Deindustrialization of Germany: Energy Costs Driving Industries Abroad, but WHERE?
Bohuslav Lipovsky
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Germany, once a symbol of industrial might, is now facing an alarming shift—industries are moving abroad, largely due to skyrocketing energy costs, and very low employee morale. This growing trend of “Deindustrialization in Germany” is shaking the country’s economy and reshaping the global industrial landscape, leaving countless businesses worried.
High energy prices, driven by Germany's Energy Crisis, are forcing businesses, especially from the Energy-Intensive Industries to look elsewhere, triggering job losses and a decline in manufacturing output. The EU is tremendously concerned about the situation.
But How did mighty Germany meet this fate, and what’s the way forward for its precious industrial sector? We’ll explore that here.
A Quick Look at Germany’s Age-Old Industrial Strength
Germany’s industrial sector has been the backbone of its economy for decades. From post-WWII reconstruction to becoming a leading global manufacturing hub, the country has been the most preferred space for industries like automotive, chemicals, steel, and machinery.
Historically, efficient energy use and robust infrastructure gave Germany a competitive edge in the global market, which established it as an example for many to learn. However, things have dwindled down pretty badly from there.
Germany’s shift towards renewable energy, commonly called “Energiewende,” led to unintended challenges. Despite having a noble goal of transitioning to clean energy, the strategy overlooked the immediate energy demands of heavy industries, which rely on affordable, stable energy sources.
Consequently, the rise of high energy prices in Germany started gnawing away at its industrial core, triggering the daunting trend of deindustrialization in Germany.
What Triggered the Energy Crisis in Germany?
The energy crisis in Germany doesn’t have a single culprit. Instead, it has been triggered by a mix of factors such as the blocking of economic natural gas from Russia and strict attempts for renewable energy transition.
For years, Germany’s energy strategy relied heavily on gas imports from Russia. However, the recent geopolitical tensions and the war in Ukraine have critically disrupted the supply. This led to rising gas prices in Europe and Germany became the primary victim of burnout.
Additionally, the country has also been committed to phasing out coal and nuclear energy while transitioning to renewable sources like wind and solar, causing supply volatility. These sources are not yet reliable enough to completely sustain the country’s vast industrial needs.
As a result, gas prices have surged more than three times their pre-crisis levels in Europe. German industrial giants like BASF and Thyssenkrupp now struggle with escalating expenses, and are advocating options like energy-intensive industries relocation.
The Impact of High Energy Prices on Energy-Intensive Industries
Germany’s industrial sector is dominated by energy-intensive industries like automotive manufacturing, steel, aluminum, and chemicals. These industries require huge amounts of energy to operate smoothly and the recent situation has left them vulnerable. Which industries are most affected?
For instance, BASF, a global chemical giant, recently announced plans to downsize its operations in the country with the reason being unbearably high energy prices in Germany. Now, the company is shifting its focus toward expanding its production efforts in China and the U.S. to access more stable energy costs.
Germany’s prime power - the Automotive industry, is also struggling due to immense pressure caused by rising energy costs. A recent study revealed that energy costs for Germany’s automotive sector increased by 20% in 2022 and a similar trend followed in 2023.
To tackle the situation, some companies are investing in energy efficiency in manufacturing
Industrial Relocation From Germany to the CEE
With energy prices embracing unsustainability, major companies (even industries) are moving production lines to regions with more affordable energy options. CEE (Central and Eastern Europe), Balkan Region, the U.S., and parts of Asia (including China) have become popular relocation destinations.
Why are German Companies Relocating to CEE?
CEE countries like Poland, Hungary, and the Czech Republic offer lower energy prices, a skilled workforce, and proximity to Germany. These factors make them an attractive destination for German manufacturers to relocate their plants and escape rising energy costs. Those countries served for decades the German industry as home base, manufacturing workbench and offer a massive infrastructure. Relocating to the CEE Region is therefore not an unknown scenario for German companies. What are the do's and dont's for a successful Factory Relocation?
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Why is the U.S. Another Great Location for German Manufacturers?
The U.S. has also become a preferred relocation spot for energy-intensive companies due to the abundance of natural gas and a more stable energy supply. For instance, as already mentioned BASF recently announced significant investments in its U.S. operations to mitigate the impact of Germany’s energy crisis.
While industries are shifting abroad, the German economy faces severe consequences, including rising unemployment, loss of workforce morale and expertise, and a reduction in manufacturing output. Experts believe the longer Germany relies on its current energy strategies without eforts, the greater the threat to its long-term industrial future.
What are the Sustainable Energy Solutions
Industrial relocation due to energy costs remains a growing concern for the German economy while experts have come up with certain solutions that could help the country protect its industrial might. Let’s have a look at some key workarounds:
1. Investment in Green Hydrogen
2. Energy Storage Technologies
3. Fossil Fuel to EV Manufacturing: The Electrical Vehicle (EV) industry has given the German economy a ray of hope. The country’s auto production, fueled by EV makers embracing green transition, rose by 11% in 2023.
4. Government Incentives & Aids: The German govt. has announced various subsidies and initiatives to support sustainable energy solutions industries, such as tax breaks for companies investing in energy efficiency in manufacturing and renewable energy integration. The move aims to lower energy costs for manufacturers.
What is the Global Impact of Deindustrialization in Germany?
The global supply chain is also feeling the impact of Germany’s industrial issues due to rising energy costs and unsteady availability. Countries that receive German industrial relocations benefit from increased investments while Germany struggles to maintain its industrial dominance.
Furthermore, the rising gas prices in Europe have sparked a shift in global energy markets with companies focusing on more stable energy supplies. The ripple effect of Germany’s deindustrialization may lead to a reorganization of global manufacturing hubs, which could alter the competitive dynamics across industries.
Final Word
The rise of energy prices and the ongoing energy crisis are pushing industries abroad, leading to the acceleration of deindustrialization in Germany. The German industries must combat the situation in time with prompt adoption of sustainable energy solutions while policymakers must offer the much-needed support to prevent further erosion of the country’s manufacturing base.
Despite the cost rise and high inflation in the recent years, Central and Eastern Europe still offers a safe heaven in the European Union with a well built road infrastructure.
Understanding the causes and consequences of industrial relocation is crucial not only for Germany but for industries around the globe. Manufacturing relocation remains a viable option for companies to enjoy cost benefits and stability.
The growing trend of factory relocations to Central and Eastern Europe, or Balkan Region might leave the German economy hollow, but ask yourself an honest question : "What is the alternative?", "How much of German industry can/will survive the next 12 months in Germany?".
The former manufacturing giant must reclaim its throne. Balancing energy transition goals with the economic needs of its industrial sector and working morale is a must for that.
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CHIEF OPERATING OFFICER
2moThe post highlights the deindustrialization of Germany, primarily due to soaring energy costs. Once an industrial powerhouse, Germany is now facing an exodus of industries to regions with lower energy costs, like Central and Eastern Europe (CEE) or the United States. For example, BASF, a global leader in chemicals, has reduced local operations in favor of China and the U.S. In 2022, energy costs for Germany’s automotive sector increased by 20%, adding pressure on this key industry. This trend also poses a risk for France, Germany's close neighbor. France, engaged in its own energy transition, could face similar challenges if it doesn’t maintain competitive energy costs. The French automotive and chemical industries may also consider relocating to regions with lower energy costs. If France cannot balance energy transition goals with industrial needs, it may follow Germany’s path. The question is: how long can French industries withstand energy price fluctuations before relocating? #Deindustrialization #Energy #GermanIndustry #FrenchIndustry #CEE #IndustrialRelocation #EnergyTransition #GreenHydrogen #IndustrialFuture
Interim Managing Director - Former Director at P&G, Danone and Carlsberg
2moSadly, the deindustrialization of Germany is not only due to rising energy costs, but also to a number of other factors: an aging infrastructure, declining levels of education, labor costs that are rising ahead of productivity (actually, productivity has been steadily declining since it peaked in 2017), a stifling bureaucracy, high taxation, and more... Most of those are the result of an incompetent and ideologically blinded government. Even the recent energy crisis, which is admittedly and external factor, was made worse by ill-conceived and rigid policies. Witness the decommissioning of nuclear reactors (dictated by the Green party's anti-nuclear dogma), that had to be offset by restarting coal plants! Or the stubborn refusal to tap fracking gas in Germany, for fear of its impact on the environment, while imported LNG at much higher environmental costs. The exodus of companies and talent from Germany took some time to get moving - after all, relocating factories or moving abroad to a new home are not easy decisions. But it is now in full swing and will be difficult to reverse.
Finance and Administration East Europe at STIGA
2moInteresting. I am having the same question, What will GER do after the deindustrialisation as I do not expect a Quick offset by the green technologies. For Sure, CEE is a good alternative in my opinion. US not sure, as I expext it is a temporaty solution.
🌐 Chartered FCIPD | MBA | 🛰️ Technology | 💼 VC & Private Equity | 🤝 M&A
2moGood read, did not know about US as good option, for this type of industries,thanks for the article
Very good article. Key developing technologies listed, worth to understand, where Germany and EU is situated as of today with these technologies advancement and why the chances to jump onboard the journey are lost at EU for the forseenable future. Energy problem is multiplying the EU poor competitiveness problem.