Why the 4th largest economy is so behind on technology

Today is a normal day in Germany. The launch of a new government online service to request support funds for university students failed with a host of technical difficulties. It is one day after OpenAI launched their new GPT-4 model with much fanfare. Today no German company can claim to be a serious challenger to either ChatGPT, nor their language models. Those who try, often fall into obscurity (lets be fair, who heard anything of substance from AlephAlpha recently?). And when was the last time a small business didn’t make a fuss if you wanted to use a Mastercard or Visa card?

Experts have warned that Germany’s public sector is lagging behind when it comes to technological innovation. In a recent EU report, Germany was ranked 21st out of the bloc’s 27 countries in terms of digitisation [1]. Even attempts for a digital transformation are often met with resistance from public sector employees. Where those resistances are overcome, we see a lack of ambition, manifesting in a pure digital replication of old analoque processes.

According to the Digital Economy and Society Index (DESI), Germany is not, as is often assumed, a victim of a shortage of digital skills. In fact, Germany is ranked among the EU average in terms of human capital for digital transformation [2].

But all of this is not purely by accident. Germany’s technology Ecosystem is broken. In October 2022 Germany had only half the number of unicorns as the UK did, less than 1/20th of the US. [3] But why is Germany so far behind on technology? There are a number of reasons, spanning from education to government policy, tech ecosystems and even the German culture.

Education

Because Germany is not encouraging innovation, radical ideas, and new technologies. Above all, the German education system is pushing for conformity and not for innovation. When I was still in school, a teacher once said it was “unrealistic” when I said I wanted to be a startup founder, though I co-founded my first company before I even finished high school. There are two major pillows to make an economy ready for the digital future: Entrepreneurship and Technology. Germany is focusing on neither in schools. Computer Science is still not a mandatory subject in schools. Entrepreneurship education is very rare. What this lead to, is a country that is mostly following instead of going ahead. We have a lot of tech companies, that are building great products, but few of them have truly global ambitions and even fewer are not just bascially “the German answer to [insert US company here]“. We proved that it can be different: In the Biotech sector we have BioNTech, a company that was at the top of rapid COVID vaccine development. This worked, because they could apply biotech to the traditional channels of research commericallisation that made Germany traditionally strong.

Percieved unwillingness to innovate amongst businesses

But it goes deeper: While the German government is not pushing for innovation, many German businesses are not either. This leads to a lack of low hanging fruit for startups to pick, in turn limiting the speed and scope of scaling their revenues, thus leading to smaller funding rounds and less investment in the ecosystem, finally producing smaller companies that often strive for either a limited local market leadership or aquisition by a foreign compeditor.

Many German businesses are cautious about adopting new technologies. Fax machines are common place, in fact, four out of ten businesses still use fax machines [4]. And to anyone who has been in Germany before: Did you try paying in a small cafe or a local bakery or butcher with a Visa or Mastercard? You will be met with a lot of resistance. First of all, nobody in Germany seems to understand a debit card that is badged Mastercard or Visa, to Germans this badge means credit card. Most only accept Girocard, while themselves calling it EC and not realising that EC was renamed Girocard almost 20 years ago.

But digital payments, of course, are only the tip of the iceberg. Many companies now are discussing the impact of ChatGPT, and AI in general, but how many are actually activly adopting this technology? A friend of mine is selling a very innovative product into mid size companies in Germany and is often met with, in my opinion rediculous, demands: They refuse to invest in hardware to run some software tools, despite the hardware cost being even just a fraction of the employee’s salaries whose productivity can be boosted by orders of magnitude. While Galeria-Karstadt was in a prime position to become a leader in the digital retail space, they are now struggling to survive, filing again for bankruptcy.

Often, esteblished companies seem threadned by change, rather than embracing it. A great example was the EU copyright reform where media companies were resiting the changing landscape due to digital distribution channels, by lobbying for changes that would force search engines and social media pages to pay for the right to link to their content. This would have had a massive impact on the internet as we know it, and would have been a massive blow to the free flow of information. [5] But it also shows they don’t understand how this is helping them by creating traffic. Have you ever heard of another industry before, that tried to actively fight free advertising?

Germany is scared of disrubtion. 47 percent of managers in Germany are convinced that their own company is in great danger of disruption according to a survey from 2019 [6].

The Ecosystem issue

Germany’s innovation potential is hindered by the deficiencies in its tech ecosystem, particularly in the area of venture capital (VC) funding. Although Germany has a strong industrial base and a skilled workforce, it lags behind other countries in terms of its start-up culture and entrepreneurship. Start-ups often struggle to access the necessary funding, and the VC industry in Germany is smaller and more risk-averse than in other countries. This lack of available capital means that many innovative ideas fail to get off the ground, and promising start-ups may struggle to scale up and compete on a global level. Unless Germany can address these deficiencies in its tech ecosystem, it risks falling behind in the global innovation race. Compared with other European countries, the German VC industry still accounts for a tiny portion of economic activity. A report from German state-owned bank KfW found that VC investments in Germany represented 0.047% of GDP between 2017 and 2019, compared with nearly 0.1% in the UK. [7]

What we can do

But it isn’t all bleak. Germany has a lot of potential, and we can do a lot to change this. We need to change the education system, and make it more open to innovation and entrepreneurship. We need to change the culture of German businesses, and make them more open to change. We need to change the VC industry, and make it more open to risk. Already we can see changes in the Government. The state of Bremen, that I call home, has already done incredibly much to push digitisation and gain efficiency. Yes, the support package for university students didn’t quite live up to the rosy promises, but the fact that they tried is something we should applaud.

Going forward, it is important that founders get encouraged to continue the ecosystem flywheel once they exit their startups. The new DCTF is also a huge step in the right direction, enabling government funds for startups in areas of national importance. Don’t get me wrong, I don’t advocate for a complete German clone of Silicon Valley. I am a firm believer that Europe has its unique outlook on business and success, that can and should play a role in European startups. But we need to be more open to change, and more open to risk. We need to be more open to innovation. We need to be more open to the future.

Sources

[1] DW News. (2021, July 22). Germany and digitalization: Why can’t Europe’s richest country get up to speed? [Online]. Available: https://www.dw.com/en/. [Accessed: Mar. 15, 2023]germany-and-digitalization-why-cant-europes-richest-country-get-up-to-speed/a-58273979

[2] European Commission. (n.d.). Digital Economy and Society Index (DESI). [Online]. Available: https://digital-strategy.ec.europa.eu/en/policies/desi

[3] “List of unicorn startup companies,” Wikipedia, 2023. [Online]. Available: https://en.wikipedia.org/wiki/List_of_unicorn_startup_companies. [Accessed: Mar. 15, 2023].

[4] DW News. (2021, July 15). Germany: Four out of 10 companies still use fax machines. [Online]. Available: https://www.dw.com/en/germany-four-out-of-10-companies-still-use-fax-machines/audio-58219722. [Accessed: Mar. 15, 2023].

[5] L. Barigazzi and L. Cerulus, “Winners and losers of Europe’s copyright reform,” POLITICO, https://www.politico.eu/article/copyright-platforms-eu-google-winners-and-losers-of-europes-copyright-reform/. Accessed on: Mar. 15, 2023.

[6] Staufen AG. “Study Success in Change: Every second company in Germany sees itself threatened by disruptive developments.” Staufen AG. 2019. [Online]. Available: https://en.staufen.ag/news/study-success-in-change-every-second-company-in-germany-sees-itself-threatened-by-disruptive-developments/. [Accessed: Mar. 15, 2023].

[7] A. Wieland. “How foreign investors are tapping into Germany’s late-stage VC boom.” PitchBook. 2021. [Online]. Available: https://pitchbook.com/news/articles/foreign-investors-tapping-into-germanys-late-stage-vc-boom. [Accessed: 28-Mar.-2023].

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