Setting up a clothing business in Germany: market analysis and industry variables

Opening a Business

Setting up a clothing business in Germany: Discussing the four variables

German textile and clothing industry is among the oldest and consists mainly of SMEs; the sector remains the second largest manufacturer of consumer articles in the country, after the food industry.

Germany has a liberal foreign investment policy. Despite persistence of structural rigidities in the labor market and extensive government regulation, the economy remains strong and internationally competitive. Although production costs are very high, Germany is still an export powerhouse. Additionally, Germany is strategically placed to take advantage of the rapidly growing central European countries.

The current government has addressed some of the country's structural problems, with important tax, social security, and financial sector reforms. At present production and processing of resources is often carried out by suppliers from Asia or Eastern Europe and by branch plants in such countries. This is much cheaper than producing in Germany. Many firms acquire ready-made garments or materials and finish them in Germany. High-value production, technology-intensive refining processes, design and the automated production of specialized textiles are still carried out in Germany to some extent.

A. Market size

The German economy is the world's third largest and accounts for nearly one-third of European Union GDP. Germany's "social market" economy largely follows free-market principles, but with a considerable degree of government regulation and generous social welfare programs and protections.

Germany is the largest consumer market in the European Union. Over 82 million people in Germany and more than 100 million German-speaking consumers make up the largest language group in the European Union. Additionally, this language group has one of the highest per capita incomes and therefore purchasing power in Europe. The number of consumers and Germany's geographic location at the heart of a 25-member European Union that added ten members in 2004 make it a keystone around which many U.S. firms seek to build their European expansion strategies.

For American companies, the German market - the largest in the EU - continues to be attractive in numerous sectors and remains an important element of any comprehensive export strategy to Europe. While U.S. investors must reckon with a relatively higher cost of doing business in Germany, they can count on high levels of productivity, a highly skilled labor force, quality engineering, a first-class infrastructure, and a location in the heart of Europe.

The most successful market entrants are those that offer innovative products featuring high quality and modern styling.

New trends in the fashion scene are widely reported, although more by foreign trade magazines. Within Germany, the notion of fashion is still connected mainly with 'wearable' and saleable ready-to-wear.

In 2002, the turnover of the German textile and clothing industry amounted to EUR 23.9 billion (provisional figures), of which clothing accounted for EUR 9.6 billion, down by approximately 8 per cent. Exports have risen again by 2 per cent, while imports dropped by nearly 6 per cent, leading to the import surplus falling by approximately 20 per cent.

The importance of the textile and clothing industry is shown in the international trade of its products. Germany is the third-largest importer of textiles and clothing, after Hong Kong and the U.S.A., and it is the fifth-biggest exporter after China, Hong Kong, Italy and the U.S.A. Germany has succeeded in increasing its exports by 15 per cent within a period of ten years.

B. Resources

1. Labor

The German labor force is generally highly skilled, well-educated, disciplined, and very productive. In international comparison wages in Germany are among the highest. Average industry wages were about $25 per hour in 2002 (U.S. $21). About half of labour wages are the result of tax and social security expenses. Nonetheless German labour is known to be productive and skilled. German quality is famous in the world.

For employees in the textile and clothing industry, most of whom work in small and medium-sized enterprises, this is cold comfort, however, as their numbers have declined by 6 per cent in the textiles industry and by around 10 per cent in the clothing industry to a total of 167,000.

1. Import Turnover Tax

All industrial imports into Germany are subject to an "Import Turnover Tax" of 16%, which is charged on the duty-paid value of the import article plus the customs duty, which varies by item.

2. Tax on domestic products

Value added tax: 16%

Value added tax for food: 7%

Corporate income tax on distributed and undistributed income: 25%

All imports and deliveries of goods to or in Germany are subject to VAT, as are services deemed to have been rendered within the country. The tax liability rests on the German business providing service or products or on the importer or buyer of goods or services from abroad. The tax levied on the business is invoiced to customers, who may deduct it from their own liability.

Germany's regulations and bureaucratic procedures can be a difficult hurdle for companies wishing to enter the market and require close attention by U.S. exporters.

3. Standards

EU attempts to harmonize the various product safety requirements and related standards for industrial products. In many cases, Germany will also be the first Member country to implement EU-wide standards. The Europe-wide "CE" mark supersedes all other compliance certificates, provided the products in question are covered by an EU-directive. German buyers may require additional performance or quality marks, which are not necessarily legally required, but greatly enhance a product's chances to be marketed.

Both EU requirements and the standards for a German quality or performance mark will, in many cases, require an imported product to be modified. Even if the product does not require modification, it may require testing and certification before it can be marketed.

The German organization that compiles the standards laying down the requirements for a "GS" mark is the "Deutscher Industrie Normenausschuss - DIN."

D. RISKS

1. Financial

The fashion industry is very sensitive to economic cycles. There has been very limited business development in the German textile and clothing industry in 2003 and the mood remains gloomy, with falling turnover. Clothing sales in the first two months of 2003 alone fell by nearly 15 per cent.

Anyone who wants an overview of the fashions being created in Germany must direct attention towards different levels of activity. Trade fairs present the big manufacturers of clothing, fashion shows young and innovative labels, and training centres new talent.

Foreign-Exchange Controls

Practices regarding finance, availability of capital and schedules of payment are comparable to those, which prevail in the United States. There are no restrictions or barriers on the movement of capital, foreign exchange earnings or

2. Safety

German firms continue to enjoy a relatively good reputation for their payment practices and management of credit. However, the continuing poor macroeconomic situation in Germany (high structural unemployment, increasing corporate bankruptcies, high public indebtedness, flat growth, etc.) has generally increased the probability of defaults by German importers. Default risk is somewhat higher for firms in unevenly performing eastern Germany.

The most commonly used modes of making financial transactions are:

(a) Electronic funds transfer

(b) Letter of Credit

(c) Cash-in-advance

3. Competition

Germany's textile trade deficit remains huge due to growing imports from Eastern Europe and Asia. Only the U.S. imports more clothes than Germany. However, import of textiles and clothing into Germany decreased from U.S. $37,029 million in 1995 to U.S. $31,250 million in 2002.

Major export markets are Europe and, to a lesser degree, the U.S., Hong Kong, Taiwan and Japan. Although the textile and clothing industries are not among the German core industries they are one of the world's major in- and exporters. Some of the former producers, though, remained as small trading companies.

Firms that produce standardized products with low value-added will have difficulties adjusting to market changes and maintaining competitiveness. In 2002, 1,125 companies were actively participating in textile production and 615 businesses in garment production. These businesses are mostly small and too sub-divided to be competitive on the world market. About 42% of these businesses are of a 20-49 employees with sale volume of EUR 1,500 million.

Conclusion

Most inhabitants of Germany are ethnic German. There are, however, more than 7 million foreign residents. Germans appreciate style and innovation. Germany has one of the world's highest levels of education, technological development, and economic productivity. Economic uncertainty in eastern Germany is often cited as one factor contributing to extremist violence, primarily from the political right. Germans often describe their economic system as a "social market economy."

The German economy is heavily export-oriented, with exports accounting for more than one-third of national output. This has lead to the German macroeconomic expansion.

Germany offers protection of property rights to even foreign investors. Germany has transparent and effective laws and policies to promote competition, including antitrust and unfair competition laws. Legal, regulatory, and accounting systems are generally transparent and consistent with international banking norms.

Political acts of violence against either foreign or domestic business enterprises are extremely rare and do not affect investors. According to Transparency International "corruption watcher," Germany is among the least corruption-plagued countries of the industrialized world.

Demand remains for selected and specialized clothing product groups. The "Made in Germany" label provides a competitive advantage for it is thought to represent quality. High domestic production costs also instigated successful survival strategies, such as the production of highly specialized and design-intensive rather than mass products.

All these factors particularly favorable investment and legal policies strengthen the prospects of setting up a business in Germany. However, with the clothing and textile industry in a saturation stage, it is desirable to set up the clothing business with the most stylish and innovative products and this product should be marketed well.