Die Digitale Transformation: Is Germany missing out?
Germany’s digital transformation has been a long time coming, with Chancellor Angela Merkel joining the chorus for more and faster change. FNZ’s resident expert Ralf Hohwieler explains the background.
When Chancellor Angela Merkel visited giant tech fair CeBit in Hannover last year, she didn’t seem all that impressed. The vast displays of drones and 3D printers seemed to do little to allay her fears that Germany is losing digital ground. With its traditional industries under threat from data-driven technologies and too little investment in critical areas like big data and digital change, how can the country catch up?
Figures from Bitcom (the German association for IT and communication) do suggest healthy growth, with sales expected to reach €160 billion by year-end and over 20,000 new jobs bringing employees in the sector to around 1 million. Yet Mrs Merkel continues to state that Germany needs to do more, citing Japan’s Society 5.0, or the Digital 5 (Britain, Israel, Estonia, New Zealand and South Korea) as examples.
What needs to change
Germans have been accused of being masters of old industry. Arguably, the focus on ever refining and improving industrial products has served the German economy well, with trade surpluses, record employment and a generally positive outlook, but it could also mean there’s a risk of missing the ‘next big thing’. German industry would counterclaim that many digital processes have been incorporated, with associated product advances. But is that enough? Besides – how can industries truly digitally transform within a largely still analogue society?
“Bier ist Bier, und Schnaps ist Schnaps” say the Germans. The proverb comes from a belief in the separation of work and private time, but also describes the tendency to do one thing at a time, and to do it well. Germany’s much-feared red tape and public bureaucracy, labour laws formed in the industrial age and prohibitive data regulations have created a culture that doesn’t sit comfortably with the digital age’s multi-tasking, flexibility and round-the-clock availability.
Germany is rising to the digital challenge. As digitalisation makes its way across the industry, expect the country to become known for respectively different products, services and entities providing them.
It’s not all bad
The flip side? Pre-adoption scepticism brings a beneficial filter: when new technologies are eventually accepted, they’re tried, tested, and fit for the local market. For example, Uber may have had particular issues in Germany, but at the same time car sharing schemes like DriveNow and Car2Go have been gaining traction. Bikesharing schemes seem to be everywhere with even supermarket chain Lidl offering one!
Much domestic debate focuses on the automotive industry, particularly the need to embrace the electric car. There seems to be an underlying fear that focusing resources on an interim technology will mean not enough is dedicated to one that is truly future-proof – the next generation of car, the one that’s really going to breakthrough. Commentators point to PayDirect as an example of this thinking – the direct payment platform developed by a consortium of German banks which pundits agree launched at least five years too late. No game-changer, by that time consumers had become loyal to systems like PayPal and AmazonPay.
The financial services view
There are signs that financial services are learning quickly. According to Techfluence, Germany has 31 out of 73 Europe-wide robo advisers (the UK has only 20). Eight are new entrants that have come to market since December 2016. It remains to be seen how many will succeed in the long-term, but their current rise is a welcome change in hitherto largely static platform scene, dominated by a small number of established vendors and remarkable for chronic underinvestment.
With the impact of MiFID II favouring digital processes, while banks’ business models are under increasing efficiency pressures, it’s game on for digital change in financial services. The domestic FinTech scene is buoyant, with two entirely digital banks, N26 and Solaris launched recently. This ups the ante for established banks and paves the way for greater acceptance of digital banking. This consumer confidence is an important factor. Germans are notorious for their preference of physical money – over 50% of daily transactions are conducted in cash, while credit card transactions hover around 6%, perhaps one of the reasons why entrants like ApplePay may have avoided Germany so far.
With the impact of MiFID II favouring digital processes, and with banks’ business models under increasing efficiency pressures, it’s game on for digital change in financial services.
Germany’s digital transformation is most visible in Berlin, the nation’s start-up capital. Berlin’s prerequisites are different in a number of aspects, but a key point is that it doesn’t have an industrial base like other German centres. Employing around 80,000 people, the digital economy contributed about 8% to Berlin’s GDP in 2016, more than construction and almost on par with the industrial sector. The city is noted for network hubs such as The Factory or FinTech incubator FinLeap, which already helped bring several financial services companies to market.
As yet, Germany doesn’t have a global digital player. But change is afoot, Germans are rising to the digital challenge, and as digitalisation makes its way across industry and society expect the country to become known for respectively different products, services and entities providing them. Should Mrs Merkel revisit CeBit in March 2020, she will no doubt be pleased with the state of Germany’s ‘Digitale Transformation’.