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Germany Essay Research Paper We are a

Germany Essay, Research Paper


We are a car maker with an interest in doing business in Germany. We know that we have to do a lot of research before we take the plunge and open a plant in Germany. We’ve researched the following topics on Germany; national context, role of economic geography, the cultural environment, legal environment, legal environment, it’s relationship with the United States, international trade, economic evolution and economic policies and strategies. This was a streneous task however we arrived to the conclusion that it would be profitable to do business in Germany.


Germany is the world’s third largest economy. While the German economy


currently is experiencing high unemployment and slow growth, the country’s


economic strength has been the subject of world renown since the end of


World War II. Germany is one of the founding members of the European


Union (EU), a North Atlantic Treaty Alliance (NATO) member, and a


member of the Group of Seven (G-7) industrialized nations and the General


Agreement on Tariffs and Trade (GATT)/World Trade Organization (WTO).


It joined the common European currency, the euro, on January 1, 1999, and


Frankfurt is the seat of the European Central Bank.


OIL


Germany consumes about 2.9 million barrels per day of oil, nearly all


of which it imports, making Germany the third-largest oil importer in the


world. German oil imports come primarily from (in decreasing order of


magnitude) Russia, Norway, the United Kingdom, and OPEC (Libya, Saudi


Arabia, Nigeria, Algeria). German imports from Russia have remained


unchanged in recent years. However, OPEC’s share of German imports has


decreased, while the share of North Sea oil from Norway and the United


Kingdom has increased. Germany produces around 61,000 bbl/d of crude


oil, much of which comes from the North Sea.


In Germany, about three-quarters of the price of gasoline is made up of


taxes, compared to around one-third in the United States. The pump price


for gasoline is about three times higher in Germany than the United States.


Gasoline consumption (and overall oil consumption) have declined slightly


since 1995. Between 1992 and 1997, the number of German gasoline stations


decreased (despite a rise in the number of stations in the former East


Germany).


Under a law which took effect on April 15, 1998, Germany’s strategic oil


inventory agency EBV is required to hold a 90-day emergency stockpile of


oil, up from 80 days previously. In late August 1999, the German government


planned to offer a tender for over 31 million barrels of sour crude oil in


response to increased crude prices. No further action was reported on this


tender as of October 1999.


Refining


Refining costs more in Germany than other countries in Europe, as Germany


levies eco-taxes. High costs have initiated a wave of consolidation and some


closures. Overall refining capacity has increased due to the opening of the Elf


Mider refinery in the former East Germany. The Elf Mider facility was the


first new refinery to be built in Europe in over a decade.


NATURAL GAS


Germany produces very little natural gas, and satisfies most of its demand


through imports. Almost one-third of Germany’s gas imports come from


Russia. The other main sources of imports are the Netherlands (about 24%)


and Norway (about 20%). Gas consumption accounts for about 20% of total


energy consumption in Germany. This share is expected to rise over the next


decade, especially for electric power generation as nuclear power is phased


out. Gas currently fuels only about 10% of German electricity.


Ruhrgas remains Germany’s dominant natural gas transmission company,


holding 60% of the German natural gas market. Years of Ruhrgas’s


monopolistic control of Germany’s gas market have left Germany with a


highly developed gas infrastructure. Ruhrgas is currently involved in laying


pipes to connect Poland to the German system in order to increase imports


of Russian gas via Poland, a project that could be completed in late 2001.


Ruhrgas has also bought stock in Russia’s Gazprom, in an effort to facilitate


closer relations between the two companies in anticipation of future increases


in German demand for gas.


Competition in the market has developed slowly. Ruhrgas’s main competitor,


Wingas, was formed in 1990 by a joint venture between BASF’s Wintershall


and Russia’s Gazprom. At the end of 1997, Wingas had become Germany’s


sixth largest company. Now, with its own domestic pipelines and links to


export supply lines, Wingas has gained market share, while Ruhrgas’s share


has decreased. Wingas is in the second stage of a pipeline construction


project that will connect Russia’s Yamal Peninsula to the German network,


which is expected to increase further the Wingas market share. The retail gas


market is expected to be fully opened, allowing consumer choice among


suppliers and brands, in December 1999.


Germany is in the process of developing its first offshore gas field in the


North Sea. There are two reservoirs with over 450 billion cubic feet plus


condensate, which will be connected to the German mainland via a new


pipeline. Gas is expected to start moving through the new pipelines in early


2000. The new pipeline will be built with excess capacity, in anticipation of


finding additional reserves on the new route into Germany. The project is


being undertaken by the Deutsches Nordseekonsortium (German North Sea


Consortium), which is made up of Wintershall (40%), BEB Erdgas und


Erdoel (40%), BASF (12%), and RWE-DEA (7%), and it is being


coordinated by Wintershall.


German companies also are involved in gas projects outside Germany. For


instance, the German company Lurgi has signed a seven-year agreement with


state-owned Turkmengas to develop pipelines and a processing plant


enabling Turkmenistan to export its natural gas. Germany’s Siemens Power


Generation Group won a contract to supply, install, and operate three gas


turbine units in Egypt.


COAL


Coal is Germany’s only major domestic fuel source. Over 75% of German


coal is used for electricity generation, and coal makes up over 50% of


electricity generation. Hard coal production is expensive in Germany, relative


to production costs in other major coal producers, because German coal is


deep underground. Hard coal production has remained a robust industry


only through heavy subsidization, which now is coming to an end. Lignite, or


“brown coal”, production, however, is inexpensive in Germany. Germany is


the world’s largest lignite producer, with about one-fifth of global output.


In March 1997, the German government, the mining industry, and the unions


reached an agreement on the future structure of subsidies to the German hard


coal industry. Subsidies to the industry are to be reduced from over DM10


billion ($5.5 billion) in 1997 to DM5.5 billion ($3 billion) by 2005. The


agreement called for closure of 7-8 of Germany’s 19 hard c

oal mines (14 of


which are in operation as of October 1999), resulting in an estimated decline


in employment from 76,000 miners in 1997 to 36,000 by 2005.


Decreasing coal production has brought about changes in the organization of


the industry. Two of the major producers, Saarbergen and Ruhrkohle


Bergbau, merged to form Deutsche Steinkohle (DSK), which accounts for


96% of German production. DSK is part of the larger RAG group, which


intends to diversify its holdings and focus less on coal as the sector shrinks


in coming years.


As domestic production declines, Germany is emerging as a significant coal


importer. Coal imports rose a reported 20% in 1997 and another 15% in


1998. Main suppliers are South Africa and Poland, with further supplies


coming from Colombia, Australia, and the United States.


Germany’s lignite production is separate from hard coal production. Lignite


was the most important fuel in the former East Germany. Since reunification,


wasteful and environmentally damaging mining methods practiced during


Communist rule have been reformed. The industry also has been privatized.


Lignite production in Germany fell by almost 75% between 1989 and 1996,


mostly in the former East Germany. Rheinbraun, a subsidiary of RWE, is


responsible for 85% of German lignite production. Most of its lignite is used


to produce electricity in RWE’s five power generation plants.


German companies also are involved in coal projects outside of Germany.


RAG owns shares in the Burton Coal Project and the German Creek coal


mine, both in Australia. Ruhrkohle International Mining, part of DSK and


RAG, recently bought the U.S. coal company Cyprus Amax, which made


RAG the world’s second-largest privately-owned coal producer. The


acquisition of Cyprus Amax increased RAG’s oversees coal production


from about 10 million metric tons per year (about 9 million short tons) to


about 72 million metric tons per year (65 million short tons).


ELECTRICITY


Germany is Europe’s largest electricity market. Generation is fueled by coal


(54%), nuclear power (29%), natural gas (10%), hydro (4%), and oil (less


than 2%). The industry is undergoing dramatic changes in fuel mix and in


organization. Efforts continue to phase out nuclear power and to increase


reliance on renewable energy sources, most notably wind power. The


German power market was liberalized in April 1998, and the ramifications of


this change are still developing.


Germany had the most expensive electricity in Europe before liberalization,


and it remains the most fragmented market with over 900 utilities. Industrial


power prices have dropped between 30% and 40% since April 1998 (with


residential prices currently following suit), and mergers are now sweeping the


industry. An estimated third of all German power companies are considering


mergers or joint ventures. The largest of the potential mergers is between


Viag and Veba, two of the eight major grid operators. A merger of the two


would create Germany’s largest power company, a distinction currently held


by RWE. Details of the deal are still under negotiation as of October 1999.


Smaller companies and new entrants to the market complain that the market


is not yet completely liberalized, as the major grid operators and regional


supply companies make it difficult for consumers to change suppliers. U.S.-


based Enron, for instance, claims that the current grid access agreement does


not allow it to offer competitively priced electricity.


Electricity is clearly on the path toward commoditization. Companies are


advertising their new energy packages for residential consumers, and


marketing is becoming a key element of energy companies’ strategies as


“price wars” drive down residential prices. Spot markets have developed,


whereas prior to liberalization long-term contracts were the norm. New power


exchanges are planned for Frankfurt, Hanover, Dusseldorf, Leipzig and


Berlin, and the development of a futures market is underway.


Nuclear Power


Currently Germany ranks fourth worldwide in installed nuclear capacity,


behind the United States, France, and Japan. Germany’s nuclear plants


comprise about 30% of Germany’s electric generation capacity, and about


29% of actual generation.


Nuclear power has become controversial since the September 1998 elections.


The Greens, the environmental party that is part of the ruling alliance voted


into power in the 1998 elections, are staunchly opposed to the continued use


of nuclear power. Chancellor Schroeder had decided to end close all 19


nuclear reactors in 2005, but he has since rescinded his position. The


government now plans to phase out the use of nuclear power beginning in


2002.


There are few economically viable alternatives to quickly replace such a


significant portion of the fuel mix, especially in the wake of the liberalization


of the industry. Over the longer term, however, high costs (high fixed costs,


long depreciation periods and long annual operating times) associated with


nuclear generation could work to decrease nuclear generation’s role in


Germany’s power sector. Nuclear installations currently are initiating


programs to reduce production costs and waste disposal costs in order to


become more competitive in the deregulated, extremely price-sensitive


market.


Renewables *germe.html*


Germany has a strong commitment to protecting its environment


*germe.html*. It has actively promoted the use of renewable energy, both


under the Kohl government with the Electricity Feed Law, and now under


Schroeder’s government with eco-taxes. In Germany’s eco-tax regime,


energy tax (energy taxes are slated to increase 10% over the next three years)


revenue is used to fund renewable projects. As a result, Germany is the


largest producer and consumer of wind energy *germe.html*in the world. A


full 1% of electricity is generated by wind power. Hydro-power is the second


largest renewable source, followed by biomass and solar power.


The growth rate of wind power has accelerated in recent years (it grew 30%


in 1997). Over the past 10 years, more than 5,000 modern electric-generating


windmills have been installed, mainly along the windy North Sea coast. Wind


is expected to produce 3.5% of electricity by 2010. In one region (Schleswig


Holstein), 10% of electricity now is generated from wind.


Individual German municipalities also are developing solar power potential.


In Berlin, the Energie 2000 program aims to increase solar power use. City


officials and the area’s power firm, Bewag AG, are investing $22.5 million


between 1997 and 2000 to support solar energy projects, and 44 potential


solar installation sites already have been identified. Meanwhile, Germany


plans to build two major plants to manufacture solar energy collectors, and


aims to build sufficient capacity to meet one-third of world solar technology


demand.

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