Published on: January 7, 2025 / Update from: January 7, 2025 - Author: Konrad Wolfenstein
The German economy in transition: challenges and opportunities for administration, the service sector and the manufacturing industry - Image: Xpert.Digital
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The German economy has had to reinvent itself again and again over the past decades. Globalization, digitalization, climate protection and demographic change are just some of the factors that challenge companies and the state alike. “The future of Germany as a production location is now being decided” – this is how leading business representatives describe the current situation. Administration, the service sector and the manufacturing industry play an important role. They are closely interwoven and influence each other. A stable and competitive manufacturing sector has a positive impact on the service sector, which is also changing and increasingly based on digital technologies. The administration, in turn, lays the foundation for innovation, growth and social balance through legislation, regulation and infrastructure measures.
Despite this close connection, all three areas are subject to numerous challenges. The current developments and challenges in the interaction of these sectors are explained below. Possible opportunities for Germany as a location are also discussed - always with a view to how the manufacturing industry can be strengthened and in what way the administration and service sector can contribute to this. This interaction is by no means static, but rather subject to constant change. “Anyone who misses the change will lose competitiveness in the long term,” warns an entrepreneur from the manufacturing sector. For this reason, it is worth taking a closer look at the diverse facets of this change and analyzing how the three sectors can work together.
Importance of the interaction between administration, the service sector and the manufacturing industry
The German economy is often described as an “export-strong industrial powerhouse”. In fact, a significant part of the overall economic value creation still relies on the manufacturing sector. Mechanical engineering, the automotive industry, chemistry and electrical engineering are just a few examples of industries that have made Germany known worldwide. They act as a motor for innovation and technology development and ensure that Germany is considered a strong industrial location.
At the same time, the service sector has developed into a stable pillar of the German economy. “The service sector has long been the backbone of our modern society,” explains an analyst from a consulting agency. More and more companies are outsourcing activities that are not part of their core business, such as IT services or marketing, creating new jobs in this sector. The boundaries between the manufacturing industry and the service industry are also becoming increasingly blurred, for example when industrial companies not only concentrate on physical products but also offer digital services.
The state administration plays a central role in creating the framework conditions for both sectors. It provides infrastructure, regulates competition, collects taxes and subsidies and sets standards through environmental and labor law. “Without a functioning administration, the foundation of the economy will collapse,” emphasizes a high-ranking administration official. At the same time, the administration exerts a great influence on economic development through regulation and support: it provides incentives for investments, supports sustainable projects and ensures compliance with regulations.
Current challenges in the manufacturing industry
The manufacturing industry in Germany has struggled with structural change in recent years. Rising energy costs, international competition, high investment requirements for climate-friendly technologies and increasing automation are changing the landscape. An important development is the digitalization of production, known as Industry 4.0: machines, products, supply chains and customers are digitally networked with each other. “We are in the middle of a phase of change in which digitalization is also fundamentally transforming traditional industrial sectors,” says an expert in digitalization in mechanical engineering.
Automation and the use of robotics have led to companies streamlining their processes. Although this increases productivity, it can also cost jobs, especially if certain tasks are eliminated or relocated abroad. “The industrial sector must reposition itself and train its employees accordingly,” warns a trade unionist. Where companies cannot withstand international competition, locations or massive job cuts sometimes occur.
In addition, geopolitical tensions as well as rising wages and production costs in Germany are encouraging some companies to relocate parts of their production to more cost-effective regions. Such outsourcing weakens Germany as a location because local added value and jobs are lost. At the same time, new markets offer opportunities for companies that operate successfully globally: They reach a broader customer base and benefit from international value chains. But if you want to be present on international markets, you need sufficient capital, innovative strength and the right strategy.
Service sector between growth and new requirements
Service sector between growth and new requirements and the role and challenges of state administration - Image: Xpert.Digital
The service sector has steadily gained in importance in Germany over the past decades. The relocation of activities from the manufacturing industry to specialized service areas is just one side of this development. There is also growth in sectors such as IT, consulting, finance, real estate and tourism. New technologies and business models are making services increasingly diverse and at the same time linking them more closely to industrial processes.
“We are experiencing a surge in innovation that digitalization is triggering in the service industry,” explains a manager in an IT company. Big data, artificial intelligence and cloud computing enable service providers to better understand their customers, develop new solutions and optimize processes. So-called platform companies are particularly successful here and build large networks through which they provide or simplify services.
At the same time, many service providers have to adapt to changing customer needs. More and more consumers and companies are demanding sustainable and ecologically sensible offers. This development means that companies are paying more attention to issues such as climate neutrality, energy efficiency and responsible resource consumption. “Sustainable services are no longer a niche topic, but are becoming a central competitive factor,” emphasizes a consultant for sustainable business. This means that new job profiles are also emerging in the service sector that are more closely aligned with ecological and social objectives.
Role and challenges of state administration
The administration not only takes on regulatory tasks, but also actively shapes the framework conditions for the economy. This affects, among other things, tax policy, infrastructure measures and research funding. At the same time, public administrations themselves are facing major structural changes. Digital transformation requires comprehensive modernization in authorities and administrations so that processes become more efficient and citizens and companies receive faster and more reliable services. “We have to courageously push forward digital change in our authorities,” warns a senior executive at a state authority.
The effects of confusing or slow administrative processes are particularly evident when it comes to approvals for new industrial plants or investment projects. Long processing times, bureaucracy and a lack of resources in the offices slow down entrepreneurial initiatives. This is particularly true for small and medium-sized companies that do not have the same capacity for legal and administrative requirements as large companies. A medium-sized company owner explains: “Our time and costs in terms of bureaucracy have increased immensely. This makes it difficult to innovate and expand our capacities.”
Politicians are also faced with the task of actively supporting structural change. This includes investments in education and research, the promotion of new technologies and support for affected regions, for example if traditional industries there collapse. The federal and state governments have set up various funding programs, ranging from innovation vouchers to comprehensive investment packages. It is important that these measures are implemented consistently and in a targeted manner so that they actually reach the companies and increase their competitiveness.
Employment development and dealing with job losses
The discussion about job cuts in the manufacturing sector shows how much pressure this sector is under. “We must not stand idly by when key industries of today may no longer be competitive tomorrow,” warns a representative of the industrial union. In addition to the immediate social effects - unemployment and loss of income - a decline in industrial production also has macroeconomic consequences, such as lower tax revenues or lower export earnings.
Nevertheless, declining employment in the manufacturing sector can be partially compensated for by growth in the service sector. It is not uncommon for new jobs to arise in this sector, for example in areas such as IT, research or logistics. However, a simple transfer of workers is often not possible because the requirements for knowledge, skills and qualifications vary greatly. As a result, the need for further training and retraining that opens up prospects in promising industries for those affected is increasing.
Qualification offensives by politics and business can cushion structural change. This applies to both the promotion of digital skills and the acquisition of new technical skills. “Further training is not an option, but a requirement in a rapidly changing market environment,” says a human resources director at an automotive supplier. It is crucial that companies, unions and government agencies pull together and offer needs-based programs so that as many employees as possible can keep up with the changing world of work.
Impact of imports and international supply chains
Globalization has led to supply chains now being heavily interconnected internationally. Many companies in Germany purchase raw materials, intermediate products or certain components from abroad. On the one hand, they benefit from cheaper purchasing prices, for example if they buy in countries with lower labor or energy costs. On the other hand, this also increases dependencies, which can prove problematic in times of crisis. “It was only the recent delivery bottlenecks that made it clear to us how vulnerable our supply chains are,” points out a purchasing expert from the automotive industry.
Although cheaper imports lead to lower prices for consumers, they can put a strain on the manufacturing sector, especially when competition from cheaper products from abroad is very strong. In some cases, companies relocate parts of their added value abroad in order to produce there under more favorable conditions. This has the already mentioned negative effects on Germany as a location. At the same time, this step is vital for some companies to survive in international competition. “We had to relocate some of our production sites abroad in order to remain competitive. “It wasn’t an easy decision, but it was an economic necessity,” explains a managing director of a medium-sized company.
On the other hand, globalized supply chains also offer opportunities: access to global markets enables innovative companies to grow quickly and reach customers internationally. In addition, through imports, German companies obtain technologies and intermediate products that they cannot (yet) produce themselves. The combination of local know-how and international resources can lead to new products and business models. “Globalization is both an opportunity and a challenge for us,” summarizes an export manager at a technology company.
Economic consequences of a weak manufacturing sector
If the manufacturing sector weakens in the long term, this will have far-reaching consequences. Traditionally, the German economy is heavily dependent on the export of industrial goods. The products “Made in Germany” enjoy an excellent international reputation, so fluctuations in this segment have a high impact on the gross domestic product. A weak manufacturing sector also means that less can be invested in research and development. This is particularly critical because innovations often arise in the industrial environment and only later spread into the service sector.
In addition, innovative strength throughout the country suffers when core industrial sectors lose importance. “Our experience shows that a strong industry forms the backbone for technological progress and social prosperity,” emphasizes a renowned economic researcher. Without such impulses, Germany and its companies risk falling behind in the global innovation race. This could result in a negative spiral: lower investment, lower competitiveness, even less production and thus higher unemployment and falling government revenue.
In addition, many industrial jobs are comparatively well paid and contribute to a stable middle class. A decline in this area could increase social inequality. At the same time, high social costs caused by unemployment are putting a strain on public budgets. For the service sector, reduced purchasing power also means less demand for its offerings. All of this underlines the importance of a stable manufacturing sector when it comes to Germany's overall economic health.
Measures to strengthen the manufacturing sector
In recent years, politicians have developed various instruments to support Germany as an industrial location and make it fit for the future. These include, among other things, tax cuts for companies, the reduction of electricity taxes in certain sectors and improved depreciation options for investments. The aim is to ease the burden on companies and give them more financial scope for research, development and modernization.
“We need clearer investment incentives so that our companies can invest in climate-friendly and digital technologies,” demands a representative of a German industry association. The goal of making industry more climate-friendly requires enormous investments in new production processes, materials research and energy supply. That is why the government is also supporting promising projects in the areas of electromobility, hydrogen technology or storage technology in order to support companies in building new value chains.
Other measures include expanding the research allowance to motivate companies to increase research activities, as well as improving financing options for start-ups and young companies. In this way, innovative ideas can establish themselves on the market more quickly and provide new impetus for the established industry. The extension of compensation regulations for energy costs or the creation of a national raw materials fund are also steps to reduce risks in procurement and make costs for companies more predictable.
Digitalization as a key for administration, the service sector and the manufacturing industry
Digitalization is a central topic for all three areas. For companies in the manufacturing industry, networking machines and processes offers great opportunities to make their production more efficient. “Using modern sensors and big data analysis, we can detect and correct even the smallest errors in production at an early stage,” explains a production manager at an automotive supplier. At the same time, new business models arise when companies not only sell products but also offer digital or data-based services.
In the service sector, digitalization increases the variety of offers. Online platforms, IT security, cloud solutions or AI-based services are now indispensable. At the same time, competition is growing - international technology companies in particular are penetrating traditional service areas. Therefore, the ability to quickly develop new applications and adapt them to changing customer needs is a crucial competitive factor.
State administration is also facing a digitalization push. Digital citizen services, online approval procedures, central data registers and automation of routine processes are intended to simplify administrative procedures and reduce processing times. “If we consistently expand digital administrative processes, Germany as a whole as a business location will benefit,” emphasizes a senior administrative official. Although there are a variety of political programs for digital modernization, there is often a lack of human and technical resources when it comes to practical implementation.
Globalization, trade conflicts and geopolitical risks
Globalization is a driving force for change in administration, the service sector and manufacturing. Companies no longer only export to neighboring EU countries, but to Asia, North and South America and Africa. They often set up local subsidiaries or production sites in order to better serve the sales markets. “If you want to think globally, you also have to act locally,” explains a manager of a global mechanical engineering company.
At the same time, geopolitical risks have increased in recent years: trade conflicts, sanctions and political instability can limit supply chains and export opportunities within a short period of time. This becomes apparent, for example, when new tariffs are imposed on imports or when important transport routes are blocked due to political tensions. In such situations, a lot depends on the diplomatic skills and negotiating power of German and European politicians. “We need a strategic foreign trade policy that does not make us dependent on individual regions of the world,” warns an economic politician.
Companies are responding to these uncertainties with diversified supply chains to reduce the risk of production disruptions. Nearshoring is also often considered - i.e. the relocation of production steps to geographically closer regions - so that delivery routes are shorter and less prone to disruption. At the same time, the question remains open as to how future crises will affect world trade. The state can make it easier for companies to enter or exit markets, but ultimately companies themselves must develop long-term strategies that rely on robustness and adaptability.
Sustainability and climate protection as drivers of innovation
Climate change requires that the economy and society be transformed sustainably. This affects all three sectors equally. Industrial companies must reduce CO₂-intensive processes, use more environmentally friendly energy sources and rethink their entire value chain. Service companies also have a responsibility to develop ecologically acceptable models, be it in the areas of logistics, tourism, finance or consulting. And the administration must provide targeted incentives so that sustainable technologies and processes can become established.
“Our goal is a climate-neutral industry by the middle of the century,” emphasizes a representative of the federal government. This claim opens up opportunities for companies that want to open up new markets for sustainable technologies: For example, wind turbines, solar technology, energy storage and environmentally friendly transport systems can secure jobs and become new export hits. At the same time, however, high investments in research and development are required. The interaction with the service sector is also important here, as services such as maintenance, financing or sales must be redesigned in order to achieve the sustainability goals.
In concrete terms, this means: Not only must investment be made in cleaner processes in the manufacturing industry, but software solutions and consulting services that can control and monitor the transformation are also required. “Climate protection can be a driver for innovation if we set the right course,” says a sustainability expert. It is therefore important that administrations speed up their approval processes when companies invest in green technologies and that politicians do not create legal uncertainties that block investment decisions.
Medium-sized businesses as the backbone of the German economy
In the context of the German economy, we often talk about large corporations, for example from the automotive or chemical industries. In fact, a large part of the added value and innovation lies in medium-sized companies, i.e. in small and medium-sized enterprises (SMEs). “Small and medium-sized businesses are the heart of the German economy,” it is often said in politics and the media. These companies are characterized by high flexibility, close customer relationships and specialized niche skills.
But medium-sized companies in particular are particularly feeling the pressure from digitalization, a shortage of skilled workers and international competition. Many do not have the resources of large corporations to invest quickly in new technologies or to counteract fluctuations on the global market. “We rely on reliable framework conditions in order not to endanger our long-term projects,” explains a mechanical engineer from rural areas. It is therefore important that government support programs and tax relief also reach SMEs.
In addition, securing skilled workers is essential for medium-sized businesses. As demographic change in Germany intensifies, it is becoming increasingly difficult to find well-trained employees. Additional pressure arises because more and more young people want to pursue academic careers, while apprenticeships in industry or crafts tend to be less popular. “We have to strengthen the image of vocational training so that medium-sized businesses have enough young people,” demands an education politician.
Digitalization of the world of work: home office, AI and new qualifications
The COVID-19 pandemic has had a lasting impact on the way we work. Many companies from all sectors have learned that home offices and flexible work structures work. This trend is not limited to service sectors. In industry, too, administrative activities, construction and engineering services are increasingly being carried out remotely. “We converted our IT within a very short space of time and were thus able to enable efficient work from home in the development department,” says a project manager in the automotive industry.
Artificial intelligence (AI) is also a game changer for all sectors. Algorithms can recognize patterns in huge amounts of data, make forecasts or support decision-making processes. In the manufacturing industry, this enables predictive maintenance of machines so that failures are minimized. Chatbots, automated customer analyzes or AI-based marketing strategies are used in the service sector. In administration, citizen concerns could be processed more quickly using AI and routine tasks could be automated.
All of these developments lead to a need for new qualifications and skills. Employees must be prepared to continue their training and learn new technologies. Companies need talent management strategies that not only rely on traditional job profiles, but also involve digital experts, data analysts and AI specialists. “Despite all digitalization, people remain the crucial element in every company,” emphasizes a human resources manager from the IT industry.
Opportunities and risks for the future
The German economy is at a crossroads. On the one hand, administration, the service sector and the manufacturing industry are called upon to actively shape change and adapt to new market conditions. On the other hand, the importance of traditional values such as quality, reliability and innovation must not be lost sight of. “Germany must continue to stand for excellent products and services” is a widely heard credo in business.
While service providers increasingly operate in digital ecosystems and develop new business models, the manufacturing industry will have to continue to rely on technology and process innovations. Here, partnerships between industry and service companies can produce valuable synergy effects. For example, when mechanical engineering companies cooperate with software providers to develop smart production systems, or when logistics providers offer tailor-made services for industrial supply chains.
The administration, in turn, is faced with the task of accompanying the transformation as a mediator and designer. It must create legal and infrastructural conditions, promote the development of new technologies and keep Germany attractive as a location. This also means digitizing administrative processes and reducing bureaucracy so that companies can invest and expand unhindered. “Only if we promote the entrepreneurial spirit will we ensure prosperity,” emphasizes a senior government official.
The goal must be to keep Germany attractive as an economic and production location
Administration, the service sector and the manufacturing industry are in a phase of profound upheaval that is characterized by digitalization, globalization, climate protection requirements and demographic changes. In order for the German economy to remain one of the leading industrial nations in the coming decades, it is necessary that all three areas work closely together and strengthen each other. “We are a strong economy, but we cannot rest on our laurels,” says a representative of a leading business association.
The manufacturing industry remains of central importance for Germany. High-quality products, innovations and a large part of exports are created here. However, comprehensive investments in research, development and sustainable technologies are required in order to remain internationally competitive. The service sector can support this path as a provider of ideas and services by providing digital solutions, consulting services and specialized services. At the same time, the administration is required to ensure reliable and efficient framework conditions, be it through the digitalization of the authorities, the rapid expansion of the infrastructure or through targeted funding programs.
A key success factor will be the qualifications of the workforce. Industry 4.0 specialists, AI experts, software developers, but also skilled workers are in demand to maintain and expand value creation in Germany. Further training and strengthening vocational training help to create the conditions for a flexible and competitive labor market. “We need an education offensive that promotes innovation, creativity and lifelong learning,” demands an educational researcher.
Last but not least, companies as well as politics and society should be prepared to take risks when it comes to trying out new technologies and business models. This involves a certain level of fault tolerance, which is essential for true innovation. This is the only way to create a culture of progress and experimentation, in which new solutions are quickly scaled and successful ideas are further developed.
All of these efforts ultimately serve the goal of keeping Germany attractive as an economic and production location, securing jobs and ensuring the prosperity of broad sections of the population. “The changing German economy is not a crisis, but an opportunity – if we shape it with courage and foresight,” is the conclusion of an economic expert. This includes the courage to change, the willingness to invest, social cohesion and a common understanding that innovation and tradition are not mutually exclusive but rather enrich each other.
In the end there is the realization that administration, the service sector and the manufacturing industry can only be successful together. Digitalization creates new opportunities in all areas, from government agencies to high-tech factories. Globalization opens up new markets, but also requires a rethinking of supply chains and business models. Climate change requires sustainable solutions that can only be achieved with the help of new technologies and innovative strategies.
Germany is well advised to strengthen its industrial core and at the same time exploit the opportunities in the service sectors. At the same time, it remains the responsibility of the administration to guide and support this process and to intervene where market mechanisms lead to undesirable social or ecological consequences. The pace of change should not be underestimated: “We have to set the right course today in order to be successful tomorrow,” says an executive from the industry.
If this course is set responsibly, the German economy can continue to be one of the leading players in the globalized world. In this way, change can become the engine of dynamic, innovative and sustainable development. It is up to politics, business and society to work together on a sustainable strategy and thus give future generations in Germany a perspective based on prosperity, security and progress.
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