The German Software Industry Dilemma

 In Industry News

GermanyGermany is the second largest software market in the world. $79,4B was spent on software and related services in Germany in 2012.

In spite of this huge domestic market, Germany doesn’t foster many global software brands.

Out of the 250 biggest ICT companies in the world, only 6 are from Germany. Out of the top 50 biggest Internet companies in the world, only 4 are from Germany.

Germany runs regular trade surpluses primarily due to its strong export of cars and other machinery. Germany also exports chemical products, hardware, electronic equipment, metals and pharmaceuticals. Germany’s main imports are electronic devices, fuel, vehicle parts and metals. Its main trading partners are France, Netherlands, United States and Italy. Germany recorded a trade surplus of €18.80B in March of 2013.

What’s the problem?

Software is Eating the World

TBK1The software industry is the biggest and the fastest growing industry in the world. If Germany doesn’t get its “fair share” of the global software industry, the country will not be able to maintain its position in the global value chain. Germany will lose attractive and well paid jobs, and they will lose wealth and the average income per capita will decline.

In this context no nation on this globe can afford to ignore the software-driven industries.

Germany represents 5,67% of world demand for software and software related services. While this is a very lucrative domestic market for the local German software vendors it is not enough for growing to a size that can withstand global competition. 94,33% of the global market for software and software related services remains OUTSIDE Germany!

If German software companies do not take advantage of the global markets they will sooner or later face devastating competition form successful incoming global players. The idiosyncrasies of the software industry nurture “winner takes all” mechanisms. Networking effects and low or no production and logistics cost always play in favor of the global market leaders.

“Grow or die” also applies to the German software industry.

The disadvantage of the advantage


Location is more and more irrelevant in the software industry

The German software industry is facing a peculiar paradox.

Their domestic market is big enough to sustain substantial growth. However it is too small to grow to a size withstanding incoming competition from successful global players.

The German language, legal and market requirements form nice barriers to entry for incoming global players. However, these same barriers also prevent taking advantage of the spillover effects offered to software driven business models.

Any software company operating in English benefits from spillover.

1.5 billion people on this planet are prepared to consume products and services (business and consumers) based on the English language. Software companies operating in English are found by people looking for solutions, their marketing has a much wider reach and their products can be consumed/used right away by a huge market.

Fewer than 200 million people are prepared to use and consume products and services based on the German language. This means that a software company starting out with a German product and operating in German only has access to only 13% of the market available to a software company offering their product in English.

It is even worse than that:

A German product doesn’t get any traction in the English speaking market! German software companies do not enjoy any spillover.

There is spillover into Germany from the English speaking software companies, but not vice versa, thus giving German software companies a double disadvantage.

Germany is concerned

While the German software industry seems less concerned with this issue, the German government has realized that something must be done.

In 2011 the German [slider title=”Bundesministerium für Bildung und Forschung”] Federal Department of Education and Research [/slider] sponsored a research project looking into the reasons why the German software industry didn’t get a fair share of the global growth in the software-driven industries.

Research Model

On June 5, 2013 the final results of the research was presented at a meeting in Berlin, Germany. The project team also presented a number of recommendations for the industry as well as for policy initiatives for the Government.

The research presented by  Prof. Dr. Dres. h.c. Arnold Picot and Prof. Dr. Thomas Hess was based on a simple “business model” reviewing the impact of company internal as well as external factors associated with global growth.

The research also included observations outside Germany. Interviews had been performed in the US, Israel, Russia, Scandinavia, the UK and Germany.

While some of the observations and conclusions may be specific to the German software industry we certainly believe that most of the conclusions also have global relevance.

The main conclusions

In this post we will bring the main conclusions presented at the meeting in Berlin on June 5, 2013. We will go into more detail on each of the factors included in the research in later blog posts.

The main conclusions from  the research are:

  • Lack of funding (capital) is not the issue (this is breaking news and we will return to this in a later post)
  • Lack of qualified staff is not the issue (this is breaking news and we will return to this in a later post)
  • The somewhat [slider title=”technical product focus”] The study indicates that German software companies are more concerned with product perfection than with how to get the product to the market. [/slider] of German software companies is not the issue
  • The German software companies develop their product primarily for the German market and that is an issue.
  • The German software companies do not even consider international markets and that is an issue.
  • People in the German software industry have little personal network outside Germany and that is an issue. (Thank you XING!)
  • Relationship to and/or location in a “cluster” ecosystem makes no difference (this is breaking news and we will return to this in a later post)

Lack of global ambitions

The number 1 reason a software company does not achieve global growth is lack of global ambitions.

Software businesses are the easiest to globalize. Unless your software is strictly tied to a  [slider title=”national market”] Software developed for the government/the public sector and software depending heavily on local legislation and national idiosyncrasies may be difficult to take to the global markets.[/slider] then launching it on a new international market requires only little investment compared to all other industries. Software companies don’t need to build factories and establish logistic infrastructures like most other industries. The capital investment required for globalizing a software product is negligible.

There are obviously numerous practical issues to deal with when moving into a new market. However, “ambition” is the fundamental source of energy providing the stamina, persistence, endurance, creativity and patience required to overcome the obstacles and achieve global success.

Without global ambitions global expansion will not take place. It is as simple as that.

Can the German government make the German software entrepreneurs and executives more ambitious?

What do you think?

Other posts on this subject

Why are German software companies failing to get global market shares?
Money is Not the Problem in the German Software Industry
Getting Qualified People is Not the Problem in the German Software Industry
Lack of International Network is a Problem in the German Software Industry


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