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German Mittelstand Momentum

Originally published in SME WORLD April 2014 Issue. Available Online

Uhlmann, Weidmuller, Neoperl, Inomed, Herrenknecht. Do these names ring any bells? Most people have not heard of them unlike Nike, Reebok or Christian Louboutin. These are German companies which are performing extremely well in providing specialized products or services but unknown to the masses. Professor Dr. Hermann Simon’s book Hidden Champions talk about many such companies which are also known as Mittelstand. These are hidden because the companies are involved in products that help to make products or provide services. Mittelstand focus is largely on building/ manufacturing products that are highly specialized serving niche demand across the globe. These are SMEs in Germany which are huge success stories and driving a resilient economy.

We are aware of the Eurozone crisis of 2008 – 09. It spread to more than 8 countries and had stark effect on the economies. Greece and Spain faced huge unemployment issues. However, through all the crisis Germany remained firm and strong.

German economy is significantly dominated by large number of innovation and research driven companies called Mittelstand. It is their approach to business which has insulated the country’s economy through the Eurozone crisis though there are other factors in play too. 

Usually family – owned and often family managed too with some amount of professional management, these firms exude certain common traits and clarity which are the reason behind their global dominance.

·         Uhlmann’s mission statement is straight. “Our mission is your requirement”. Period. They proudly claim that “What we do, we do properly. What we do promotes our strength”.

·         Herrenknecht, a company specializing in underground technologies states its mission as “Clear value propositions, measurable benefits for the customer and transparency play an important role in this.”

·         Inomed produces nerve protection instruments for precisely targeted patient treatment. Mission - Our work is driven by the very essence of medicine: helping people. This makes for high quality, reliable products – a standard that we strive to safeguard and maintain every single day.

·         Neoperl builds drinking water networks world-wide. They claim they understand the differences – worldwide. Drinking water networks have unique properties from country to country and we develop solutions to take into account local plumbing conditions. To achieve this goal, our engineers and technicians develop new products in close cooperation with our international sales team. This know-how transfer is the basis for our global success.

·         Weidmuller is in existence since 1850. The company shifted focus since inception when it was making press studs and is into industrial connectivity serving 80 countries.

Mittelstand focus on innovation and spend handsomely on R&D to build excellence that is not easily surpassed by competitors. These companies are setup not to make say corrugated cartons but the machinery that helps make the cartons or the high quality adhesives for strength and uniformity. The owners are judicious to not only make world-class products but protect them with patents thus staying ahead of competition and copying. Due to their close contact with customers, Mittelstand listen and innovate to meet customers’ needs building lasting solutions.

The owners of the Mittelstand have very long term view where profit in the short term is not the objective. The companies look beyond the current generation. They aim and strive to take the competition and excellence to a depth where few would want to tread. Though companies delve in lot of products, there are some key sectors where Mittelstand are dominant. That’s how they are strong in exports and global markets.

Ownership pattern helps make decision making faster and these companies give serious importance to their relationship with employees, suppliers and of course the customers. The labor cost is high in Germany but there is flexibility and collective bargaining regarding employment and wages to tide over economic slowdown and challenges. Job loss is minimal and being embedded in the local community, Mittelstand operate in sustainable view of the workers. There is a pride in specialization and continuous improvement, creating centers of excellence.   

If Mittelstand are so successful in Germany then why cannot others emulate them? The answer lies in four reasons:

1.     Finance

Mittelstand are largely financed by owner’s funds and equity. They German view is to be debt-free and spend what they have not borrow endlessly. 

1.     Labor

Dual Program of Training & Education as well as the concept of Apprenticeship which is the highlight of German education system to serve industries provides for highly skilled labor. People work in a company for 3 to 4 days a week learning skills and doing actual fieldwork; remaining 2 days are meant for theoretical learning in classes. This happens for 2 to 3.5 years which makes the workforce employable and effective.

2.     Government

The state has very clear views about Mittelstand. There are dedicated SME policy and research institutions as well as chambers and associations to provide a wide – range of constructive support to help them excel. The laws are strict and contract enforcement is strong. Thus issues of payment delays, fraud etc are checked strongly. The associations like Deutscher Mittelstands Bund (DMB) have 14000 members forming a network for knowledge sharing and business development. Regional and national networks are strong with stress on serious industry academia interaction including sponsored research thus making the best use of the facilities. 
  

3.     Culture

German culture is one of straight-forwardness. People are focused and driven. One would seldom see people involved in personal discussion and chit-chat while working. They have respect for professional and private time. Both are rarely mixed. They will not work slowly intentionally to get overtime etc. Workforce is loyal and dedicated. They are skilled, detail-oriented and educated. Training is ongoing and lifelong. One of the BBC shows on Faber Castell factory in Germany has shown employees cleaning their work place regularly instead of sitting idle without being prompted to do so or served any formal notice or instruction. The highlight of their excellence is highlighted in Uhlmann’s official statement – what we do we do properly. I had the opportunity of observing two German’s at work for a specific project in India. They knew what they had to do and when. They worked unsupervised, completed the task with minimal extra help, did not ask arbitrary questions and in many cases did not respond to friendly chats while at work.

It is not easy to emulate Mittelstand success factors and not within a span of 5 – 10 years atleast. They have a view that traverse generations and is inclusive of the community where they exist. But there definitely is lot of inspiration and learning for company owners, workforce and the external stakeholders like suppliers and government from the German Mittelstand.

We interviewed two prominent German bodies to understand more about the Mittelstand Momentum – Federal Ministry of Economics and Energy (Press Officer for SME Policy, Economic Policy – Mr. Adrian Toschev) and Institute for SME Research (IfM), Bonn (Mr. Michael Holz, German contact person of the European Network for Social and Economic Research (ENSR)).

Interview with German Federal Ministry of Economics and Energy

What makes German Mittelstand so successful? How does Germany define small and medium enterprises? Is it a common definition or banks, government and other statutory bodies define it separately?

In a strictly quantitative sense, SMEs are companies with less than 500 employees and less than 50 Million Euro annual turnover, according to the Institut für Mittelstandsforschung (IfM) Bonn. In a European context, the European Commission defines SMEs as companies with less than 250 employees and less than 50 Million Euro turnover or total assets of less than 43 Million Euro.

Irrespective of the quantitative definitions, in recent years the term “Mittelstand” has become an international trademark for success. Many international experts point to the German Mittelstand as a major driver for economic growth in Germany. Hence, in Germany, “Mittelstand” refers to a specific liberty-oriented mindset. It stands for resilient performance, accepting responsibility, embracing innovation, and sustainable business models. SMEs are an important part of the German Mittelstand. The success of the Mittelstand companies is driven by these virtues of the Mittelstand entrepreneurs. Many of them are owner-managers who take personal economic responsibility for their economic actions. They focus on the long haul, are loyal to their employees and are driven by an intrinsic wish to innovate.

Many companies even remain committed to the spirit of the German Mittelstand even after they have outgrown the traditional definitions of SMEs. The Ministry of Economics and Technology is committed to improve the conditions for entrepreneurial activity and stimulate innovation. (http://bmwi.de/EN/Topics/Economy/small-business-policy.html)

How many laws are applicable to businesses in Germany?

“The legal system in Germany does not distinguish between SMEs and large companies. Laws usually apply to all companies. However, there are certain exemptions for SMEs, e.g. accounting requirements are lower for SMEs. Furthermore, new legislative proposals are always subject to a SME-Test, i.e. the effects of a legislative proposal on SMEs are analyzed before a law is passed.”

What type of funding options is available to average business entities in Germany? How do startups and new businesses fund their venture at inception? Tell us some specifics about bank based funding support to any Mittelstand. Do the banks provide specific seed capital for new companies? How do the financial markets help new or existing companies? What benefits do they offer?

Companies in Germany can rely on well-functioning financial markets. However, entrepreneurs wanting to start a new business often face particular challenges. They might lack equity and sufficient collateral or a credit rating and therefore may find it difficult to obtain a bank loan. Our support includes for example granting long term credits for capital expenditure and working capital with more favorable interest rates than for conventional bank loans.

Many young companies also rely on alternative financing sources, like e.g. venture capital. One instrument to provide you and innovative companies with venture capital is the investment grant for business angels: If private investors provide young and innovative companies with capital for at least three years, they get 20% of their investment reimbursed via the investment grant for business angels. Furthermore, venture capital is provided through different venture capital funds.

How efficient are the German laws and judiciary to intervene in such matters and offer time-bound solutions for industrial disputes or contractual obligations, payment delays?

The German legal system significantly contributes to the success of the German economy. It provides companies a reliable framework in which they can do business. Access to German courts is affordable and the length of the proceedings is comparatively short. There is also an efficient system of injunctive relief in place whenever immediate action is needed. Most importantly, judgments are usually swiftly enforced. All these elements give German companies the tools they need to effectively enforce their contractual rights. Payment delays are therefore less of a problem in Germany than in other countries.

Please share some highlights of the German labor market. How do you manage to maintain the skill-set inventory to keep the human resource demand and supply gap narrow? Is there any positive correlation between the education system and employability in industry? What are the key aspects?

The recent development of the German labor market is very positive: 42.3 million people are gainfully employed – a historical record high. The unemployment rate is very low at 5.2 percent. In particular, youth unemployment (7.8%) is the lowest in the European Union. Moreover, Germany is the only country in the European Union that has managed to significantly decrease unemployment and increase employment since 2007.

For decades we have built and relied on our vocational training system that breeds skilled professionals with needs-oriented qualifications. Our dual vocational system combines practical and classroom training and makes sure that the in-company curriculum and school-based curriculum are coordinated. These training structures offer a way to teach young people not only theoretical knowledge but to additionally allow them to gain work experience.

This education system plays an important part for the German labor market and is recognized as one factor that helps to keep the youth unemployment rate low. Therefore, many countries wish to learn more about the dual vocational training system. Collaborations between Germany and other countries are important to figure out how specific components of this dual system can be applied there. For example: back in 2011, Germany and India signed an agreement on close co-operation in the field of vocational education and training. Based on this agreement, various joint activities have been launched in this area.

But despite this undeniably positive development Germany faces a demographic challenge: Until 2025 the aging of the German workers could create a shortfall of up to 6 million qualified professionals, if no action is taken. We aim to avert this shortage of skilled workers through different strategies: One focus is to tap our domestic potential, particularly women, workers with a migration background and older workers. In addition we wish to attract highly trained professionals from abroad. Not only did we change our immigration policy, we also started a website (www.make-it-in-germany.com) that helps qualified professionals from abroad to find work in Germany.

 What is the role of the central and local governments in promoting and helping small and medium businesses become sustainable?

SME policy is a multi-stakeholder task that can be designed and implemented only through dialogue and cooperation between the various relevant partners. It could be best described as interplay between economic policy, self-governing bodies within business and interest groups. The Federal Ministry of Economics and Technology engages in constant dialogue also with the private sector in order to hear firsthand what the current needs of companies are.

We see our role in helping the Mittelstand companies in providing a level-playing field and making sure the political framework conditions are suitable. We seek to further improve the environment for entrepreneurial activities and support innovation. Our Central Innovation Program for SME (ZIM) aims to sustainably increase the innovative capacity and competitiveness of SMEs: http://www.zim-bmwi.de/zim-overview.

Last but not least we provide assistance to address disadvantages that arise due to small company size (e.g. access to information, access to finance, access to foreign markets).

All of these measures seek to improve the environment for entrepreneurial activities and help the Mittelstand companies – regardless of their size – to tap their full potential for growth and innovation.

Interview with Institute for SME Research (IfM), Bonn

What is the exact meaning/ definition of the German term Mittelstand?

The generic/over-arching term "Mittelstand" can be defined in a quantitative way (based on enterprise size) as SMEs and in a qualitative way (based on ownership and management structure) as family enterprises.

According to the German quantitative SME-definition as developed by IfM Bonn, those enterprises are classified as SMEs which have less than 500 employees and which generate an annual turnover of less than 50 million EUR.

The European Commission sets smaller size limits for the definition of SMEs: employment < 250 employees, annual turnover < 50 million EUR or balance sheet total < 43 million EUR. Based on this general definition, the Commission further distinguishes micro enterprises, small enterprises and medium-sized enterprises.

In contrast to the afore-mentioned (quantitative) definitions, the qualitative definition of family enterprises, does not refer to enterprise size but solely to the ownership and management structure of a company. Here the central criterion is the so-called unity of ownership and management. Hence, a family enterprise is both owned and managed by members of the same family.

Although a considerable overlap exists between the two subgroups of SMEs and family enterprises, there are also marked differences. For example, approx. every third (quantitatively defined) large company is organised as a (qualitatively defined) family enterprise.

The German term "Mittelstand" in its qualitative definition comprises economic and as well as social, psychological and political aspects. The Mittelstand is an expression of the civil society and represents the idea of economic freedom and liberty combined with decentralised, consensus- and stakeholder-oriented decision-making. Ludwig Erhard, former Chancellor and Minister of Economics and one of the masterminds of the German "economic miracle" after the Second World War, once declared that the importance of the Mittelstand cannot be understood by looking at quantitative issues such as tax statistics only. It is rather the specific liberty-oriented mindset and behaviour of the Mittelstand companies, their long-term orientation, their loyalty to their employees, their region and to all their stakeholders that account for their huge importance for the German economy and society.

Of special significance is the willingness of the owner-managers to bear the personal economic responsibility and liability for the economic risks they take. Therefore, economic decision making in family enterprises is strongly linked to assuming the liability for these decisions. This is considerably different from decision making in non-family enterprises (e.g. in stock-market listed corporations), where strategic decisions are taken by managers (i.e. paid employees), who are not personally liable for the outcome of their decisions and who generally have a much shorter time-horizon, as their success (and part of their remuneration) is measured by the development of the enterprise's share price. Hence, in order to understand the motives, values and behavioural determinants of Mittelstand companies in Germany one should primarily focus on the qualitative aspects of the Mittelstand definition.

What is the leadership and management structure that is predominant?

With regard to the ownership structure, one can generally distinguish between family enterprises and management-led enterprises. IfM Bonn classifies firms as family enterprises where up to two natural persons or their family members have at least 50 % ownership of the company and where (at least some of) these individuals are also involved in the management of the company.

According to calculations of IfM Bonn for the year 2006, 95.3% of all German enterprises were organised as family enterprises. They generate 41.1% of the overall turnover and employ 61.2% of all employees (who are subject to social security contributions). Among all enterprises with an annual turnover of up to 1 million EUR, 97.3% are family-owned and -led. The share of family enterprises in the total business population (of the respective size class) steadily decreases with increasing size class. However, even every third large company (33.5%) with an annual turnover of more than 50 million EUR is a family enterprise. This clearly demonstrates that family enterprises with their specific ownership and management structures are able to operate successfully in those larger size dimensions that require a higher stock of manpower, financial capital and tangible assets (buildings, machines, equipment, vehicles etc.) as well as more complex organisational structures with regard to both organisational set-up and workflow management.

How efficient are the German laws and judiciary to intervene in such matters and offer time-bound solutions for industrial disputes or contractual obligations, payment delays?

They are usually very efficient as reliable, transparent and efficient legal framework conditions and processes are considered a fundamental ingredient of a highly developed and specialized industrial economy which is based on market-/contract-based forms of co-operation. Inefficient legal systems would considerably increase the transaction costs in a market economy and thus would place a considerable burden on economic transactions and on overall and company growth.

A particular feature of the German Mittelstand is its long-term orientation and a high degree of stakeholder orientation. Mittelstand companies usually place much importance on maintaining positive and productive relations with their major stakeholders (e.g. employees, customers, suppliers, municipalities, regional institutions (e.g. schools, universities, R&D organizations)). Mittelstand companies consider their employees as one of their key competitive factors and therefore aim at creating a positive enterprise/work culture which allows staff members to identify with their company. Therefore, they are motivated to do their best to support the development of the firm, e.g. by coming up with own suggestions for product and process innovations as well as for organizational innovations. Furthermore, the economic, political and social system of Germany as a whole is characterised by a relatively high degree of consensus orientation and positive cooperation. This also includes constructive relations between the social partners (employer associations and trade unions). For all these reasons, industrial disputes are usually less frequent in Germany than in other countries which are marked by different economic, political and social systems and enterprise cultures.

What skill-sets are commonly required to get employment in a Mittelstand?

Mittelstand companies regard their employees as a key factor for achieving innovation, growth and competitiveness. Therefore, employees should have obtained solid educational achievements (either in the form of dual apprenticeship training or in the form of tertiary education at universities). Based on this they should be able to understand well the production processes of their companies and the needs of the relevant markets and their clients. These qualifications and a positive motivating enterprise/work culture should enable them to develop suggestions for innovations which maintain and further increase the competitiveness of their companies.

In contrast to many industrialized countries and emerging economies, middle management and production units in Germany are mostly staffed with skilled employees who have terminated dual apprenticeship training (a special feature of the German vocational training system) and have often acquired further continuous training degrees.

What is the average employment in these types of companies? What is the male to female ratio? Are all the jobs permanent or contractual in nature?

High-quality vocational training according to commonly agreed national standards is provided in a wide range of training occupations in all economic sectors and their sub-branches. This large spectrum of training occupations can also be regarded as an important factor why the German economy has a broad (sectoral) basis and is competitive in quite a large number of economic sectors and therefore has avoided a more unbalanced concentration on just a few sectors. The fine-tuned combination of company-based practical training on the job and theoretical training in vocational schools and the strong orientation at labour market needs guarantee high transition rates from vocational training into permanent full-time employment and thus ensure that the economy's demand for skilled labour is being met. Moreover, two to three year lasting dual vocational training provides young people with medium- and long-term employability and therefore good job and career prospects. It is also an important preventive measure against youth unemployment.

There is fair amount of research done by the Institute for Employment Research (www.iab.de) on the percentage of the permanent and contractual jobs.

What is the retirement age of people in Germany? Is there any particular law or rule?

In the year 2007, The German Bundestag, the lower house of parliament, has voted to raise the retirement age from 65 to 67. Actually, the German coalition deal has pencilled in a cut in the retirement age from 65 to 63, for those who have put in 45 years of contributions. The overall plan to push the pension age gradually up to 67 remains in place.

Please share some highlights of the German labor market. How do you manage to maintain the skill-set inventory to keep the human resource demand and supply gap narrow?

In view of demographic change and an extended working life (i.e. later retirement age); the need for continuous training measures increases in enterprises. For every single employee, continuous vocational training represents a life time task as learning does not stop after termination of apprenticeship training or tertiary education. Life-long learning is indeed indispensable to adapt to new technological and professional developments as well as to maintain and increase employability. Continuous training does not only benefit the individual employee but also the company itself. Highly-qualified employees who dispose of up to date professional knowledge and company-specific know-how are of key importance to sustain and increase companies' (international) competiveness.

Is there any positive correlation between the education system and employability in industry? What are the key aspects?

The highly skilled labor force is a fundamental strength of the German economy and a major reason for its positive performance on international markets. The German dual apprenticeship system is a key component for the steady supply of skilled employees. Within its 2-3 year duration, it combines theoretical training in (public) vocational schools with company-based practical training which is regulated in nationally defined specific training directives. Every year more than 700,000 young people start vocational training thereof approximately 85% in the form of dual apprenticeship training. More than 60% of all German establishments (local enterprise units) are authorized to recruit and train apprentices. Every year approx. 30% of all establishments actually participate in vocational training.

What is the role of the central and local governments in promoting and helping small and medium businesses become sustainable?

One striking feature of the German economy is the large number of public support programmes and measures offered by governments and policy makers at the Federal-, Land- and even local level. For almost any specific enterprise need there is a support measure. A data bank on the website of the Federal Ministry of Economic Affairs and Technology (BMWi; http://www.foerderdatenbank.de) provides a comprehensive and up-to-date overview of available EU-, Federal and Land-support programmes (including programme guidelines and contact details).  

On the other side, general competition policy is a very important component of economic policies in Germany. It is not directly targeted at SMEs, but the aim is to safeguard fair competition (which, however, is particularly to the benefit of SMEs). Detailed information is available at: http://www.bundeskartellamt.de/wEnglisch/index.php

Michael Holz has studied Economics at the Westfälische-Wilhelms-Universität in Münster and Administrative Sciences and Public Law at the University of Applied Sciences for Public Administration in Münster. Since 1997 he works as research fellow at the Institut für Mittelstandsforschung (IfM) Bonn. His main research fields are Internationalisation, International Comparative SME Research, SME Support Policies and Administrative Burdens for SMEs. Since 2003 he also works as the German contact person of the European Network for Social and Economic Research (ENSR).

Acknowledgment

I am thankful to the following personnel for their help in acquiring permission to use data from the official websites as well as facilitating the electronic interviews.