German Firms Accelerate Capital Flight to US Amid Deindustrialization

The US has emerged as the leading investment destination for German companies seeking refuge from high energy costs — caused by Washington-led sanctions — since the onset of the Ukrainian conflict.

Germany's deindustrialization has sped up as the US welcomes an unprecedented level of capital flight from firms in the European Union (EU).

Lured by Washington's tax cuts amid Germany's downturn, companies in Europe's largest economy disclosed a whopping $15.7 billion of capital investments in America in 2023 — a significant upswing from $8.2 billion in 2022 — according to data from the Financial Times' subsidiary, fDi Markets.

In 2023, German companies launched 185 capital projects in the US, with 73 focusing on manufacturing.

The most significant project involved Volkswagen's Scout Motors electric vehicle branch investing $2 billion in Columbia, South Carolina. The report from fDi Markets did not include mergers and acquisitions and different types of equity investments.

Top executives at Germany's two industrial giants — BASF and Siemens Energy — attributed the attractiveness of the US to factors like feasible industrial policies, a bullish long-term market forecast and a growing emphasis on supply chains.

“We see this huge investment potential with the new buildout of energy infrastructure in the US...In the past, we have pretty much-exported transformers from Germany, from Austria, from Croatia, and from Mexico into the US. But given the market size and that we needed to do an expansion, we looked, and we said the new factory is a good investment case given the market outlook," Tim Holt, an executive board member of Siemens Energy, told FT.

Holt pointed to the supply chain upsets in two of the world's main maritime routes — the Panama and Suez canals — geopolitical conflicts and the outbreak of the COVID-19 pandemic as reasons for overseas expansion.

2023 Top Investments in the US by German Companies

Company	Cost in $	Jobs
Volkswagen (trucks/SUV)	2 billion	4,000
Mercedes-Benz (batteries)	1.9 billion	2,000
ZF Friedrichshafen (automotive)	500 million	400
e-VAC Magnetics (metals)	500 million	300
Merck KGaA (semiconductors)	300 million	68

Source: fDi Markets

The Biden administration's passage of the Inflation Reduction Act and the Chips And Science Act has spurred an investment surge, granting over $400bn in tax incentives, loans, and subsidies to revive US manufacturing and speed up its energy transition — while also poaching investment from its NATO allies.

A recent study by the German American Chambers of Commerce suggests that 96 percent of 224 subsidiaries of German firms in the US are looking to increase their investments by 2026.

Europe’s economic powerhouse, renowned for its manufacturing prowess and heavy industries, has been in ruins following the loss of cheap Russian gas — the backbone of its industrial boom for decades.

Chancellor Olaf Scholz's unpopular decision to join the Western-led anti-Russian sanctions triggered a significant escalation of incremental deindustrialization in Germany, resulting in job losses, increased cost of living and shutdowns of plant operations.

“There is no doubt that the European industry is challenged. It won’t be clear-cut, but energy-intensive industries in Europe will likely shrink rather than grow in the medium term,” Michael Heinz, BASF’s North America chief executive, told FT.

A study last year by the German Chamber of Commerce and Industry found that almost one-third of German industrial firms aimed to relocate production abroad rather than domestically — a percentage that had doubled compared to the previous year.