EDIT: following comment is specifically about German German, Swiss German etc do not always work the same
> In German on the other hand, "Ä" is part of the language but not part of the alphabet
Some people claim that, but I wouldn't take that as an authoritative statement. Plenty language authorities disagree, since "ä" and "ae" are not interchangeable.
> it is simply expanded to "AE" as in the previous comment
Only in some contexts (lists of names predominantly), generally "ä" is sorted after "a". E.g. the Duden dictionary goes "zahlen", "zählen", "Zahlenangabe".
There is also the topic of language revisions. In my experience, gnu tools sort swedish correctly by the old rules, those that collate w with v, i.e w and v sort as if they are equal (war before ver before whar).
However, in 2006 the arguably authorative dictionary changed to sort w after v. Gnu tools have yet to catch up with this, what I can see. :)
As an example of a conflicting locale, Swedish would have Äpfel after Käsen!