"The Backbone of German Manufacturing" Moving Overseas: What the Consideration of Relocation by 30% of Mid-Sized Companies Implies for Japan

"The Backbone of German Manufacturing" Moving Overseas: What the Consideration of Relocation by 30% of Mid-Sized Companies Implies for Japan

When discussing the German economy, focusing solely on automotive and chemical giants can lead to a misunderstanding of its true strength. The backbone of German industry is the so-called "Mittelstand," a group of companies headquartered in regional cities, often family-owned, that dominate the global market in niche areas such as machine tools, precision components, measuring instruments, and chemical materials. These companies have been integral in linking employment, exports, vocational training, and regional finance.

This backbone is quietly shifting its focus beyond national borders.

According to local reports based on the "Internationalization Report" by Germany's state-owned financial institution KfW, 29% of industrial medium-sized and small enterprises with overseas operations plan to move part of their production abroad within the next five years. In the past five years, 8% of companies had already executed such relocations. Dirk Schumacher, KfW's chief economist, warns that even if only half of the companies planning to relocate proceed with their plans, the pace of relocation will clearly accelerate compared to the past.

It is important to interpret these numbers carefully. It does not mean that one in three German SMEs has decided to flee abroad. The survey targeted about 1,700 companies, of which approximately 600 have overseas operations. The 29% figure pertains to industrial companies active abroad, and "consideration/planning" is not the same as "execution." Nonetheless, the fact that companies with the capability for international expansion, which have supported domestic employment and exports, are considering relocation as a realistic option is significant.


It is not a temporary recession but multiple structural issues

Explaining why companies move production bases solely by citing electricity costs or environmental policies is simplistic. In reality, multiple pressures are being exerted simultaneously.

The first issue is the cost and procedures of domestic locations. In another survey published by KfW in February 2026, 65% of medium-sized and small enterprises exposed to international competition cited excessive bureaucracy, and 60% cited high taxes and public burdens as serious competitiveness issues. Energy-intensive companies tend to be more pessimistic about the future. Although the shock of price increases is gradually diminishing after a rapid reassessment of dependence on Russian gas, production in energy-intensive industries decreased by 15.2% from February 2022 to March 2026. Investment decisions for factories are influenced more by the ability to predict prices and policies five to ten years ahead than by short-term price fluctuations.

The second issue is the increasing competitiveness of Chinese companies. German companies once viewed China as a low-cost production base and a huge market for selling high-quality machinery and automobiles. However, now Chinese companies compete not only on price but also on quality, development speed, and digital functions. According to the KfW survey, 19% of all German SMEs feel increased competitive pressure from Chinese companies, with 34% in industrial sectors recognizing pressure from low-priced products and 28% acknowledging competition in terms of quality. A market that was once a customer has transformed into a supply base for a strong competitor.

The third issue is U.S. tariff policy and geopolitics. To avoid high tariffs and ensure capturing demand in large markets, local production may become more rational than exports. This is not a simple matter of "leaving because they dislike Germany." Business decisions such as producing near sales destinations, reducing exchange rate and tariff risks, and diversifying procurement sources result in the same outcome of relocating production abroad.

The fourth issue is demographics. Without enough skilled workers, technicians, and successors, even with equipment, it is impossible to increase operations. Germany's vocational training system has been globally recognized, but the shrinking young population cannot be compensated by the system alone. Without simultaneous progress in automation investment, utilization of immigrant talent, and expansion of employment for women and the elderly, maintaining domestic production itself will become difficult.


However, it is not a "complete withdrawal"

Listing only pessimistic numbers might make it seem like German companies are abandoning the country en masse. However, the movement emerging from the survey is closer to a strategy of "dispersing nearby" rather than a complete withdrawal.

19% of companies with overseas operations are either further redirecting exports to the EU single market or have already begun such measures. For industrial companies, this figure rises to 24%. Within the EU, they can utilize common rules, short transport distances, and a large market without tariffs. Even if some production is moved to Eastern Europe, it is easier to retain research and development, high-value-added processes, and headquarters functions in Germany. Instead of a complete transfer to remote locations, there is an aspect that should be read as "nearshoring," repositioning Europe as a single production zone.

Moreover, there are bright spots in the current economic indicators. According to Germany's ifo Institute, the export expectations index rose from minus 2.8 in the previous month to plus 9.6 in August 2026, reaching the highest level since February 2022. According to the Federal Statistical Office, exports in the first half of 2026 increased by 3.9% compared to the same period the previous year, and real GDP for the April-June quarter increased by 0.2% compared to the previous quarter. There is a possibility that the short-term cycle may improve.

However, recovering orders for several months and being chosen as a location to place a factory for 20 years are separate issues. The improvement in business sentiment does not mean that the long-term decline in location competitiveness has been offset.


Three emotions reflected on social media—anger, counterarguments, resignation

Reactions on social media regarding this topic are not simply a chorus of policy criticism. From public posts and related discussions, three major narratives emerge. However, the posts highlighted here are merely representative examples of statements confirmed through searches, not public opinion surveys.

 

The most prominent is "anger at politics that have diminished location competitiveness." On X, posts warning that "Germany's attractiveness is further declining" along with the 29% figure, and posts emphasizing the crisis by likening the corporate exodus to a "caravan," have spread. On Facebook, phrases like "a warning that the government cannot ignore" are also seen. This reaction perceives energy, taxes, and regulations collectively as political failures.

The second is a counterargument that "companies are also responsible." In manufacturing-related posts on LinkedIn, it has been pointed out that the real issue is not just cost reduction but a lack of innovation. Since German products have been chosen for their design, quality, and technological innovation rather than cheapness, simply lowering wages and regulations will not restore competitiveness. Comments also suggest that the narrowing quality gap with Chinese products is a result of years of technology transfer and local investment.

The third is a cold question of "who bears the cost of industrial protection." In related Reddit threads, there is opposition to retaining companies through electricity subsidies, concerns about job losses due to overseas relocation, and criticism of discussions blaming wages for declining competitiveness. "Should households bear the burden to protect factories?" "Should public funds stop relocations for shareholder profits?" "Can the same level of employment be created after manufacturing leaves?" None of these questions have easy answers.

The spread of strong words on social media is backed by the fact that factory relocation does not end with economic indicators alone. If a core factory in a region shrinks, it affects not only direct employment but also mold making, logistics, maintenance, dining, retail, and vocational schools. On the other hand, fixing old equipment and business models with unconditional subsidies hinders the movement of talent to new industries. Between anger and counterarguments lies the difficult question of industrial policy: "What to protect and what to change?"


Why it doesn't end with a "sense of déjà vu" for Japan

Japan is not in a position to view Germany's news as a distant case of industrial hollowing out. Both countries share commonalities such as dependence on manufacturing and exports, strong medium-sized and small enterprises in the parts and materials sectors, an aging population, and being resource-importing nations. The industrial structure, where multiple layers of suppliers and skills are concentrated around large company factories, is also similar.

Moreover, the internationalization of Japanese companies is already quite advanced. According to the Japan Bank for International Cooperation (JBIC) survey for fiscal 2025, the overseas production ratio of responding Japanese manufacturing companies for fiscal 2024 was 36.1%, and the overseas sales ratio was 40.9%. Due to differences in survey targets and definitions, it cannot be directly compared to Germany's 29%, but overseas production itself is not a new phenomenon for Japan. What is important is not the binary choice of overseas expansion or domestic return, but what functions to assign to domestic and overseas bases.

Japan's strength lies in the experience accumulated over years of overseas expansion in local management, quality control, and supplier development. During periods of yen depreciation, export profitability improves, and domestic investments in semiconductors and storage batteries have moved against the backdrop of economic security. Just as Germany is re-evaluating the EU as a safe and nearby market, Japanese companies can also design Japan, ASEAN, India, and North America as multiple bases with different roles.

On the other hand, weaknesses are also clear. These include domestic labor shortages and a lack of successors, power and logistics costs, delays in digitalization, and a structure where price pass-through becomes more difficult the further down the transaction hierarchy you go. If large companies increase overseas procurement and domestic SMEs cannot transition to a research and development model, they will lose not only orders but also improvement know-how. Factories do not disappear all at once. New equipment is placed overseas, domestic equipment updates are postponed, hiring decreases, and skill transfer is interrupted. This accumulation leads to hollowing out.


Five points Japan should learn

First, policies to protect domestic production should focus on "functions that are difficult to substitute" rather than the "number of factories." It is necessary to identify functions that influence the resilience of the entire supply chain, such as research and development, prototyping, mother factories, key materials, manufacturing equipment, and repair and maintenance. Returning all mass production processes to the domestic market is neither realistic nor efficient.

Second, in energy policy, predictability is as important as cost. Companies are more concerned about how prices and supply will evolve over the depreciation period of equipment than next month's electricity bill. If policies regarding renewable energy, nuclear power, power grids, storage, and long-term contracts frequently fluctuate, investments will head overseas even with subsidies.

Third, regulatory reform should be measured in time rather than the number of cases. How many months does it take for permits, factory land, grid connections, and subsidy reviews? What companies lose is not just the cost of writing applications but the opportunity to enter the market. Shortening administrative procedures becomes substantial investment support for SMEs.

Fourth, do not label overseas expansion as the enemy of domestic employment. By placing production near growth markets, some companies can increase sales and profits and return those profits to domestic development and advanced processes. The issue is not the overseas ratio but whether decision-making, intellectual property, design, skill development, and supply capacity of key materials remain domestically. A mechanism is needed to simultaneously require investment plans and human resource plans that strengthen domestic functions when relocating overseas.

Fifth, do not make SMEs a cost adjustment valve. If order prices do not rise while demanding wage increases, decarbonization, cyber measures, and equipment updates, the domestic supply network cannot be maintained. It is necessary to integrate thorough price pass-through, joint research, joint use of equipment, business succession, and M&A support to increase the number of companies that can earn high gross margins even with small scales.


The question is whether we can create a "reason to stay"

Production relocation is not necessarily a sign of decline. Overseas investment to get closer to the market strengthens companies. However, if new investments consistently head abroad and equipment, people, and research and development are not updated domestically, the story changes. While it may be a rational decision for individual companies, for the country as a whole, it incurs costs such as skill loss, regional employment decline, and reduced supply capacity in times of crisis.

The 29% figure in Germany highlights the limitations of discussions that demand patriotism from companies. Companies are driven not by persuasion but by predictable systems, available human resources, stable energy, swift administration, and markets that justify investment. At the same time, companies cannot win the technological competition with China and emerging market companies by merely saying "move because it's expensive." Management that connects domestic and overseas bases, maintains the distance between research and development and the field, and hones uniqueness is necessary.

The biggest lesson Japan should learn is that it is too late to think about measures after a factory announces its closure. The precursor to hollowing out is not the increase in overseas bases itself but the halt in the next domestic equipment investment. Policymakers, financial institutions, regions, and ordering companies must look not only at which factories remain but also where next-generation equipment is placed, where young technicians are nurtured, and where design data and improvement capabilities are accumulated.

The wavering of "Made in Germany" is a mirror reflecting the future of "Made in Japan." What needs to be protected is not the country of origin label but the ability to continuously create new value domestically.


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