Germany has been warned for years that it risks becoming an “industrial museum” unless it embraces radical modernization – and that includes artificial intelligence (AI).
Productivity in Europe’s largest economy has barely grown over the past fifteen years, export shares in automobiles and machinery are declining and Germany’s energy costs are the highest among the G7 group of wealthy nations. Together, this has created a toxic mix that is increasingly weakening the country’s global competitiveness.
Policymakers and business leaders believe a narrow window exists to reverse the decline by fully incorporating AI in factories and supply chains, which would help the country catch up with the world’s two biggest players, the United States and China.
Speaking at the inauguration of Europe’s first exascale supercomputer, Jupiter, in September, German Chancellor Friedrich Merz said the two global powers were “in a tight race to compete for future market share in an AI-enabled global economy.”
“We have every opportunity in Germany and we have every opportunity in Europe to catch up and then maintain the momentum,” he told attendees of the launch event in Julich, western Germany.
The US and China have stepped up industrial-scale stress tests of AI models, advanced chips and data centers, such as ChatGate and DeepSeq. Their early tests prove that their systems can handle AI workloads at business-critical scale without downtime.
Never ending AI pilot projects
Meanwhile, Germany’s industrial giants have been accused of being stuck in so-called pilot refinement, experimenting with AI but hesitating to fully launch ambitious projects.
For example, Bosch launched generative AI pilots in its factories in late 2023 to optimize production scheduling and monitoring. Volkswagen, in collaboration with Siemens, has tested AI-powered digital-twin factories – virtual replicas of production lines that allow engineers to simulate, predict and improve performance.
Although these projects have been praised as innovative, until recently, they were still limited to limited trials rather than full or partial rollouts due to legal and security concerns.
“many [German] “Companies still lack clear AI strategies and change-management capabilities,” AI expert and author Thomas Ramge told DW. “So the pilots don’t move on to main operations.”
Once Germany’s industrial leaders can prove the economic benefits of AI, the country’s deep manufacturing know-how and network of small and medium-sized suppliers that feed into key supply chains will help German companies catch up, Ramge said.
Germany’s Economy Ministry estimates that AI could deliver at least an additional percentage point in annual real GDP growth from 2026.
Germany hampered by talent, chip shortage
As well as competing globally for the best tech talent and the high-end chips needed to power AI, German companies remain risk-averse amid high upfront costs and a corporate culture that still cautions on disruption.
They will also have to contend with regulatory uncertainty, particularly the EU’s AI Act, which critics say is overly complex, has vague definitions and strict compliance rules on applications deemed high-risk. The European Commission has proposed to delay the full implementation of the Act Till August 2027.
Despite many obstacles, AI adoption is growing rapidly in Germany. According to a survey published in May by the IFO Institute in Munich, 41% of companies now use AI in their business processes – a 27% increase from last year. Nearly one in five companies plans to adopt it soon.
Germany’s industrial leaders are clearly setting the pace, with more than half already deploying AI. Yet the survey also highlights long-term concerns. Many smaller companies and sectors – including retail, hospitality and manufacturing – are hesitant, with some saying AI is not even on their agenda.
In addition to uneven adoption, the survey reveals an emerging labor market challenge. More than a quarter of German companies expect AI to result in job cuts over the next five years, while only a small minority expect new positions to open up.
Alexandre Mendonça, an associate at Bruegel, a Brussels-based think tank, believes this is ironic given the labor shortage caused by the global AI boom.
“German companies are having difficulty finding experts to work with this type of technology – it’s actually one of the highest rates in the EU,” Mendonça told DW. “Adoption is not enough – the ability to use AI is critical.”
Germany’s growing AI successes
Germany may be cautious in fully implementing industrial-grade AI, but one of its business giants is already shaping the global infrastructure behind the current AI boom.
Siemens is a key part of Europe’s “Data Center Four”, providing the automation systems, power grids and cooling technology that keep hyperscale AI facilities running reliably.
Germany’s automotive sector is also introducing AI on a large scale, with more than 70% of carmakers and parts suppliers already using it in production, according to an ifO survey.
Yet, as Ramge cautioned, these deployments are important but may not be enough to address the many headwinds facing the auto industry, including volatile electric-vehicle (EV) demand, rising energy costs and fierce competition from China.
,will be a necessary condition for AI [auto industry] Surviving through software-defined vehicles, better production and better supply-chain management – but that in itself will not be enough,” Ramge told DW.Strategy, cost structure and industrial policy all need to run parallel to AI deployment.”
Germany has also highlighted AI successes beyond industry. SAP has embedded generative AI into its enterprise software used worldwide through its co-pilot called Juul, while insurer Allianz is deploying AI globally for risk modeling and fraud detection.
The faster German companies adopt AI, the bigger the benefits are expected to be, helping to fix some of the country’s biggest issues.
A 2023 report from business consultancy McKinsey predicts that annual productivity growth over the next decade could increase by 1.5%, while annual GDP could increase by €450 billion ($520 billion) and German factories could use a quarter less electricity.
While Germany is well ahead of the rest of the EU in AI adoption, Bruegel’s Mendonca believes Germany’s progress will continue to be hindered by a talent shortage and a lack of training for new workers amid rapidly evolving technology.
“Germany’s technology and scientific sectors are at the forefront of AI adoption. These sectors are also facing a shortage of talent,” he said. “That talent no longer exists – so we have to think ahead.”
Edited by: Uwe Hessler