The German Mittelstand has weathered the European economic storm and remains a thriving, connected powerhouse that is fuelling Germany’s economy. What are the lessons here about survival for the UK mid-market?
The international investment community may be busy proposing solutions to reverse Germany’s drop in output but the response from Economics Minister Sigmar Gabriel is clear: “We’re not going to help the German economy with some flashes in the pan and more debt.”
His statement reveals two fundamental truths about the German attitude to business: an embrace of the long-term combined with an abhorrence of borrowing, or Schulden, which means debt in German. This attitude is also prevalent in Germany’s legendary Mittelstand, 92% of which is made up of private companies, mostly family-owned, regionally based and offering high-quality manufacturing.
Lesson 1: Embrace the long term
“Its starts with the shareholders; the shareholders have a long-term perspective when investing into family-managed businesses… ” says Professor Klaus-Günter Klein, partner at Grant Thornton Germany. “Having a good long-term perspective both in customer relationships and on a shareholder basis is good mixture to be successful on the market.”
Lesson 2: Build loyalty and local relationships
Family businesses that are rooted in one place with a strong local connection to employees are central to the German economy and there is an engaged attitude to relationships. Bernd Kaimer is the CEO of Sanha – a medium-sized company in Essen that manufactures plumbing components. He says: “I’m trying to create a special link with customers and suppliers, to have them loyal at my side in good times, as well as in bad times. I’m trying to teach them that success is always a collective success. We are all sitting in one boat and we have to row in the same direction.”
Lesson 3: Be open-minded in tough times
“We have to admit that there may be moments when pushing things forward and the overcoming of obstacles are tougher than in other occasions,” says Dirk Valbert, CFO of German unified communications manufacturer Swyx. “Right then it’s our capacity and willingness to identify mistakes as opportunities for further and sustainable development that distinguishes us.”
Lesson 4: Develop a shared sense of purpose
The consequence of building good relationships has been profound, particularly when engaging with unions. During the global downturn unemployment rose sharply in Europe and the US, but in Germany it remained stable. Flexibility was embraced by employees, who were willing to work fewer hours because they were ‘rowing in the same boat’ as their employers.
“The workforce has a long-lasting relationship with their company and that makes it much easier to overcome difficulties if there is a problem,” says Klein. “People are more willing to assist and help the company when it runs into difficulties.”
Lesson 5: Act now on demographic change
Germany is approaching some of its long-term challenges in a characteristically resolute manner. “The demographic change in the workforce has had a very big impact,” says Klein. “People are postponing their retirement and many companies are starting their own initiatives to offer young people internships very early to ensure that they can recruit enough people.”
Lesson 6: Retain talent through on-going training
Apprenticeships are seen in an entirely positive light in Germany; a step into partnership with a respected local company with the prospect of advancement. One of the important pillars of the relationship between employees and employer is the understanding that employees will receive training throughout their career.
The consequence is a dependable, quality-driven service, says Klein, something that is particularly evident in the auto industry. “They can provide a long-term prospect for the car-maker, providing a good supply chain they can rely on.”
Lesson 7: Invest, invent and capitalise on your intellectual property
Mittelstand companies are among the most innovative in Europe, with 54% launching an innovative product or process into the market between 2008 and 2010. German SMEs also try to hold onto their intellectual property. Their low debt and good local bank relationship enables them to invest in innovation and retain their inventions, with the end result that many of the companies are ‘hidden champions’ – specialists with a global lead in their particular field. But warns Valbert, whose company launched 15 years ago with an advanced IP-based telephony product, it’s good to be ahead of the market but “be careful not to be too far ahead – otherwise your investments will not be paid off.”
Lesson 8: Seize opportunities for international expansion
Once a Mittelstand company has developed a specialist niche, it often unlocks further potential by seeking vigorous international expansion. According to Agents of growth research by Grant Thornton, mid-sized peers in the UK are often slow to seize opportunities for export and overseas expansion, and this reluctance is something MSBs recently raised at a round table with UKTI minister, Lord Livingston.
Lesson 9: Establish a community and wider sense of identity
The Mittelstand is a model that other countries often seek to emulate but not so easy to adopt as its development is rooted in German history, in particular its decentralised nature. Up until the formation of the German Empire in 1871, Germany was still a series of independent political states and that legacy remains today with the Mittelstand’s regional spread and focus. There is the potential to develop these regional identities and relationships within the UK, especially with talk of devolving powers to our big cities.
The Mittelstand also has a clear sense of itself and its place in the German economy. In the UK, MSBs are an almost forgotten segment and there is little understanding of why they are crucial to the UK economy.
Lesson 10: Make it fun!
“One very important thing is trying to teach (customers and suppliers) that we want to have fun in what we are doing – and not doing it just for the sake of it,” says Kaimer.
“Doing new things or exploring new markets comes with some change management,” says Valbert, “so you have to make sure that your staff are able to follow and everybody feels as if we are going in the right direction and are a part of something special. We have a great culture at Swyx. A couple of weeks ago we had a canoe trip with the whole company, a nice BBQ and a couple of beers together talking non-business stuff and I think that is as important as the business aspects.”
So, perhaps things aren’t quite as bad in Germany, after all. The economic figures that have caused the fright were affected by factory closures during the summer months. The weaker euro may now also help exports, while underlying unemployment figures, at 4.9%, are still low.
George Osborne has warned that the eurozone is in danger of “slipping back into crisis”, but for the resilient Mittelstand, perhaps it is just business as usual.
Video: Rama Knight