The world is in a space of digital change. Ever faster product and service lifecycles, technical disruptions and innovations driven by the fast-growing start-up scene are increasingly determining the developments and economic successes of the future. Often the view is directed to the American Silicon Valley - the origin of many digital innovations. So, which areas can Germany catch up with?
Innovation in Germany – an evaluation of the status quo
Economic prosperity in Germany is based on traditional industries such as machinery engineering, the energy sector, chemical, aerospace and automotive industry. If it is not possible to transfer these industries into the next phase of economic development, Germany will be outperformed by countries with an advanced digitization strategy.
The digital transformation of industry holds numerous potentials, which a study by the German Federation of German Industries (BDI) estimates to 1.25 trillion euros by 2025. In order to leverage these, companies need to exploit the opportunities created by a connected and more efficient production as well as the development of new business models – despite regulatory barriers and data protection requirements. Only companies that are able to constantly reinvent their business model and develop it further by using new technologies can assert themselves in these times.
Companies who fail to constantly challenge and adapt to these developments risk missing the potential benefits. 90% of American companies that were listed among the Fortune 500 companies 50 years ago have seen their leading position deteriorate. The same holds true for German companies. For the first time, the German software producer SAP is among the world's most valuable companies in the world, while at the same time former industrial giants like Bayer and Siemens are losing ground. Not surprisingly, Paypal's market capitalization reached a higher value than the five largest listed banks in Germany.
However, more and more young companies such as startups or venture capitalists rank among the most valuable companies in the world. In particular Uber, Amazon and Chinese mobile phone manufacturer Xiaomi symbolize the success of the industrial revolution and the corresponding transformation of existing industries (transport, retail, electronics).
In Germany, large companies cite complex processes and internal political dissent as problems which often hinder and slow down new developments. Thus, many companies fail to realize new ideas quickly and often miss the desired window of opportunity. A study by Capgemini in cooperation with the Massachusetts Institute of Technology (MIT) has shown that 60% of the managing directors of DAX-listed companies believe that they are "digitally competent", but actually it is only 26%.
A wishful dream: the Silicon Germany
Compared with the American Silicon Valley there is only a small number of digital developments in Germany. The effect does not only relate to new developments in convenience services like the current version of the Amazon Echo, but more fundamentally is the impact on daily business where new technologies would bring efficiency gains. Rapid adaptation of technical developments could lead to more sustainable improvement in the following industries:
1. Financial and banking industry
Technically, banks are able to transfer money in a fraction of a second and allow customers to open their bank accounts easily from home via the smartphone – an example of this is Berlin-based fintech N26, which has grown its customer base to 200,000 customers since its launch in 2015.
In the last 15 years, PayPal has been using personal mail address to identify an account while banks require a 22-digit IBAN number for each transfer. The startup TransferWise offers foreign bank transfers 60% below the price of regular banks. Flexible and convenient payment possibilities like AlibabaPay, Amazon Payments or ApplePay are rarely available in cash-fixated countries like Germany where, for example, taxi drivers often only accept cash. Sweden is pursuing the ambitious goal of completely abolishing cash until 2021. Cafés with the inscription "no cash accepted" are already found in Malmö, in the south of the country.
2. Travel and transportation industry
In the last 30 years, the main means of transportation in Germany have not changed; the use of cars, bikes and buses has remained stable. Nowadays, the need to reduce CO2 emissions goes hand-in-hand with a simultaneous rise in mobility alternative triggering a change among the population, especially in metropolitan areas. This might be one of the reasons for the success of shared economy concepts like carsharing where DriveNow (a cooperation between BMW and Sixt) and Car2Go (another mobility cooperation startup between Daimler and Europcar) are well established.
Lately, startups like Emio and Coup have introduced the same business model to Scooters. DriveNow and Car2Go now have reached almost three million customers on their platforms and have been able to increase their customer base by about 40% year on year. Tesla currently is planning to set up its own car-sharing service for the Tesla owners – enabling to make a Tesla vehicle that is not in use available to other people on the Tesla Carsharing platform.
Uber and Lyft are an integral part of everyday life in the Valley. With 5.5 million trips per day, the private chauffeurs have revolutionized the urban traffic. In Germany, the business model so far has failed due to the lack of legal restrictions and personal transport licenses for private drivers.
The aviation industry is also experiencing changes. Airlines such as Richard Branson's Virgin Atlantic are increasingly using new technologies to refine their offerings to their customer base. For example, the first airlines allow the check-in without entering a booking code and communicate with the passengers at the gate by using Beacon technology.
3. Logistics industry
The logistics sector is also affected by new startups which are entering the market and capturing parts of the value chain of which have been part of well-established companies so far. In the forwarding business, Flexport, UShip, Uberfreight or Freighthub established themselves as new competitors of DHL, DB Schenker and Dachser. Startups aim at completely digitalizing the fragmented forwarding business and bringing transparency into the transport business through a previously unknown quantity of data. Up to now, 11 billion euros have been invested in the aforementioned startups and these are only the ones which have been published.
On the other side, current market leaders are unable keep up with the fast-paced market transformation. Some exceptions are a small number of co-operations with startups, but in general activities with regard to digitization are scarce.
Rocket Internet, Germany's largest incubator for startups, also increasingly targets the urban logistics market by exploiting free capacities. Rocket Internet's 'Foodora' offers an urban delivery service using bicycles for restaurants that do not have their own in-house delivery service – ZipJet, a dry cleaning startup, picks up laundry at private households and returns them.
4. Automotive industry
Numerous initiatives have already been launched to keep up with the fast-paced innovations of the automotive sector. Customers can experience digital innovations in various areas: parcels are delivered directly into the trunk, connected cars are transformed into a pseudo living room and additional services can be ordered on-demand.
Technology companies such as Google, Uber, Amazon and Tesla seem to have gained a clear advantage in the development of autonomous vehicles. It is questionable whether the lack of experience in the field of vehicle manufacture will be a disadvantage.
It is the challenge for German car manufacturer to close the gap in the technical interior of the vehicles through technological upgrades. Customers of established car manufacturers have to pay high prices to update the maps on their navigation system while an update of the automotive electronic is usually not possible. Meanwhile, Tesla provides its users with software updates free of charge.
Many companies are struggling to keep up with the pace of digitalization. Startups, on the other hand, are flexible and do not have to take into account established structures. Furthermore, the innovation power of established German companies is hampered by rigid regulation: the German hotel associations are forcing bans on AirBnB, taxi unions manifest their position by prohibiting transport platforms like Uber and Lyft and four federal ministries are responsible for digitization which restricts the advancing in legal progress.
Prospects that arise through digitization offer enormous economic opportunities in all branches of industry. In the next article, cultural and structure related differences between the Silicon Valley (respectively America) and the ecosystem in Berlin (respectively Germany) will be highlighted.