A decade ago it was considered the “sick man of Europe.” Today, the German economy is powering ahead of its rivals, driven forward by the innovation- and export-focused German Mittelstand.
Humorist Evan Esar once defined statistics as the science of producing unreliable facts from reliable figures. But reliable fact is that the German Mittelstand is the backbone of the German economic model. And the numbers support this: The German Mittelstand makes up 99.7 percent of all German businesses, employs some 60 percent of the German workforce and generates around 40 percent of Germany’s export sales. In 2012, it is expected to create 200,000 new jobs.
The Institut fur Mittelstand-forschung Bonn (IfM) describes the Mittelstand as companies with fewer than 500 employees and an annual turnover of up to 50 million euros – on the surface, not that different from SMEs (small- and medium-sized enterprises). Until recently, these firms were an assortment of locally rooted, family-run or family-owned businesses that had been around for generations. The advent of globalization presented an opportunity to expand and achieve some remarkable results. As described in the 2012 edition of Prof. Bernd Venohr and Dr. Florian Langenscheidt’s Lexikon der Deutschen Weltmarktfuhrer (Dictionary of German World Market Leaders), around 1,500 Mittelstand companies from Germany are currently world leaders in niche markets. Even so, few people have ever heard of them.
Hidden champions
You may be familiar with Miele (a world leader in electric household goods) and Meissen (a luxury porcelain manufacuturer), but how about Wacker Neuson (a leader in everything from dump trucks to demolition machines), BavariaYacht (a top manufacturer of 30- to 45-foot yachts), Alfred Karcher (the world’s largest producer of cleaning equipment) and Alfi (a leading producer of uniquely designed household goods)?
Using the analogy of a three-legged stool, Venohr says there are three core elements that underpin the success of Germany’s Mittelstand. They are summed up by the following rubrics: (1) family ownership, (2) niche markets and innovation, and (3) continued improvement.
Of Mittelstand companies, 70 percent are family-owned and 70 percent are located in small towns and rural areas. This helps the company cultivate long-term relationships with its employees and retain expert knowledge in order to be more efficient and stay ahead of competitors.
Family ownership is also a characteristic that transfers to the company’s relationship to its customers around the world. This engenders an environment of genuine trust and promotes long-term investment in the company. It is also an implicit rejection of the short-term, profit-centered, hire-and-fire Anglo- Saxon economic model. Flat hierarchies, low employee turnover figures and average leadership periods of 20 years contribute to stability. Loyalty is at the heart of the Mittelstand.
The second core element identified by Venohr is leadership in niche markets. Simply put, finding a gap in the market and developing a strategy to become the dominant global player. This is based on a combination of “superior product quality and a focus on customer needs, driven by constant innovation.” Unsurpassed customer support combined with a strong commitment to solving problems further increases the loyalty of customers.
The third piece of the Mittelstand jigsaw is its continuous re-evaluation of the value chain, whereby best practices are achieved and then optimized. In short, a continuous improvement of products and services.
“I want the United Kingdom to have its own version of the German
Mittelstand – a backbone of medium- sized companies that exports, innovates and generates growth,” said John Cridland, Director-General of the Confederation of British Industry (CBI) in October 2011. With a better- functioning cadre of Mittelstand companies, a commensurate CBI report noted that a further 20-50 billion British pounds could be added to the United Kingdom’s annual gross domestic product. But is this realistic? Isn’t the German Mittelstand the result of generations of development, and geographic and cultural factors? Is there not something specifically German about the way the Mittelstand operates? It can be argued that in order to condense the Mittelstand down to a quantitative (more successful firms and better GDP) rather than qualitative (the way the Mittelstand operates) value is to rather miss the point. The German Mittelstand is a complex construction explains Michael Holz of the IfM Bonn: “It isn’t just economic. It also has a political, social and psychological context.” Without doubt, it is powered by much more than the balance sheet.
Entrepreneurial bond
Similarly, Dr. Ulrich Hoppe, Director- General of the German-British Chamber of Industry and Commerce, highlights a cultural difference between the Anglo-Saxon and German models. He points to the existence in the United Kingdom of “serial entrepreneurs,” people who start up companies only to sell them at an opportune moment. “In Germany,” he says, “an entrepreneur is linked to the company, the product and the service they are providing,” keeping hold of it through good times and bad.
And then there is flexibility. German firms hit the headlines in the wake of economic turbulence in 2008/9 when employers were able to persuade their employees to work fewer hours. Supported by the government, short- term work was arranged in a flexible way in order to keep as many employees as possible. Such agreements are
premised on medium- and long-term perspectives, whereby companies undertake investments that will be profitable in the long run and not necessarily the running or next year.
With this in mind, it is no surprise that Mittelstand firms spend two or three times as much on research and development as many international rivals. Or that many companies rely on local banks in sync with the Mittelstand model. Close, long-term relationships mean these banks understand the risks involved when lending money.
A more focused strategy of finding niche markets – combined with closer working relationships with employees, customers and banks – could enhance the efficiency of SMEs abroad. It is difficult, though, to see the market- driven model of the United Kingdom and United States embracing the intricacies of the German Mittelstand.
The Mittelstand model, however, is not without its imperfections. Long-term strategies are fine, but if a firm is in crisis today, it needs to change direction now rather than wait for a better tomorrow. There is also the more pertinent question of family succession, with critics arguing there are signs that young people are not as enthusiastic about taking over the family business as they used to be. In addition, Germany is facing an existential demographic crisis and lacks enough highly trained young people to fill empty positions. For a high-wage model that relies on constant innovation, this represents a serious problem.
Though such concerns need to be addressed, the model’s success is evident. It is based on specific core values and a way of conducting business that is distinct from the profit-driven model. At its heart is the family enterprise, which focuses on building long-term relationships with employees, banks and customers. The model revolves around creating high-quality products in niche markets and ensuring that a company’s name becomes synonymous with first-class customer service. With such foundations, globalization provides the opportunity for Mittelstand firms to flourish.
Undoubtedly, there will be challenges ahead, but with the global demand for German products showing little sign of slowing, the Mittelstand is set to remain the backbone of a strong German economy for a considerable time to come.
German Mittelstand companies usually have fewer than 500 employees and an annual turnover of up to 50 million euros. They are often export- oriented and focused on innovative and high-value manufactured products. Of them, 1,500 are worldwide leaders in niche markets. Different than SMEs, they are typically family- owned and run businesses that are passed along to the next generation.