Germany Essay, Research Paper

We are a car maker with an interest in doing business in Germany. We know that we have to do a lot of research before we take the plunge and open a plant in Germany. We’ve researched the following topics on Germany; national context, role of economic geography, the cultural environment, legal environment, legal environment, it’s relationship with the United States, international trade, economic evolution and economic policies and strategies. This was a streneous task however we arrived to the conclusion that it would be profitable to do business in Germany.

Germany is the world’s third largest economy. While the German economy

currently is experiencing high unemployment and slow growth, the country’s

economic strength has been the subject of world renown since the end of

World War II. Germany is one of the founding members of the European

Union (EU), a North Atlantic Treaty Alliance (NATO) member, and a

member of the Group of Seven (G-7) industrialized nations and the General

Agreement on Tariffs and Trade (GATT)/World Trade Organization (WTO).

It joined the common European currency, the euro, on January 1, 1999, and

Frankfurt is the seat of the European Central Bank.

OIL

Germany consumes about 2.9 million barrels per day of oil, nearly all

of which it imports, making Germany the third-largest oil importer in the

world. German oil imports come primarily from (in decreasing order of

magnitude) Russia, Norway, the United Kingdom, and OPEC (Libya, Saudi

Arabia, Nigeria, Algeria). German imports from Russia have remained

unchanged in recent years. However, OPEC’s share of German imports has

decreased, while the share of North Sea oil from Norway and the United

Kingdom has increased. Germany produces around 61,000 bbl/d of crude

oil, much of which comes from the North Sea.

In Germany, about three-quarters of the price of gasoline is made up of

taxes, compared to around one-third in the United States. The pump price

for gasoline is about three times higher in Germany than the United States.

Gasoline consumption (and overall oil consumption) have declined slightly

since 1995. Between 1992 and 1997, the number of German gasoline stations

decreased (despite a rise in the number of stations in the former East

Germany).

Under a law which took effect on April 15, 1998, Germany’s strategic oil

inventory agency EBV is required to hold a 90-day emergency stockpile of

oil, up from 80 days previously. In late August 1999, the German government

planned to offer a tender for over 31 million barrels of sour crude oil in

response to increased crude prices. No further action was reported on this

tender as of October 1999.

Refining

Refining costs more in Germany than other countries in Europe, as Germany

levies eco-taxes. High costs have initiated a wave of consolidation and some

closures. Overall refining capacity has increased due to the opening of the Elf

Mider refinery in the former East Germany. The Elf Mider facility was the

first new refinery to be built in Europe in over a decade.

NATURAL GAS

Germany produces very little natural gas, and satisfies most of its demand

through imports. Almost one-third of Germany’s gas imports come from

Russia. The other main sources of imports are the Netherlands (about 24%)

and Norway (about 20%). Gas consumption accounts for about 20% of total

energy consumption in Germany. This share is expected to rise over the next

decade, especially for electric power generation as nuclear power is phased

out. Gas currently fuels only about 10% of German electricity.

Ruhrgas remains Germany’s dominant natural gas transmission company,

holding 60% of the German natural gas market. Years of Ruhrgas’s

monopolistic control of Germany’s gas market have left Germany with a

highly developed gas infrastructure. Ruhrgas is currently involved in laying

pipes to connect Poland to the German system in order to increase imports

of Russian gas via Poland, a project that could be completed in late 2001.

Ruhrgas has also bought stock in Russia’s Gazprom, in an effort to facilitate

closer relations between the two companies in anticipation of future increases

in German demand for gas.

Competition in the market has developed slowly. Ruhrgas’s main competitor,

Wingas, was formed in 1990 by a joint venture between BASF’s Wintershall

and Russia’s Gazprom. At the end of 1997, Wingas had become Germany’s

sixth largest company. Now, with its own domestic pipelines and links to

export supply lines, Wingas has gained market share, while Ruhrgas’s share

has decreased. Wingas is in the second stage of a pipeline construction

project that will connect Russia’s Yamal Peninsula to the German network,

which is expected to increase further the Wingas market share. The retail gas

market is expected to be fully opened, allowing consumer choice among

suppliers and brands, in December 1999.

Germany is in the process of developing its first offshore gas field in the

North Sea. There are two reservoirs with over 450 billion cubic feet plus

condensate, which will be connected to the German mainland via a new

pipeline. Gas is expected to start moving through the new pipelines in early

2000. The new pipeline will be built with excess capacity, in anticipation of

finding additional reserves on the new route into Germany. The project is

being undertaken by the Deutsches Nordseekonsortium (German North Sea

Consortium), which is made up of Wintershall (40%), BEB Erdgas und

Erdoel (40%), BASF (12%), and RWE-DEA (7%), and it is being

coordinated by Wintershall.

German companies also are involved in gas projects outside Germany. For

instance, the German company Lurgi has signed a seven-year agreement with

state-owned Turkmengas to develop pipelines and a processing plant

enabling Turkmenistan to export its natural gas. Germany’s Siemens Power

Generation Group won a contract to supply, install, and operate three gas

turbine units in Egypt.

COAL

Coal is Germany’s only major domestic fuel source. Over 75% of German

coal is used for electricity generation, and coal makes up over 50% of

electricity generation. Hard coal production is expensive in Germany, relative

to production costs in other major coal producers, because German coal is

deep underground. Hard coal production has remained a robust industry

only through heavy subsidization, which now is coming to an end. Lignite, or

“brown coal”, production, however, is inexpensive in Germany. Germany is

the world’s largest lignite producer, with about one-fifth of global output.

In March 1997, the German government, the mining industry, and the unions

reached an agreement on the future structure of subsidies to the German hard

coal industry. Subsidies to the industry are to be reduced from over DM10

billion ($5.5 billion) in 1997 to DM5.5 billion ($3 billion) by 2005. The

agreement called for closure of 7-8 of Germany’s 19 hard coal mines (14 of

which are in operation as of October 1999), resulting in an estimated decline

in employment from 76,000 miners in 1997 to 36,000 by 2005.

Decreasing coal production has brought about changes in the organization of

the industry. Two of the major producers, Saarbergen and Ruhrkohle

Bergbau, merged to form Deutsche Steinkohle (DSK), which accounts for

96% of German production. DSK is part of the larger RAG group, which

intends to diversify its holdings and focus less on coal as the sector shrinks

in coming years.

As domestic production declines, Germany is emerging as a significant coal

importer. Coal imports rose a reported 20% in 1997 and another 15% in

1998. Main suppliers are South Africa and Poland, with further supplies

coming from Colombia, Australia, and the United States.

Germany’s lignite production is separate from hard coal production. Lignite

was the most important fuel in the former East Germany. Since reunification,

wasteful and environmentally damaging mining methods practiced during

Communist rule have been reformed. The industry also has been privatized.

Lignite production in Germany fell by almost 75% between 1989 and 1996,

mostly in the former East Germany. Rheinbraun, a subsidiary of RWE, is

responsible for 85% of German lignite production. Most of its lignite is used

to produce electricity in RWE’s five power generation plants.

German companies also are involved in coal projects outside of Germany.

RAG owns shares in the Burton Coal Project and the German Creek coal

mine, both in Australia. Ruhrkohle International Mining, part of DSK and

RAG, recently bought the U.S. coal company Cyprus Amax, which made

RAG the world’s second-largest privately-owned coal producer. The

acquisition of Cyprus Amax increased RAG’s oversees coal production

from about 10 million metric tons per year (about 9 million short tons) to

about 72 million metric tons per year (65 million short tons).

ELECTRICITY

Germany is Europe’s largest electricity market. Generation is fueled by coal

(54%), nuclear power (29%), natural gas (10%), hydro (4%), and oil (less

than 2%). The industry is undergoing dramatic changes in fuel mix and in

organization. Efforts continue to phase out nuclear power and to increase

reliance on renewable energy sources, most notably wind power. The

German power market was liberalized in April 1998, and the ramifications of

this change are still developing.

Germany had the most expensive electricity in Europe before liberalization,

and it remains the most fragmented market with over 900 utilities. Industrial

power prices have dropped between 30% and 40% since April 1998 (with

residential prices currently following suit), and mergers are now sweeping the

industry. An estimated third of all German power companies are considering

mergers or joint ventures. The largest of the potential mergers is between

Viag and Veba, two of the eight major grid operators. A merger of the two

would create Germany’s largest power company, a distinction currently held

by RWE. Details of the deal are still under negotiation as of October 1999.

Smaller companies and new entrants to the market complain that the market

is not yet completely liberalized, as the major grid operators and regional

supply companies make it difficult for consumers to change suppliers. U.S.-

based Enron, for instance, claims that the current grid access agreement does

not allow it to offer competitively priced electricity.

Electricity is clearly on the path toward commoditization. Companies are

advertising their new energy packages for residential consumers, and

marketing is becoming a key element of energy companies’ strategies as

“price wars” drive down residential prices. Spot markets have developed,

whereas prior to liberalization long-term contracts were the norm. New power

exchanges are planned for Frankfurt, Hanover, Dusseldorf, Leipzig and

Berlin, and the development of a futures market is underway.

Nuclear Power

Currently Germany ranks fourth worldwide in installed nuclear capacity,

behind the United States, France, and Japan. Germany’s nuclear plants

comprise about 30% of Germany’s electric generation capacity, and about

29% of actual generation.

Nuclear power has become controversial since the September 1998 elections.

The Greens, the environmental party that is part of the ruling alliance voted

into power in the 1998 elections, are staunchly opposed to the continued use

of nuclear power. Chancellor Schroeder had decided to end close all 19

nuclear reactors in 2005, but he has since rescinded his position. The

government now plans to phase out the use of nuclear power beginning in

2002.

There are few economically viable alternatives to quickly replace such a

significant portion of the fuel mix, especially in the wake of the liberalization

of the industry. Over the longer term, however, high costs (high fixed costs,

long depreciation periods and long annual operating times) associated with

nuclear generation could work to decrease nuclear generation’s role in

Germany’s power sector. Nuclear installations currently are initiating

programs to reduce production costs and waste disposal costs in order to

become more competitive in the deregulated, extremely price-sensitive

market.

Renewables *germe.html*

Germany has a strong commitment to protecting its environment

*germe.html*. It has actively promoted the use of renewable energy, both

under the Kohl government with the Electricity Feed Law, and now under

Schroeder’s government with eco-taxes. In Germany’s eco-tax regime,

energy tax (energy taxes are slated to increase 10% over the next three years)

revenue is used to fund renewable projects. As a result, Germany is the

largest producer and consumer of wind energy *germe.html*in the world. A

full 1% of electricity is generated by wind power. Hydro-power is the second

largest renewable source, followed by biomass and solar power.

The growth rate of wind power has accelerated in recent years (it grew 30%

in 1997). Over the past 10 years, more than 5,000 modern electric-generating

windmills have been installed, mainly along the windy North Sea coast. Wind

is expected to produce 3.5% of electricity by 2010. In one region (Schleswig

Holstein), 10% of electricity now is generated from wind.

Individual German municipalities also are developing solar power potential.

In Berlin, the Energie 2000 program aims to increase solar power use. City

officials and the area’s power firm, Bewag AG, are investing $22.5 million

between 1997 and 2000 to support solar energy projects, and 44 potential

solar installation sites already have been identified. Meanwhile, Germany

plans to build two major plants to manufacture solar energy collectors, and

aims to build sufficient capacity to meet one-third of world solar technology

demand.