The next German government’s greatest challenge: building the framework for a digital revolution

The next German government’s greatest challenge: building the framework for a digital revolution

Editor's note: this is a guest post from Johannes Reck, CEO of Berlin-based GetYourGuide, which provides an online platform for discovering and booking attractions & activities.

It’s an election year here in Germany, but you’d be forgiven if you hadn’t heard. The campaigns were barely differentiated and in a time of national populism, it seemed more fitting to keep voters asleep than to confront them with an inconvenient truth.

It’s bizarre, because there is so much at stake for Germany this year. Immigration, foreign policy and social welfare are on everyone’s minds and were discussed at great length in newspapers and talk shows. But no one really tackled the one issue that will likely define the prosperity of the country over the decades to come: how German companies can continue to compete globally on an increasingly digital playing field.

I believe preparing for a digital future will be the defining challenge of the next German government; more so than immigration, foreign policy or any other issue currently being debated. Times may seem relatively prosperous in Germany at present, but the outlook is everything but rosy.

Fraying at the seams

We have some catching up to do. To get a clear sense of the issue looming on the horizon, one need only look at our economy’s digital readiness as it stands today.

Our economy is currently in good shape. Last year, it grew at a healthy clip of 1.9 percent — its fastest in five years. But our biggest drivers of growth are our industrial and automotive sectors. Both are coming under enormous pressure in the years to come: The Chinese are all over the country investing in and learning from our industrial champions, most notably the robotics company Kuka. It is naïve to think they will continue to be benevolent spectators. The automotive industry isn’t doing much better. “Dieselgate” was probably just a mild warning for what’s to come. As self-driving cars & electric engines hit the mainstream over the next 15 years, our national car champions might find their business models evaporating.

Looking at our tech sector, SAP is our largest homegrown player on the international stage, but it’s the only tech company that can count itself in the DAX Top 10, and it’s 45 years old. Contrast that with the tech companies listed in the S&P 500’s top 10: Apple, Microsoft, Facebook, Amazon, Alphabet. All of them are relatively young companies with gigantic market capitalisation and cash flow. All of them own large scale consumer platforms and are investing in next generation hardware, artificial intelligence and a massive core data infrastructure.

We need similar players for our own economy, but first we need to create the conditions for them to be created. I advocate five main policy changes:

First, we need to make it easier for German startups to recruit talent from abroad.

Standardized stock option programs for employee incentives are largely not available in Germany, because our business incorporation structure, known as the GmbH, doesn’t allow them. This structure is great for local bakeries, but doesn’t work for fast-growing startups with international expansion ambitions. This impedes recruiting of top candidates from the US, Israel or other countries with top tech talent.

We need to reform our business incorporation model to allow true equity to be awarded to employees of high-growth startups in the form of stock options. Furthermore, the federal government should follow America’s model of taxing stock options at the much lower capital gains rate, rather than our own “rich tax” rate.

Second, we need to invest in developing a stronger homegrown talent pool.

In Germany, there is an acute shortage of highly skilled STEM workers.Currently, these workers have to be recruited from abroad, which is very cost-intensive and time-consuming for German tech companies. Unless we address it, this problem is going to get worse: economic research institute Prognos estimates a shortage of around 3 million skilled workers by 2030.

The federal government should support the expansion of top universities in Berlin and Hamburg, based on the model of ETH Zurich and Cambridge, and invest in research and development as well as in training programs for qualified workers.

Third, we need a 100% digitized e-government.

For both citizens and businesses, any process with German authorities is a very costly and complex paper war. Processes for business registration, reporting and financing are often completely offline, antiquated, and hampering local startups’ ability to innovate.

The federal government should invest in creating end-to-end digitized business registration solutions. This will help new startups get off to a running start by helping them spend less time navigating bureaucracy, and more time building great products and teams.

Fourth, we need a lot more Venture & Growth Capital.

Despite some progress, the European Venture Capital industry is still in its infancy compared to the much more mature and robust funding markets in the US or China. Early stage VC funds across all of Europe manage to raise less than a third of the capital compared to their American peers. Even worse, the growth stage investors are raising less than 1/20th compared to US American funds. In Germany, there is the general notion that pension funds and endowments should play it safe and only invest in “risk-free” assets. The paradox of a time of massive technological disruption with no interest rate is that the “risk-free” assets are actually the riskiest assets. Not investing heavily in technology is the most certain path to fail.

Lastly, we need greater access to data in order to compete fairly with global players.

Currently, more than 80% of all data is in the hands of a select few companies (Google, Facebook, Amazon, Alibaba, Tencent), all of which come from the US or China. Access to these companies’ data is very restricted for German companies. In addition, these companies pay little tax in Europe and circumvent our privacy laws.

The federal government should better enable German startups to access these companies’ data, tax them fairly, and reinvest that revenue in the digitization of the European economy.

Wirtschaftswunder 2.0

Our government isn’t blind to these problems, but it’s been notoriously slow to address them. In 2014, Chancellor Merkel said, “We have the opportunity for a digital economic miracle. The question is whether or not it will happen in Germany.”

I strongly believe it can happen in Germany. We have highly talented people, a tremendous level of grit that has made us world champions in many disciplines and an very entrepreneurial mindset. In the next four years, we collectively need to take action towards the digital Wirtschaftswunder — and we need to start now.

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