Germany's Mittelstand Economy
Published on: Mar 20, 2017

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The Mittelstand Economy of Germany

The Mittelstand Economy (Mittelstand means ‘mid-sized) of Germany represents numerous mid-sized, often family-owned thriving businesses which are regarded as the backbone of the German economy. They are focused on niche markets with high barriers to entry and are heavily dependent on exports. Mittelstand companies have an excellent reputation as being creative, quality-conscious and technology-oriented. The Mittelstand Economy is a successful model for Small and Medium Enterprises (SMEs) worldwide, in realizing their role in the nation’s economic development. Important characteristics of Mittelstand companies are captured in the table below.

Mittelstand Characteristic

Description

Private & Family-owned

Mittelstand companies are usually private and family-owned. There is a strong link between the enterprise`s owner and its management alongwith certain forms of organizational and financing behaviour of leadership and entrepreneurial attitudes (e.g. flexible decision-making, long-term investment planning or loyalty with employees).

Debt-avoidance, Independence and Long-term focus

Mittelstand companies try to avoid debt to focus on growing at a pace they can manage and also to maintain autonomy. Mittelstand managers are more interested in building and preserving the business for the next generation rather than sell off the business to bigger players. Since most Mittelstand companies are not listed, they are not forced to make decisions based on quarterly earnings reports and usually have a very long-term time horizon.

Innovation & Local Manufacturing Base

Mittelstand companies aim to become leaders in a difficult and very specialized market-a market big enough to grow to a couple of billion dollars with staggering profit margins, but too small for global giants like Siemens, GE etc.

Being focused on a premium segment, there is an ethos of constant improvement. Since these companies often focus on sophisticated, expensive products where the barriers to entry are high, there is high level of specialization with specific products, product components and services either for larger companies or for niche markets, and also often customized products made in close interaction with the customer. As a result, they have a large aptitude for innovation. 

Also, having a local manufacturing base in Germany helps in transferring/maintaining know-how locally. Some Mittelstand companies file more patents in a year than countries like Portugal or Greece. 

Flexibility

Management and ownership of the company in many cases lie with one single person or a small group of people. Therefore, decision-making is easier and companies are able to react quickly to changes.

Specialized with some level of diversification

Focusing on a niche market requires Mittelstand companies to maintain a high level of specialization and innovation. However, to hedge risk, some companies also diversify into auxiliary businesses, like other products that can be manufactured with the same technology and resources they employ for their core products. At times, these auxiliary businesses contribute over 10% of their sales. 

Auxiliary Services

Some companies offer a complete package of product and services including maintenance (in some cases, pro-active, remote-controlled maintenance analysis) and training contracts. These services add to the revenues and also the value of the premium brand. 

Global focus

Exports often account for over 80% of a Mittelstand company’s sales and so they have a very structured approach to expand into foreign markets. Manufacturing bases are set up abroad but critical know-how and associated components are still kept in their manufacturing bases in Germany. Also, the companies follow an approach of vigorously defending their IP overseas.

Well-trained and competent Employees

Germany’s strength in technical education and vocational training contributes to long-term apprenticeships at Mittelstand companies. Many of the companies are strategically located near mid-sized or large German cities with very good universities. This leads to local supply of equipment and materials and a pool of highly skilled crafts people and qualified employees.

Family ownership and management help to build long-term relationships with stakeholders, especially with employees: the companies feel responsible for their work staff and in times of recession, try to hold on to them as long as possible.

Harnessing of Networks 

Germany has numerous industrial clusters around the country, some with deep historical roots. Some companies - mostly owing to their family ties - have head offices or production facilities in rural areas. This leads to some of these companies becoming the most important source of jobs for an entire region. 

Also, tightly knit communities are created around companies with soccer clubs and cultural and social gatherings. This leads to a strong ethical basis for communityhood, respect and innovation.

Mitttelstand companies also co-operate and interact closely, creating a kind of ‘crowd’ intelligence or collective wisdom, which helps in creating a strong socioeconomic foundation. 

Government Support

Mittelstand companies face stable political and regulatory framework conditions and barely encounter obstacles in terms of access to credit, time a business has to spend to deal with government regulations, legal means of conflict resolution or enforcement of property rights

Also, there is a highly differentiated system of promotion of SMEs at federal, state and local level with programs at each of these levels. 

Financial Support

Banks provide SME promotion instruments like loan guarantees, share-financing startups and other innovative financing instruments, with a view to strengthen the capital structure of SMEs, improve the equity situation with the help of venture capital and facilitate the consumption of consulting services, especially at the beginning of their existence.

Advocacy & Other Support

Business Associations & Chambers of Commerce advocate the interests of the Mittelstand companies, provide legal support or advisory for investments, cooperate with credit institutions, development banks, job centers, tax consultants and communities, acting as a sort of one-stop- shop for the companies.

The Chambers also provide ‘Innovation Vouchers’ for cost-sharing between the SME and supporting consultancy or research institution, ensuring that SMEs are encouraged to innovate, and also make careful use of the vouchers as part of their overall investment.

 

Learnings from the Mittelstand Model

Metalevel

Value system which encourages entrepreneurship

1. Improve relationship and communication channels between government and private sector.

2. Strengthen the commitment of the political system to shape a supportive environment for companies/SMEs.

Macrolevel

Political system committed to shape a business-friendly environment especially addressing SMEs

1. Improve framework conditions securing a competitive structure of markets and compensation of market failures (access to finance, time a business has to spend to deal with the government etc.)

2. Support key factors like enforcement of property rights, means of conflict solutions 

Mesolevel

Strong basic business support structure like institutions with a clear focus

1. Create SME support institutions with a clear focus (e.g. associations)

2. Strengthen business support structures for SMEs, e.g. microfinance or specific SME programs which address specific challenges

3. Support functioning of decentralized self-help organisations for addressing specific problems of SMEs (often localised)

Microlevel

Long-term, quality-based pattern of economic acting

1. Support a quality-based pattern of competition

2. Strengthen SMEs as suppliers to large companies within a functioning Value Chain

References

1. https://www.ft.com/content/cdd959be-dfbe-11e1-b81c-00144feab49a
2. The German Mittelstand (SME) an Overview - Dc MSME, Govt. of India (April 2012)



About the author

Bibhash Das

Head - Client Acquisition (Smart Cities) at Get Me Experts!

India,New Delhi

I have expertise in sustainable energy for over 6 years and international experience in multiple domains and roles.

Read my other blogs


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