From laggard to innovation leader: Germany's economic transformation capacity in the crisis

The paradox of Germany's economic position

Germany finds itself in an economic bind that may seem paradoxical to contemporaries. While Europe's largest industrial nation grapples with stagnant growth, shrinking export dominance, and declining competitive positions in 2024 and 2025, a systematic look at recent economic history reveals a phenomenon of paramount importance: the repeated ability of German companies to initially lag behind and then, through concentrated engineering expertise and perseverance, become global benchmarks. This capacity for transformation is neither accidental nor sentimental nostalgia, but rather a structural characteristic of the German economic system that has been repeatedly activated at critical junctures.

The current situation therefore warrants a nuanced analysis. The superficial diagnosis is: Germany is losing. The deeper diagnosis must be: Germany is in a phase where the conditions for a renewed transformation exist, provided that political and business actors make the right strategic decisions.

The historical precedent: Repeated catch-up patterns in German industrial history

Railway: The transition from importer to in-house development

When the locomotive "Adler" steamed along the line between Nuremberg and Fürth on December 7, 1835, it was not the result of German invention, but rather the direct adoption of British technology. The locomotive came from the factory of Robert Stephenson and Company in Newcastle and was transported to the Kingdom of Bavaria in sections by ship and with the help of mules. The engine driver was William Wilson, an Englishman. At that moment, Germany was not an inventor, but a consumer of an already proven technology.

What followed, however, was the classic German pattern of catch-up industrialization. Within a few decades, a robust German locomotive manufacturing industry developed, supplying not only the domestic market but also becoming an export industry. By the end of the nineteenth century, Germany had risen to become the world's leading locomotive manufacturer. This phase of German locomotive production became a symbol of a broader industrialization that transformed the country from an agrarian state into an industrial power.

The pattern is clear: first imitation, then optimization, finally leadership. This process isn't fast; it requires patience and investment, but it works. And importantly, there's no shame in this process. The strategic insight is that it's less about inventing the first technology than about perfecting it.

The anti-lock braking system: Seven years of improving a foreign concept

The anti-lock braking system (ABS) represents a classic case study of this German transformation pattern. Ford and Chrysler developed the first electronic anti-lock braking systems for automobiles in the 1960s. However, these early attempts were prone to errors and not cost-effective. Some manufacturers discontinued development.

Bosch imported the technology in the early 1970s and did what German companies are systematically good at: they analyzed not only the functionality but, above all, the weaknesses. Heidelberg-based Teldix GmbH had already been working on an electronically controlled system since 1968 that could regulate all four wheels independently. However, the core technical problem quickly became apparent: the analog electronics of the time did not meet the safety requirements of a braking system. Extensive winter trials demonstrated its functionality, but the hardware was not robust enough for series production in vehicles.

This is where Bosch's core competence came into play. In 1973, the company acquired a 50 percent stake in Teldix, contributing primarily its extensive expertise in the development and production of semiconductor components robust enough for automotive applications. In 1975, Bosch assumed full responsibility for ABS development. The ABS 2 anti-lock braking system, featuring digital signal processing and highly integrated circuits, went into series production in August 1978. Mercedes-Benz and Bosch presented the system on the test track of the Untertürkheim plant as a technological sensation, marking the introduction of digital technology into the automobile.

The timeline is revealing here. From the first systematic in-house development in 1969 to series production readiness in 1978, it took approximately nine years. This was no sprint, but rather consistent development work based on an understanding of weaknesses. Today, Bosch defines the global standard for ABS systems. The United States, which invented the original technology, purchases German ABS technology.

Industrial lasers: Two decades of optimization

The laser was invented in the United States in 1960. American companies took the lead in the industrial application of laser technology. TRUMPF, based in Ditzingen, Baden-Württemberg, pursued a classic German approach: in 1979, the company imported CO2 lasers from the USA. However, it quickly became apparent that the imported systems were insufficient to meet German quality standards.

TRUMPF opted for in-house development. The company focused on improvements in precisely those areas where the American originals were weak: robustness, precision, reliability, and maintainability. This was an investment program spanning decades. Today, TRUMPF is a global leader in laser technology and supplies the crucial lasers for the world's most advanced chip production. Without TRUMPF's laser technology, many of today's cutting-edge iPhones and Android devices could not be manufactured. The USA, the birthplace of laser innovation, is now purchasing German laser technology.

More specifically: The EUV lithography technology required to manufacture state-of-the-art semiconductors with feature sizes below seven nanometers is based on a partnership between ASML (Netherlands), ZEISS (Germany), and TRUMPF (Germany). ZEISS supplies the optical systems with unimaginable precision. The mirrors are manufactured with such precision that the deviation when magnified to the size of Germany is only about one-tenth of a millimeter. TRUMPF supplies the EUV drive laser. This technology has taken twenty years to develop, but it positions German companies at the forefront of global semiconductor production equipment. Intel, the American chip giant, is the launch customer for ZEISS's High-NA EUV technology. Intel intends to use this German technology to begin mass production of cutting-edge chips.

The current situation: Structural challenges versus historical competence

The crisis of Germany's export position

Current economic indicators are worrying. Germany's gross domestic product shrank by 0.2 percent in 2024 and is projected to grow by only 0.3 to 0.4 percent in 2025. Industry is measurably losing international competitiveness. In the 2024 Innovation Indicator, which compares 35 economies, Germany has slipped to twelfth place, two places lower than the previous year. Among major industrialized nations, Germany still holds a respectable second place behind South Korea, but the trend is clearly negative. The indicator value fell slightly from 45 to 43 points (out of a possible 100), while other countries expanded their commitment to innovation and consequently moved up the rankings.

In IMD's World Competitiveness Ranking, Germany has fallen to 24th place. Germany performs particularly poorly in terms of unit labor costs: only Denmark and Belgium have higher labor costs than Germany. This means that German workers and employees are paying more, while productivity has not increased proportionally. In the productivity ranking, Germany still holds 7th place out of 27 countries, but the USA and especially Denmark have significantly better results.

Export market shares paint an even bleaker picture. Since 2017, Germany has been steadily losing export market share, and this decline accelerated considerably from 2021 onward. Over 75 percent of the market share losses between 2021 and 2023 can be attributed to the fact that German exporters are simply no longer competitive. They are too expensive, too slow, or not innovative enough. This is not a temporary cyclical problem, but a structural challenge.

However, the Bundesbank has identified an important differentiating factor: Germany maintains a substantial core brand. Approximately sixty to one hundred product groups (at the HS 6-digit level) have maintained an export share of over thirty percent for extended periods. This persistent dominance within a smaller portfolio forms the basis upon which a transformation could be built.

China as a structural challenge

The current crisis is inextricably linked to the rising competition from China. China has developed into the dominant industrial nation and is pursuing a strategic industrial policy within the framework of its Made in China 2025 strategy, which explicitly targets the sectors in which German companies specialize. China utilizes not only market-based tools such as education and economies of scale to increase efficiency, but also extensive industrial subsidies.

The threat level is high. According to a survey by the German Economic Institute, between sixty and ninety-five percent of the companies surveyed anticipate losses and profit declines due to competition from China. Approximately half of the industrial firms facing Chinese competition intend to reduce production and lay off employees. China's trade surplus has reached a record high, and the country is continuously gaining market share in its European home markets, where German companies have traditionally dominated.

Specific structural problems: energy, demographics, bureaucracy

The current difficulties can be attributed to several specific factors. First, energy costs. In April 2025, industrial companies in Germany paid an average of 16.20 cents per kilowatt-hour (excluding subsidies). This is among the highest electricity prices of all EU countries. Looking ahead, the situation will worsen. By 2030, the cost in Germany for a company with an annual consumption of ten gigawatt-hours is expected to be around €132 per megawatt-hour. In China, the same price will be around €102, and in some parts of the USA, even as low as €61. Energy costs are not a marginal factor, but rather crucial for the competitiveness of energy-intensive industries such as steel and chemicals.

Secondly: Demographic structures. Germany is losing workers due to an aging population. The baby boomer generations from the high-birth years of the 1950s and early 1960s are retiring. The Engineering Monitor, published by the Association of German Engineers (VDI) and the German Economic Institute (IW), illustrates the extent of the crisis: In the second quarter of 2024, there were approximately 136,000 open engineering positions, but only about 70,000 to 75,000 engineering graduates per year. For every 100 job-seeking engineers, there are over 300 open positions. This is a structural misallocation of resources that cannot be solved by immigration alone.

Even more worrying: The number of engineering students has been declining continuously since the winter semester of 2020/21, from 783,000 to the current 749,000. The number of students in critical fields such as mechanical engineering and process engineering is declining particularly sharply.

Thirdly: bureaucracy and regulation. It has been repeatedly pointed out in the German debate that regulatory burdens are particularly high. German policymakers often impose even stricter requirements on top of already stringent EU directives. This not only creates cost burdens but also psychological unease among entrepreneurs who feel uncertain about future conditions. Approval processes are slow. This factor is difficult to quantify, but it is a consistent concern in discussions with entrepreneurs.

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The competence bases: German strengths despite current weaknesses

Despite these challenges, there are measurable and tangible competence bases upon which Germany could build another transformation. These are not imaginary, but factually existing.

Persistent excellence in core industries

As already mentioned, Germany has maintained a persistent export dominance in approximately sixty to one hundred product groups since 2010. These product groups are not chosen randomly, but rather focus on those areas where German expertise is traditionally strong: mechanical engineering, automotive engineering, chemicals, aerospace, precision instruments, and metrology.

The aerospace sector employs approximately 120,000 people and generates a revenue of €52 billion. This is not marginal, but significant. The technological leadership of this industry is undisputed. Germany, with its suppliers and engineers, remains central to the aerospace industry.

Optics, photonics and semiconductor equipment: The digital core

Germany is not a chip producer like Taiwan or South Korea, but it is one of the key suppliers for global chip manufacturing. ZEISS, TRUMPF, and their suppliers are indispensable. The technologies they produce require a level of precision and engineering that competitors struggle to replicate.

A look at High-NA-EUV lithography illustrates the point. This technology was developed over twenty years, with massive investments in research and development. It cannot be quickly imitated. And it is not peripheral, but central to the production of the most advanced semiconductors required for artificial intelligence applications. Intel, Intel's biggest competitor TSMC, and other chip manufacturers depend on this German technology.

The biotechnological renaissance: BioNTech and what lies behind it

BioNTech may be a young company (founded in 2008), but it embodies an important principle: utilizing fundamental research from the USA or elsewhere and industrializing and improving it in Germany. The basic mRNA research originated predominantly in American laboratories and was heavily funded by American authorities. BioNTech leveraged this foundation, but the company industrialized the technology in a way that surprised the world.

When COVID-19 broke out, the world urgently needed a vaccine. BioNTech took ten months to develop and clinically test the COVID-19 vaccine BNT162b2 (tozinamerane). This was not only the fastest development of a vaccine against a novel pathogen in medical history, but also proof of concept that mRNA could function as a new class of drug in medicine. BioNTech was the first company worldwide to bring an mRNA-based COVID-19 vaccine to regulatory approval.

This is less a story of invention than a story of industrialization and optimization. And that's precisely what German companies do well.

The transformation potential: A strategic reassessment

The historical patterns and current competencies lead to a compelling conclusion: Germany has not reached the end of its technological leadership, but is in a period of transition in which the foundations for a renewed transformation can be laid.

However, this requires clarity on three critical points:

First, Germany must stop thinking in terms of loss. The current debate is permeated by fear, pessimism, and catastrophic thinking. This is psychologically understandable, but strategically counterproductive. The question should not be: Can we maintain our previous market share? The question must be: To which new technological areas can we transfer our existing expertise?

Secondly, the current cost structures are a symptom, not the cause of the problem. Energy costs more in Germany than elsewhere, and that is a real problem. But Germany has also weathered periods of high costs and compensated through innovation and quality. That is German strength.

Thirdly: Action is required, but not panicked action. The energy transition must be accelerated, but not at the cost of industrial standstill. Skilled workers must be attracted, but not by lowering quality standards. Bureaucracy must be reduced, but not through deregulation that jeopardizes innovation.

Specific areas of transformation

The future-oriented industries in which Germany already has strengths are measurable: biotechnology, logistics and packaging, environmental and recycling management, medical technology, optics and photonics, aerospace, cleantech, and climate technologies. These are not exotic, but strategically central to the economic future.

Germany's exports of climate technologies now account for about four percent of its gross domestic product, more than in any other G7 country, including China. Germany is not lagging behind in climate protection, but rather leading the way. In electric vehicles, Germany ranks second worldwide, behind China.

These sectors are growth-intensive, but they require investment in infrastructure, skilled worker training, and political stability. They also require a cultural shift: less self-doubt, more focus on strengths.

The construction order

Germany is among the biggest losers of the last fifteen years. That's a fact. But Germany has proven countless times in the past that it can catch up. The railway, the anti-lock braking system, the industrial laser, mRNA technology: all these stories show a pattern. It's possible to start later and still become a global benchmark.

This requires three things: First, the understanding that technological leadership depends not on being the first to invent, but on optimization and refinement. Second, the patience to persevere through these processes over years or decades. And third, the willingness to innovate and take risks.

The current situation is serious. But it is not hopeless. With targeted investments in energy, skilled workers, and deregulation, with a clear focus on the strengths of the German economy, with less talk and more action, Germany could not simply revert to its old positions, but rather establish new ones in future technologies. This is not guaranteed. But it is possible. And history shows that Germany has done this many times before.

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