Germany’s tech sector races to safeguard its economic future

Germany’s position within the European Union as a high-ranking member makes it responsible for almost 25% of the bloc’s GDP. Yet after decades of economic dominance built on automotive engineering and cheap Russian gas, Germany finds itself at a pivotal crossroads: As its traditional strengths falter, the country is now turning to its emerging tech ecosystem in a bid to sustain its GDP standing and relevance in a global economy transformed by technology.

In terms of European tech sectors, Germany is up there alongside France and the United Kingdom. It is home not only to vibrant Berlin with its emphasis on consumer tech, mobility, and AI, but also a slew of cities that can be considered high-tech hubs in their own right. Corporate Munich, gamified Hamburg, and fintech Frankfurt have all gained ground in the post-pandemic bounce, especially in deeptech and industry-focused innovation. But this is simply setting the foundation for a country currently facing an industrial identity crisis.

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“I guess that Germany will have two options,” said Charme Rykower, Deputy CEO of the German-Israel Chamber of Commerce. “Option number one is that Germany will continue whining about the loss of its automotive superiority and of going down industrially and of being slow.”

Germany’s economy shrank in 2023 and was the worst performer among major industrial nations, in part because it was pressured to suddenly wean off Russia as a primary source for its gas following Putin’s Ukraine invasion. And while its automobile talent isn’t vanishing overnight, its industrial backbone, which was long reliant on companies like Volkswagen, Mercedes-Benz, and BMW, is under strain. Global EV disruption, Chinese competition, and the shift to software-defined vehicles have eaten into its technological edge.

What once was an economy built and supported by its SMB sector, known as “Mittelstand", high-tech sectors are helping it sustain its top spot among other first-world nations.

“The other scenario, I think, is more likely,” she continued. “Germany has shown us in the past, in a crazy effort, that when there's a crisis, they know how to deal with it. Like in the last energy crisis with Russia, they know how to also break rules, and they know how to overcome the bureaucracy. I'm sure that Germany will find a way now. It's one of the most important economies in the world at the moment… but Germany is about to go through a whole shift.”

Recent years have shown the world how Germany’s new emphasis is transforming the country from Mittelstand - 99% of its enterprises accounting for 55% of its workforce - to a high-tech nation. Government programs include High-Tech Gründerfonds (HTGF), which is Germany’s largest seed-stage venture capital fund with public and private partnerships involving the German Ministry for Economic Affairs (BMWK), KfW Bank, and major German corporations.

There is also Future Fund, a €10 billion ($11.5 billion) fund launched in 2021 to support Germany's VC ecosystem over a decade. The fund acts as a ‘fund-of-funds’ of sorts to keep German startups from relocating abroad. Scale-ups that have all benefited in the past belong in sectors including AI, biotech, mobility, and quantum computing, resulting in the growth of the sectors.

Today, there are approximately 30 startups that have achieved unicorn status across a myriad of industries and regions. “When you look into the survey of the German Startup Association, the most extensive and annually conducted survey of startups in Germany, you have only around 25% of the startup activity in Berlin and Munich together,” explained Jörn "Joe" Menninger, host of the German tech and business podcast, StartupRad.io. The podcast interviews hundreds of founders of German tech companies from its Frankfurt base with a goal to ‘bring you the pulse of innovation in Europe's economic powerhouse.’ “It's not like you have 80% like in London. You have 25% of the startup activity in the two hubs, and they are already of importance at least in Europe, maybe even globally.”

The contrast between Berlin's decline and Munich's growth means the gap between them is shrinking, with that latter becoming somewhat of the country's deeptech nerve center. Anchored by UnternehmerTUM — Europe’s largest deeptech incubator — the city has become home to quantum startups like planqc, spacetech companies like Isar Aerospace, and mobility companies like Lilium, helping it achieve the EU's top spot for transportation companies.

There is also Stuttgart, a little known city to those unnfamiliar with Germany, home to one of the largest cluster of autotech startups globally. With roughly 900 companies and a €6.7 billion ecosystem value, its advantage lies in a specialization in robotics, hardware, and mobility not easily replicated elsewhere.

In this way, Germany is learning a lot from Israel’s Startup Nation. A country forced to adapt and adjust to uncontrllable changes around them. “Something I observed in fintech, at first there were the suit wearing bankers and the hoodie wearing fintech entrepreneurs, but over time they moved a little bit closer together,” said Menninger. “For example, the bankers dropped a tie and dropped a jacket, and the entrepreneurs started to wear some nice jeans or even Chinos and a shirt. So that's kind of merged over time.” The transformation from a traditonally conservative culture to one that embraces the chaos of entrepreneurship appears well underway.

Today, Germany’s high-tech sector still ranks in the top 10, but its decline is evident. According to StartupBlink, the country is ranked as seventh worldwide - down from fifth and “reflecting a relative loss of momentum in a rapidly evolving global ecosystem.” That said, its growth rate of 28.4% and total 2024 funding of $8.1 billion shows signs that it is aware of this shift in the international technology order, prepared to pivot to new economies and focus on growth in the years ahead.

“I recommend Germans to \[adopt\] chutzpah, but it's a matter of self-confidence,” said Rykower. “Germans tend to always be very modest and understating what their activities are, and they are similar to the British. And politeness is the opposite of Israeli, because Israelis are open and real. If you're an innovator and you're an entrepreneur and you don't come up with enough self-confidence, then it's it's bad for your marketing.”

In a world moving faster than ever, Germany is learning (perhaps a bit too late) that its history of Mittelstand is no longer enough. The new race is for data, intelligence, and scalability. And this time, its whole economy depends on it.