable number of working hours to process. Experts also judge that managing social security payments adds an extra 134 hours to your corporate hours.
Although cross-border trading is not considered costly, you must still ensure that all relevant paperwork is completed accurately. Four documents must be filled in when exporting goods, and five when processing imports. Importing and exporting generally takes around a week to action.
Check the Proposed Company Name
Before registering your company, you must find out whether the proposed name is available, to avoid any duplication. This is done by checking with the local Chamber of Industry & Commerce. You can do this by telephone, or in writing (written confirmation attracts a fee of € 25), and can be completed in one day.
Notarise the Articles of Association and Memorandum of Association
Your Articles of Association and Memorandum of Association must both be notarised by a public notary. A public notary is different from a solicitor or legal professional; in that their role is to give impartial advice, and ensure that everything is done legally and properly by attesting to the signatures on the documents.
Notaries-Europe has a list of public notaries available in Germany. Regulations concerning the charges to register Articles of Association and Memorandum of Association documents were simplified in 2013 to enable greater transparency about the judicial and notarial fees.
The actual cost of notarisation is based on the value of the share capital of the company. For example:
- Up to 2500: €15
- Up to €10,000: €6 per every €1,000
- Up to €25,000: €8 per every €3,000
For a full list of fees, see The World Bank: Doing Business in Germany.
The German Cost Regulation Act also legislates a double fee (so-called '20/10 Gebühr'), if more than one contract partner or shareholder is involved.
Deposit Minimum Capital into a Bank
The minimum amount required to establish a GmbH (a company with limited liability), is €25,000. Half of this amount must be deposited with a German bank before the company can be entered into the official register, but it can't be done before the Articles of Association and Memorandum of Association are notarised.
In practice, both are usually done on the same day, by making an initial appointment with the notary and then a later appointment with the bank. Banks requires a number of documents (e.g. proof of identity and address) for directors, as well as specific documentation about the company. This is to prevent illegal activities such as money laundering. It's important to ensure all evidence is readily available and valid when you visit the bank.
Once the bank account is opened, the required amount (minimum €12,500) should be transferred into the account, and the managing director then should then inform the notary that this has been done, which is usually verified by providing a bank statement. It's worth noting that the MD is personally liable if this information is not accurate. The notary then forwards the relevant documentation to the local court to enable the company to be entered into the commercial register. This process can take a few days or even several weeks.
Obtain a trading permit if necessary
Some kinds of companies, such as restaurants and brokers, must obtain a trading permit (Gewerbeerlaubnis) before starting operations. However, this doesn't have to be obtained prior to entry on the commercial register.
NB: The following five steps should be taken in order and on the same day.
1. Notify the local Office of Business and Standards
If a trading permit isn't necessary, you must notify the local Office of Business and Standards to be issued with a trading license (Gewerbeschein). This means your company will automatically be registered with the Central Statistical Office, the applicable Chamber of Industry and Commerce, the local Labour Office, Social Security, and the Federal health Insurance Office (see below for more details).
The cost is €31 for the first shareholder and €13 for each additional shareholder.
2. Register with the Relevant Professional Association
Registering with the relevant Professional Association ensures your company is covered by occupational accident insurance pertaining to your area of business. This is done at the same time as notifying the local Office of Business and Standards (see above). There is no additional charge for this registration.
3. Notify the Local Labour Office
The local Labour Office must also be informed of the establishment of your company. Again, this happens concurrently with previous notifications, and can be done in writing or by phone. Your company will be assigned a unique eight-digit operating number, which is required prior to reporting to the Social Security Office.
4. Register Employees for Health and Social Insurance
This registration must be done with the Social Security and Federal Health Insurance Office, which liaises with the local Labour Office, as well as informing the annuity insurance carrier Deutsche Rentenversicherung Bund. Payment for health, unemployment and annuity insurances are mandatory, and collected via the DRB.
5. Post all Relevant Documentation to the Tax Office
Registration with the Tax Office must be done within four weeks of the opening of your business and no later than one calendar month after the notarising of the Articles of Association.
Following notification, the Tax Office will send out a questionnaire about the company's data, which must be completed and returned.
Walmart's Attempted Expansion into Germany: A Cautionary Tale
Walmart is an acknowledged giant in the US retail sector – its 2003 turnover was equivalent to the top 30 German retailers combined. With Germany offering such lucrative potential as the biggest European market, expanding Walmart's operations in to the country seemed like a cinch. But things did not go to plan.
Walmart's entry into the German market is now generally acknowledged to be unsuccessful, and careful analysis of their strategy offers some useful pointers for other companies hoping to succeed where Walmart failed.
Using Acquisitions as an Entry Strategy
Walmart opted to enter the German market through a series of 'on-the-face-of-it' lucrative acquisitions. Beginning in 1997, it first acquired the well-known 21-store Wertkauf chain (revenues: €1.2 billion), for $1.02 billion.
This was followed 12 months later with the Interspar chain from Spar Handels AG (the German wing of the French Intermarché Group. The Interspar operation comprised 74 hypermarkets, with revenues of €850 million), which Walmart acquired for €560 million.
Ostensibly, this seemed like a sure-fire approach, making Walmart the fourth biggest hypermarket operator in the country. However, it failed to take account of other factors which had significant impact on its continued growth.
Walmart's Trading Culture
Walmart has established its formidable reputation in the US by following the maxim of selling goods cheaply and providing a good level of service. Terms like “we sell for less-always”, “everyday low prices”, and “excellent service”, are the hallmarks of its approach to retail.
This has been achieved in the US by following a clear (some would say ruthless), strategy which includes making smart use of IT, highly streamlined logistics and inventory management, emphasis on high-quality customer service, and highly motivated employees.
However, some of these approaches did not translate well into the German market.
Walmart's Management Culture
Walmart's attitude towards management strongly favours a supremely confident and 'firm-hand' approach, which is not an approach that works in Germany. In the US, the corporate culture has been described as 'quasi religious', but taking this line in Germany simply put people's backs up.
For example, instead of appointing a CEO of German operations who understood the complexities of the country's business culture, Walmart appointed someone who spoke no German and knew little about the trading practices in Germany. Most senior staff deployed from the US also spoke no German, so English was declared the official language for managers. Senior staff were also reluctant to listen to advice from German employees.
Staff turnover was also an issue. Four CEOs were appointed in four years, one of whom rarely visited Germany but ran the business from his base in the UK. Walmart's accepted practice of redeploying store managers every two years was also unpopular. Many managers voted with their feet, citing reason such as “dissatisfaction with low pay”, and unhappiness with the “low quality” of the goods being sold as additional factors.
In the US, Walmart operates an almost universal no-union policy – in 2003, only 12 of its 1million plus employees were union members. However, workers' rights and unionisation are highly prized in Germany, and unions still hold considerable power both on the shop floor and in the political arena. Walmart's refusal to participate fully in the collective bargaining process led to clashes with the unions.
Inability to Deliver Low Prices
Walmart's commercial success has been based mainly on their laser-focused strategy of undercutting their competitors' prices. However, partly due to regulations around pricing, and partly due to the fact that some competitors simply price-matched item for item, Walmart couldn't deliver on their promise of charging the lowest prices. This was highlighted to the public in official and media reports.
Standards of Customer Service
Again, Walmart failed to appreciate the differences between what Americans consider good customer services and German expectations. For example, the so-called '10-foot rule', in which any employee coming within ten feet of a customer should interact with them caused some confusion. Many customers complained about being harassed by strangers on store premises! Surveys repeatedly show that Walmart customers viewed its service as average or below.
Restricted Opening Hours
Walmart's inability to offer its customers a 24/7 service, due to Germany's laws regarding trading hours, also hampered its operations.
Making Staff Cuts
Following considerable losses, Walmart was forced into making staff cuts in a bid to reduce overheads. However, laws concerning the laying off of staff in Germany are much tighter than in the US. Making workers redundant can be a long, costly, and difficult process.
Walmart's failure to understand operating practices resulted in repeated infringements of Germany's rules and regulations around trade. This caused negative publicity for the company, making it even more unpopular. Unions, already antagonised by Walmart's refusal to engage with them, sued the company for breaching financial disclosure regulations.
The combined effect of these elements, as well as numerous smaller problems, resulted in what is considered to be Walmart's spectacular failure to expand successfully into Germany.
The Importance of Etiquette and Customs When Doing Business in Germany
Perhaps one of the biggest barriers to cementing good working relations with business colleagues in Germany is a failure to appreciate the importance of etiquette, customs and culture within the business sector. A detail that may seem insignificant to you could cause considerable offence to Germans, so understanding the expectations and taking the trouble to meet them, goes a long way towards building positive relationships.
Clear Division between Work and Leisure Time
Germans tend not to mix their working lives with their leisure hours. They believe that everything should keep its proper order and that things should be done at the right time and place. A clear difference in their attitude and relationships with others exists between their business colleagues and their friends. Expecting them to blur those lines can be counter-productive.
Germans prize the ability to be organised and well prepared – they do not like surprises, especially in business. Sudden or impulsive changes in strategy or practices are considered to be avoidable by careful planning, and are thus viewed as a weakness.
The Importance of Rules and Regulations
Germans like their lives to be well-ordered and regulated – they believe this make things clear to everyone and results in better relationships. They prefer written contracts and written agreements over verbal communication or 'taking things as read'.
Directness of Communication
Germans are sometimes considered to be lacking in subtlety and often rude. However, this is based on a clear difference in their expectations about how matters should be communicated. They prefer direct and honest communication without frills.
Making subtle hints, giving non-verbal cues, or wrapping your views up gently, can cause great confusion, as this tongue-in-cheek guide to translating business-speak between cultures demonstrates. Germans would prefer you to state what you want directly, and they don't expect to be complimented or made to 'feel good' about their performance. Just say it like it is and be prepared for them to respond in kind.
The Appropriate Place for Humour
Levity and humour are generally considered to be indicators of a lack of concentration and commitment. Using humour at work is deemed to show you're not approaching matters seriously, and that perhaps you're lacking in maturity.
As the largest market in Europe, and relatively ease of operating once established, Germany is a superb target market for expanding your company. However, without proper planning and preparation, especially with regard to working practices and the building of positive professional relationships, your efforts may not yield the best possible results.
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