Part 1. Challenges Facing Start-up Entrepreneurs
According to Bednár and Tarišková (2017), 75% of startups fail in Germany within their first five years, and less than 10% survive beyond ten years. This is because startup entrepreneurs face numerous challenges when launching and establishing their businesses. This report outlines four key challenges startup entrepreneurs face in the German automotive sector.
Limited access to capital
Access to funding is a significant challenge for startup entrepreneurs in the German auto sector. Research indicates that securing financial resources for automotive startups can be particularly difficult due to the capital-intensive nature of the industry (Bednár & Tarišková, 2017). This is because starting an automotive business for new entrepreneurs means they have to invest heavily in research and development, create manufacturing plants, and market their new automobiles. For example, despite raising over $350 million since its creation in 2016, the founder of Germany’s auto startup Sono Motors, expressed that they still needed more funding to set up their manufacturer’s facilities and ensure the business remains afloat (Cantamessa et al., 2018). However, this funding has been challenging to secure since traditional financial institutions in Germany exhibit a degree of risk aversion toward automotive startups due to the highly competitive nature of the sector.
Additionally, stringent lending requirements and lack of collateral can further hinder startups’ ability to obtain or attract investors. Limited financial resources can hinder growth and prevent entrepreneurs from hiring top talent, investing in marketing campaigns, or purchasing necessary equipment (Harima, 2020). As a result, many new entrepreneurs encounter liquidity shortages causing their failure.
Knowledge Barriers
Startup entrepreneurs entering face knowledge barriers that can impede their progress. Understanding automotive manufacturing processes, quality standards, legal regulations, and supply chain intricacies require specialized knowledge and experience (Schumacher, 2022). However, since startup entrepreneurs lack networks and connections with suitable suppliers, distributors, and other partners, they fail since they cannot develop potential solutions for supply chain problems and other issues, they are likely to encounter (Audretsch et al., 2019). For example, German’s auto industry is dominated by established players such as Mercedes and Volkswagen, which have developed due to decades of connections and networks that enable them to operate in the challenging auto industry (Öndas et al., 2021). Furthermore, this knowledge barrier also exists among startups due to a lack of experienced and knowledgeable talent. Entrepreneurs often struggle to attract and retain talented individuals willing to join a risky venture (Harima, 2020).
Regulatory and Administrative Burdens
Entrepreneurs face a range of regulatory and administrative burdens that can impede their progress and growth. Compliance with complex licensing, tax, and legal requirements can be time-consuming and resource-intensive, diverting their attention from core business activities. For example, Startups in Germany often need help transforming their innovative technologies into successful products that match market demand due to the burdensome financial obligations imposed by high institutional fixed costs and licensing fees (Schumacher, 2022). Navigating bureaucratic processes and meeting compliance standards often poses a challenge, particularly for startups with limited financial and human resources (Fiastri, 2020). Germany’s excessive bureaucracy stifles innovation, as exemplified by the delays faced by Tesla’s Gigafactory, whose construction has been delayed by it (Thomas & Maine, 2019). Government initiatives to streamline regulations, simplify administrative procedures, and provide start-up-friendly policies can alleviate these challenges.
Market Competition and Uncertainty in the German Auto Sector
Embarking on a new enterprise entails venturing into uncharted territory, where the unknowns of market demand, competitive landscape, and business model viability loom large. The German automotive sector is a fiercely competitive domain governed by dominant market players and well-established manufacturers of global stature. As startup entrepreneurs strive to make their mark, they grapple with fierce competition and the volatile nature of the market (Olabi et al., 2021). Established enterprises possess firmly entrenched brand reputations, extensive distribution networks, and substantial resource endowments, creating an arduous uphill battle for startups to secure a foothold in the market (Öndas,2021). Furthermore, the automotive industry is experiencing notable paradigm shifts driven by technological advancements as electric vehicles, autonomous driving systems, and digitalization take center stage. Startup enterprises must skillfully navigate these technological disruptions, ensuring alignment with customer preferences and staying abreast of emerging industry trends (Olabi et al., 2021).
Part 2. Entrepreneurship Ecosystem
Mason and Brown (2014) define an entrepreneurial ecosystem can be defined as a network of interconnected individuals and organizations involved in entrepreneurship, including aspiring and established entrepreneurs, various entrepreneurial entities, institutional actors, and the dynamic processes that drive entrepreneurship, such as the creation of new businesses and the growth of high-potential venture. These actors and processes come together, formally and informally, to establish connections, facilitate interactions, and govern the overall performance of the local entrepreneurial environment (Stache et al., 2022). The Isenberg model provides a framework for understanding the entrepreneurship ecosystem, comprising six key domains: policy, finance, culture, support, human capital, and markets.
Policy
In the policy domain, Germany has demonstrated a strong commitment to supporting entrepreneurship in the auto sector through various initiatives. The country has set ambitious goals for transitioning to electric vehicles and implementing policies to promote sustainable mobility. For instance, the German government launched the National Platform Future of Mobility (NPM) to coordinate and develop strategies for sustainable transportation by providing a platform for dialogue between policymakers, industry representatives, and experts, promoting collaborative efforts and innovation in the auto sector (Meckling & Nahm, 2019).
Additionally, Germany offers targeted financial incentives, such as the Environmental Innovation Program and the Electric Mobility Support Program, which provide funding for research and development and infrastructure development for electric mobility (Schumacher, 2022). Germany heavily regulators the auto industry to help maintain the quality and growth of the sectors. Bankruptcy laws provide a safety net for entrepreneurs, allowing them to take calculated risks without the fear of severe consequences (Meckling & Nahm, 2019). However, there are still some shortcomings in Germany’s policy support for the auto sector. One significant challenge is the need to incentivize further the adoption of electric vehicles and sustainable mobility solutions. For example, due to the harsh economic times caused by the Russian-Ukraine war, German stopped the car subsidies for battery subsidies between 2023 and 2025 amidst skyrocketing energy prices (Buratti et al., 2022). This action is regressive to the EV revolution and stagnates the growth of the auto sector.
Finance
Access to finance is crucial for startup entrepreneurs in the auto sector. Germany has a well-developed financial system provides various funding mechanisms to support entrepreneurial ventures. For instance, the German Federal Ministry for Economic Affairs and Energy offers funding programs like the EXIST Business Startup Grant, which financially supports startups in the pre-seed and seed stages. Moreover, public investment banks, such as KfW Bankengruppe, provide loans and equity financing options to support startup growth and innovation (Fiastri, 2020). Germany has a robust venture capital ecosystem, with numerous funds focusing on automotive startups (Fiastri, 2020). These financial resources play a crucial role in supporting the growth and development of startups in the German auto industry. However, several drawbacks in the finance domain negatively impact the auto sector. Despite these efforts, it is increasingly more work for all startup entrepreneurs to access sufficient funding (Fiastri, 2020). While Germany has a well-developed financial system, traditional financial institutions can still exhibit risk aversion towards investing in early-stage automotive startups due to the high capital requirements and inherent risks associated with the industry.
Culture
Germany has a culture that values innovation and engineering excellence, which aligns well with the auto sector. The country’s engineering heritage and reputation for quality have contributed to the growth of automotive innovation and entrepreneurship (Fiastri, A. (2020). The entrepreneurial culture in Germany has fostered numerous triumphant narratives within the automotive sector, exemplifying its positive influence. The remarkable achievements of renowned German automotive entities, including BMW, Mercedes-Benz, and Volkswagen, have played a pivotal role in establishing Germany’s global standing regarding quality products and superior processes. These triumphs have not only bestowed wealth upon the founders and shareholders but have also engendered substantial economic advantages for the nation of Germany (Pankov et al., 2021).
Moreover, Germany’s prowess in the automotive sector has catapulted it to the forefront of the global automotive industry. The preeminent status of German automotive manufacturers, renowned for their unwavering commitment to quality, ingenuity, and cutting-edge technology, has garnered worldwide recognition and firmly established Germany as a central hub for automotive proficiency (Pankov et al., 2021). The international reputation has also facilitated global collaborations and partnerships, which have not only strengthened the global presence of German auto companies but have also facilitated knowledge exchange and cross-cultural collaborations (Fiastri, 2020). However, the German culture values stability and caution, which can sometimes hinder risk-taking and entrepreneurial endeavors. Moreover, the auto sector faces significant diversity and inclusivity hurdles within its cultural framework.
Supports
Effective leadership is a pivotal factor in shaping the entrepreneurial ecosystem within the German auto sector’s social realm. A key element is the imperative requirement for resolute endorsement from leaders across multiple hierarchical tiers. By showcasing unwavering dedication to cultivating entrepreneurship, leaders cultivate a favorable climate that fosters the aspirations of burgeoning entrepreneurs within the auto sector (Malecki et al., 2018). Additionally, Germany provides an array of supportive initiatives tailored to nurture startup entrepreneurs in the automotive domain. Illustrative instances encompass accelerators like Startup Autobahn, which furnish guidance, networking opportunities, and resource accessibility to startups operating within the automotive industry (Malecki et al., 2018).
In addition, numerous incubators and co-working spaces across the country support startups such as UnternehmerTUM; however, limited resources and support networks for underrepresented groups pose a significant challenge to inclusivity within the entrepreneurial ecosystem. Efforts are required to provide targeted support programs and networks that address the specific needs of diverse entrepreneurs. The issue of inclusivity within the entrepreneurial ecosystem of the auto sector is compounded by the scarcity of resources and support networks accessible to underrepresented groups (Maroufkhani et al., 2018). Addressing this challenge necessitates proactive measures aimed at devising targeted support programs and networks tailored to the distinct requirements of diverse entrepreneurs.
Human Capital
Germany possesses an exceptionally proficient labor force endowed with technological proficiency, rendering substantial backing to the auto sector ecosystem. Academic institutions and research establishments extend specialized curricula and research avenues in renewable energy. A noteworthy example is the Fraunhofer Society, which has multiple institutes focused on renewable energy research and breakthroughs that can effectively contribute to the automotive revolution (Fiastri, 2020). Furthermore, the German government actively promotes vocational training and apprenticeship programs to address the skills deficit and furnish the indispensable technical aptitude essential within the renewable energy sector (Krpata,2021). The German auto sector benefits from numerous serial entrepreneurs who have repeatedly initiated and operated multiple enterprises, imparting invaluable acumen and proficiency (Mason & Brown, 2014). These individuals possess a profound comprehension of the sector and its complexities, fostering innovation and the expansion of nascent ventures. Their astute grasp of market dynamics, well-established networks, and resource access offer distinct advantages to startups within the industry. However, the dominance of serial entrepreneurs may create barriers for first-time entrepreneurs and limit opportunities for new entrants as they may enjoy better access to funding, networks, and resources, giving them a competitive advantage (Fiastri, 2020). Germany’s aging workforce also poses a problem to the entrepreneurial ecosystem, resulting in a shortage of skilled labor. Krpata (2021) cites that the employment rate for individuals aged 64 has seen a notable rise over a decade, from 62% in 2012 to nearly 72% in 2021 in Germany.
Markets
Germany boasts a mature and competitive automobile market, providing opportunities for startups to tap into a solid customer base. The nation’s automotive industry, populated by prestigious manufacturers, engenders an ecosystem that bolsters the growth of suppliers, service providers, and technological breakthroughs (Di Botonto, 2014). Additionally, Germany’s strategic location within the European Union affords it advantageous proximity to a broader market and facilitates fruitful cross-border partnerships. Startups operating in the automotive sector stand to leverage Germany’s geographical benefits to extend their market penetration and seize novel prospects (Stache et al., 2022). In Germany, diaspora communities from countries with strong automotive industries, such as Turkey, have facilitated cross-border collaborations, market access, and knowledge transfer (Maroufkhani et al., 2018). However, due to globalization, the German entrepreneurial ecosystem faces increasing challenges from international automakers such as Tesla, General Motors, and even Toyota (Thomas & Maine, 2019). As a result, Germany’s automakers’ market share in international markets is shrinking.
Part 3
The entrepreneurship ecosystem in Germany, specifically in the auto sector, provides a supportive environment for the growth of new international ventures.
Policy Support
The German government can implement several policies to help support the influx of international ventures into the entrepreneurial ecosystem. First, Germany can develop policies supporting the evolution from fossil fuels to more sustainable energy sources. These policies include financial incentives such as grants, subsidies, and tax benefits for companies involved in electric vehicle production or related technologies (Raible,2016). As Meckling and Nahm (2019) cite, the need for reducing the carbon footprint, smart traffic management, and Germany’s goals for transport are some of the fundamental policies that will drive the future of its auto sectors by attracting these players with policies and initiatives that appeal and support them (Mason & Brown, 2014). Policies promoting renewable energy adoption, such as feed-in tariffs and incentives for energy-efficient technologies, also create opportunities for international startups specializing in clean energy innovations (Krpata, 2021). For example, Tesla, through its revolutionary battery technology, can benefit from Germany’s policies supporting the integration of renewable energy sources into the grid and participate in pilot projects and funding programs (Malecki, 2018). The development of these favorable policies significantly supports new ventures and helps to solve the problem of regulatory and administrative burdens that contribute to the failure of new ventures (Harima, 2020).
Financial
The financial domain of the entrepreneurial ecosystem in the German auto sector plays a crucial role in supporting the growth of new international ventures. Germany’s financial resources and mechanisms attract foreign investment and facilitate the expansion of international ventures (Krpata, 2021). German banks and venture capitals readily offer international firms significant initial investments to help finance their entrants into the German market (Bormann et al., 2018). For example, DeepMap, a California-based startup focusing on high-definition mapping for autonomous vehicles, raised significant investments from German venture capital firms (Fiastri, 2020). Additionally, it provides financial support through grants, subsidies, and investment programs for research and development, production, and infrastructure related to some of the new players (Pankov et al., 2021). The German government is also willing to fund international ventures, with companies like Tesla receiving billions in funding from the states to build its gigafactory (Thomas & Maine, 2019). The financial support in Germany’s entrepreneurial ecosystem attracts foreign investment by providing access to funding, which helps these new ventures from running into liquidity shortages.
Culture
The strong automotive culture, engineering excellence, and reputation for quality create a conducive environment for international ventures. Additionally, the German consumer shows a cultural appreciation for sustainable mobility and clean energy (Fiastri, 2020). As a result, many of them have embraced the evolution of the auto industry by purchasing EVs, plugin-hybrids, and hydrogen-powered cars. For example, Hyundai, a South Korean automaker, reported receiving orders from more than 7 German companies for its XCIENT hydrogen-powered trucks (Han et al., 2021). This culture helps show international ventures that the German population offers a ready market and helps solve the market uncertainty problem that contributes to many startups’ failure (Di Botonto,2014).
Support
International ventures are less likely to fail due to the significant support they receive from partners in the German market. The ecosystem offers various forms of support through innovation hubs and collaborative partnerships, which can foster their development and help guarantee this success. Through these partnerships, these new international ventures can learn more about German consumers to develop products and services most likely suit them (Krpata, 2021). This support also guarantees that these international ventures can utilize their German partners’ resources, superior engineering technologies, and expertise. This way, their products will be of higher quality. For example, Waymo, a subsidiary of Alphabet Inc., has collaborated with German automaker Daimler to develop autonomous driving technology (Maroufkhani et al., 2018). The symbiotic alliance harnesses the substantial backing entrenched within Germany’s automaker domain, synergizing Waymo’s proficiency in autonomous driving technology with Daimler’s manufacturing prowess and market influence (Maroufkhani et al., 2018). The ecosystem’s support network within Germany fosters the exchange of knowledge. It propels collaborative endeavors, empowering global enterprises like Waymo to access the copious resources of the automotive landscape and expedite their trajectory of expansion (Stache et al., 2022). Thus, the entrepreneurial ecosystem within Germany deftly mitigates the knowledge gap challenge, a pivotal factor contributing to the downfall of nascent ventures, by capitalizing on the existing industry knowledge and technological advancements.
Human Capital
Germany’s entrepreneurial ecosystem supports new international ventures by supporting the availability of skilled labor. The international players recognize that the German workforce is highly skilled and appreciates the value of producing high-quality auto products (Di Botonto, 2014). The country’s skilled workforce, renowned research institutions, and robust engineering culture contribute to creating a talent pool and knowledge base that can benefit international ventures. International new ventures can tap into this talent pool by establishing operations, collaborating with local research institutions, and accessing skilled labor through partnerships and recruitment (Meckling & Nahm, 2019). For example, Ford, the US vehicle manufacturer, has successfully established its presence in Germany and employs more than 20000 employees. The country’s culture of engineering and innovation has provided Tesla with a favorable environment to introduce its vehicles and disruptive technologies (Krpata, 2021). The reputation of quality work reassures other international ventures that the German workforce is ready to produce high-quality products. This availability of skilled labor helps to mitigate the barrier of shortage of skilled labor, which is one of the challenges that cause new startup entrepreneurs to fail (Buratti et al., 2022).
Markets
Germany’s ecosystem can support international ventures by offering it a ready market. Germany’s market domain offers international new ventures access to a mature and competitive automotive market. According to Akpinar, and Vincze (2016), Germany’s solid customer base, extensive supply chain, and distribution networks present market entry and growth opportunities. Collaborating with German multinational corporations and leveraging their networks can provide international ventures access to international markets beyond Germany (Kang et al., 2021). Furthermore, Germany’s position within the European Union (EU) provides additional benefits (Krpata, 2021). The EU’s open market and regulatory framework allow international ventures in Germany to access a broader customer base across the EU member states. (Fiastri, 2020) This access to a larger market increases growth potential and enhances opportunities for internationalization. Rimac Automobili, a Croatian electric hypercar manufacturer, has attracted German customers and investors due to the country’s strong market presence in the luxury and performance vehicle segment (Akpinar & Vincze, 2016). The entrepreneurial ecosystem in Germany helps overcome the challenge of market uncertainty by providing international ventures with access to a guaranteed broad customer base. The existing market infrastructure, distribution networks, and customer preferences enable startups to navigate market uncertainties and establish a foothold more easily (Kang et al., 2021).
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