Enticed by generous subsidies from the Joe Biden government, German companies want to invest more in the US and even build factories there. What are the implications for Germany as a place of business German companies love the United States: about 5,600 of them invest in the US market, according to the American Chamber of Commerce in Germany (AmCham Germany). This represents an investment of almost $650 billion (September 2022 data). And it’s not just big business groups like Siemens, Volkswagen, and Linde that want to increase their footprint in the US, in part even by building entirely new manufacturing facilities there.

“There are various reasons for this,” explains Dirk Dose, competitiveness expert at the Kiel Institute for the World Economy (IfW, German acronym). “One of the reasons is the growth of geopolitical tensions. For many companies, the US appears to be a safe haven. Other reasons are relatively low energy prices and very generous subsidies under the Inflation Reduction Act.”

Subsidies attract companies in the US

The Inflation Reduction Act (IRA) is a multibillion-dollar US government subsidy program led by President Joe Biden that, despite its name, is not so much about fighting inflation as it is about protecting the climate. Of the approximately $430 billion that the IRA provides, $370 billion is for the promotion of low-carbon technologies (equipment, systems and resources aimed at reducing greenhouse gas emissions) and energy security, with the remainder for preventive health care.

However, these subsidies and tax breaks are subject to the condition that the companies that benefit from them use American goods or manufacture them directly in the United States. For example, a buyer of an electric car in the United States, whose battery is also made in the United States, receives a bonus of about 7.5 thousand dollars. Wind turbines or solar systems with American components also have advantages. From an American perspective, this also includes commodities from countries with which the US has free trade agreements, such as Mexico and Canada.

The impact is already being felt in Germany

As a result of the US government’s IRA plans, there are already delays and threats of closure of electric vehicle battery factories in Germany – this is, for example, the case of Tesla, in Grünheide, near Berlin, and the Swedish company Northvolt, which planned to build a plant in Heide in German soil Schleswig-Holstein is now likely to invest in the US first.

So, are the alarm bells already ringing in the German industrial sector? “In fact, the share of manufacturing in total value added in Germany has been falling since 2016. Of course, it comes from a high level. I don’t see a general deindustrialization,” Doze reflects.

German Chancellor Olaf Scholz and European Commission President Ursula von der Leyen have already warned Joe Biden about distorting competition for European companies due to generous US subsidies.

Shortly thereafter, Brussels announced that it would respond with a green industry program and would like to give EU states more freedom for their own subsidies in the future.

The danger of a subsidy spiral

Economists see this confrontation as dangerous. “I don’t think we should be in a subsidy race,” says Doze. “Ultimately, it’s about taxpayers’ money. You have to think carefully about whether it pays off for society in the long run.”

He explains that it is “very unpleasant” when innovative companies, for example in the field of “green” technologies, grown with the money of German or European taxpayers, are attracted to the US through subsidies.

“Throwing away more taxes is not the solution,” says Doze. For him, however, one could think of linking separate federal funding programs for young companies to a certain amount of local loyalty.

Praise and criticism of American companies

So, if many German companies are investing more in the US to benefit from IRA subsidies, how do US multinationals rate working in Germany?

“Europe’s largest economy remains an important and attractive location for many US companies,” said Simone Menne, president of AmCham Germany. “A lot of highly qualified specialists, a dense network of infrastructure, first-class technical colleges and universities, great political stability, a strong presence in the EU market and other factors are important arguments for investing in Germany,” he clarifies.

However, the annual Transatlantic Business Barometer survey, last published on March 16, looks less optimistic. According to a survey of American companies in Germany conducted by AmCham Germany, location rankings in 2023 deteriorated for the third year in a row.

In last year’s survey, 59% of American companies operating in Germany rated the country “good” or “very good.” However, in 2023, that approval was only 34%. The quality of employees (94%), supplier networks (68%), research and development (68%) are highly rated. However, only 38% of US companies expect Germany to improve as a place to do business in the next three to four years, up from 43% in 2022.

Despite this, the fact is that many of the companies surveyed managed to register growth in sales (68%), employees (42%) and investments (42%) in 2022. In 2023, 53% of respondents expect sales to increase and many say they will expand their operations in the next three to four years.

The high cost of energy is a disadvantage

American companies see labor costs, digital infrastructure, and a shortage of skilled workers as Germany’s shortcomings. Most of all, however, they criticize high energy prices, even in comparison with other countries, even before the Russian invasion of Ukraine began.

“This plays an important role when choosing a location, especially for companies with high energy consumption,” says Menne.

For this reason, the country should be even more attractive in other areas and improve, mainly in terms of retaining a skilled workforce, reducing bureaucracy and widespread digitalization. “This helps to attract not only investments from the United States,” Menne said.

In this context, Doze refers to Apple’s decision: the American technology giant intends to expand its chip development center in Munich for billions of euros in the near future.

“If Germany invests wisely in research, education and infrastructure, and does not spend tax money on subsidies,” notes Dose, “it will remain attractive to foreign investors in the future.”