Done is Better Than Perfect: Perfectionism is no friend in addressing geopolitical challenges that impact the German economy.
German companies’ ability to perfect processes or products is unique in the global market and lends any export with a “Made in Germany” stamp a certain level of cachet. But this perfection comes at a cost in global economies that are increasingly oriented toward fast-paced industries and cutting-edge technology: it takes an enormous amount of time to achieve. In a tech-focused world where the most successful new companies do the opposite of what has made German firms successful for so long—moving fast and breaking things, as Facebook would like us to believe—several geopolitical factors add to the headwind.
Changing the cultural fear of failure will be critical as the country moves forward, particularly given the economic implications of challenges to the small and medium-sized enterprises that make up the Mittelstand from digitalization, Chinese investment, and cybersecurity threats. These threats endanger not only the country’s economic fortunes, but also the foundation of its security and foreign policy. The economy is not just about the economy.
An Ambiguous Digital Future
The advent of the internet has changed how companies operate and the regulations they are subject to, both domestically and internationally. Within Germany, internet connectivity and penetration have a huge impact on Mittelstand businesses, and strong privacy laws make providers responsible for actions taken on their networks, containing criminal activity but also stifling access. Meanwhile, a decidedly un-German lack of policy clarity on what “digitalization” actually entails makes progress in the area a slog.
Mittelstand companies are located primarily in rural or suburban areas, where internet speeds are abysmal. For large swathes of the country, particularly in the former East, broadband speeds over 50 MB are only available to 50-75 percent of residents; for comparison, fiber optic connections—the fastest currently available—can be as fast as twenty times that. For small businesses like those in the Mittelstand, Europe’s data privacy regulations (GDPR) are so strict, and can result in such severe penalties, that CEOs might think twice before attempting to use data to improve their products and services.
If politicians can’t be specific about what digitalization means for the economy…then German industry will maintain its status quo, adopt new business practices in a haphazard way…and remain sluggish in its efforts to compete in the internet-focused economy of the future.
The vocabulary used to talk about internet innovation in Germany is too vague to pinpoint what the problem is—and defining a problem is a critical step in the German cultural process of crafting a solution. As recently as 2015, 56 percent of German workers polled couldn’t define digitalization or industry 4.0. If politicians can’t be specific about what digitalization means for the economy, and what policy steps they are taking to help make it happen, then German industry will maintain its status quo, adopt new business practices in a haphazard way that could make for more costly transitions down the line, and remain sluggish in its efforts to compete in the internet-focused economy of the future.
Political Economy and Chinese Investment in the Federal Republic
China has gone on a European spending spree since the early 2000s, going from almost zero European investment spending in 2000 to €30 billion in 2017. Often backed by the government, either directly or indirectly, Chinese firms are investing in companies of all sizes in a variety of sectors, including the German Mittelstand businesses. In one example, German pump manufacturer Putzmeister was purchased by its Chinese competitor in 2012. Controversy and protests surrounded the initial deal and operating in a foreign business culture has been difficult for both sides, but the takeover has seen success from a purely economic standpoint.
Germany’s FDI regulations are narrow in scope in terms of which deals require government approval, and apply only to industries and sales touching on public order or security. Companies outside this scope can make deals freely, with the understanding that they can be audited later, and are also allowed to proactively seek the blessing of the German Ministry for Economy and Energy (BMWi) before signing any final paperwork. Germany has tended to turn a blind eye to greater strategic questions when it comes to economic opportunity, as seen in the geopolitical debate playing out around the Nordstream 2 pipeline project. FDI evaluation has been addressed by legislation at the European level to protect critical infrastructure and national security-related concerns, but even investment in non-security-related industries could lead to weakened economic resiliency.
Geopolitical Cybersecurity in the Private Sector
The increasing use of cyber weapons by both state and non-state actors is an existential threat to German economic success as a whole, including the Mittelstand. A cyberattack that took out an electrical grid could bring manufacturing to a halt or ruin a batch of temperature-sensitive chemicals, not to mention the possibility of an attack that takes down widely used business and accounting software programs.
A cyberattack that took out an electrical grid could bring manufacturing to a halt.
Companies are also at risk of landing in the crossfire of global cyber warfare and espionage. Russia and China should be highlighted as particularly concerning actors. Chinese hackers successfully stole blueprints for the U.S. F-35 fighter jet from a defense contractor, and were able to breach a law firm’s database in The Hague while the Permanent Court of Arbitration was working on rulings concerning Chinese claims to the South China Sea. The Russian approach to cyber warfare is not limited to governments or official targets, and in fact follows the country’s approach to information warfare: They believe they are fighting a broad battle of ideals, one best won by sowing discord and disrupting free and open societies.
Small and medium-sized companies are sensitive to these threats because they do not have the stability or “defensive” capabilities that a larger firm can create around its digital infrastructure. This is exacerbated in Germany by an e-policy climate that isn’t fully utilizing the latest developments in technology, leaving German companies behind their competitors in other countries.
Germany’s power on the global stage is achieved primarily through its strong economic performance. The Mittelstand is the cornerstone of the German economy; but while the companies that comprise it continue to produce world-class goods and services, macro trends in digitalization, Chinese FDI, and cybersecurity threaten the status quo. In tandem with the cultural challenges of harnessing the innovation zeitgeist that is the source of the world’s most successful companies today, these geopolitical issues also contribute to a more complex path forward from a German perspective.