Understanding the German Mittelstand’s contribution towards making Germany a manufacturing world leader
This article is the result of my efforts towards understanding how Germany’s Mittlestand has played a vital role in making Germany a manufacturing leader — fourth in the world.
For my research, I picked up David B. Audretsch and Erik E. Lehmann’s book The Seven Secrets of Germany: Economic Resilience in an Era of Global Turbulence.
One of the secrets the book talks about is Mittlestand.
The Illusion of the Big
There is a misconception that in a global economy, you’ve got to be big to make it. The American example of big companies that succeeded are Apple, Amazon, eBay, Microsoft, Google, Facebook. The old ones who have stood strong are Coca-Cola, Disney, Walmart, GM, Exxon and others.
In Germany, the large companies include, Volkswagen, Siemens, Deutsche Telekom, Bosch, Allianz, and Deutsche Bank.
But Germany has something else too. It has companies like Herrenknecht and Faber Castle. One is a leading manufacturer of tunnel drills and other is leader is manufacturing pencils. Both are family owned businesses. Just like Herrenknecht and Faber Castle, there are numerous unknown and hidden world market leaders in Germany that stand out for their high-quality products. Most of these companies are small but they compensate for their lack of scale by being great at quality, efficiency, and innovation. Also, while these companies export their products world over, they often operate from a small village from where they began their journey. The secret to their success is to be a world leader in a niche market.
Germany is no different than most companies in developed world where over 95% of enterprises are small or medium sized, in that they have fewer than five hundred employees. But still, there is something profoundly different about German small scale businesses.
While much of the world has embraced big corporations as a strategy for dealing with globalization, Germany has embraced a completely opposite strategy. And it is this strategy for nourishing the small that has played a key role to a vibrant economic performance over several years.
Eight distinct characteristics of the German Mittlestand
There are two ways to understand Mittlestand. First is through the size of the firm. According to the definition in Germany, small and medium enterprise have fewer than five hundred employees and sales of less than 50 million euros. Under this definition, over 99.6 percent of firms and over 60 percent of employees are included.
The second definition conveys a more qualitative and nuanced distinction different from size as a criteria. These criteria is based upon values, strategies, governance, HR practices and finance.
According to the book mentioned above, German Mittlestand invested over 8.7 billion euros in 2013 in building new products and technologies that amounts of 15% of all spending.
German Mittlestand generates not only a remarkable competitive advantage for production and manufacturing, but also stability in employment and growth.
The German Mittlestand differentiates itself in eight distinct characteristics:
- Firm governance
- Product strategy
- Human resources
- Org structure
- Planning time horizons and orientation
- Flexibility in production
- Ability to leverage local resources
- Global scanning for opportunities
- Firm Governance
Only a few Mittlestand companies are publicly held and listed in stock market or governed by a private equity firm. Most are family-owned. These companies resist the urge for fast growth through obtaining finance from external sources and yielding control, decision-making and independence. Hence, German companies have the lowest debt ratios in the world. It’s important to understand what family-owned businesses mean. It doesnt mean just equity ownership but presence in the top management board and its role in the governance.
2. Product Strategy
German Mittelstand is a strategy that focusses on quality, innovation, and technology of the product as a source of competition rather than relying on price competitiveness. All Mittelstand firms focus on market niches and their flexibility in the production process to achieve champion status.
3. Human Resources
SMEs in Germany realize that the apprentice system provides them with access to a resource that they have been able to develop and retain highly skilled and capable human resources. An official survey found that 97 percent felt a sense of community at their company. 97 percent felt that the values of the company coincided with their own values. This sense of harmony between the employees and the Mittlestand is responsible fro employees to be committed to the success of the organization. Thus, part of competitive advantage enjoyed by the German Mittelstand accrues from the superior motivation and work ethic of the employees. Around 85% of all apprentices are working in Mittelstand companies. The apprenticeship system offers the German Mittelstand a special source of competitiveness by providing a source of highly skilled and trained labour. While the mean annual employee turnover is 7.3%, the Mittelstand scores only at 2.7%.!!
4. Organization structure
The org structure emphasizes decentralization and independent decision-making. In family run-businesses, the top is a lot closer to thebottom. The flat decision making structures enable the companies to access know-how and ideas from their workers efficiently. In the typical Mittelstand company, the CEO knows most of the employees personally.
5. Long term thinking
Unlike publicly held companies that obsess about the earnings of the next quarter, German Mittelstand focus long term goals like sustainability, stability, survival, providing value to workers, partners and community it operates in. While securing the company’s long term existence, the companies place great value on lasting relationships with customers, suppliers and other businesses. Therefore, the managers and CEOs in German Mittelstand stay with their companies four times longer than their colleagues in large and public companies.
6. Flexibility
7. Leverage local resources
The German Mittelstand makes virtually every element involved in the supply chain its business. They are involved in the process of product development with their key clients and suppliers and have invested in and fostered those relationships for decades. The companies invest in strong and deep relationships with key suppliers and clients over generations and these relationships are strategic assets nurtured within the company.
8. Global scanning for opportunities
The German Mittelstand have an aggressive and successful orientation towards opportunities beyond their national borders. The export rate of the German Mittelstand is about 20 percent of output.
