2023 OCTOBER ISSUE
MADE IN GERMANY
BY THE
“MITTELSTAND”
Written by Andrew Sia
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From the Desk of the Publisher
I came across an article published in FT dated March 21, 2018. It is about the small-and-medium size enterprises in Germany—the famed Mittelstand. I came across the company, Mayer & Cie, whom I was doing business in my earlier days. Mayer & Cie is the world’s leading makers of circular knitting machines and we invested in their machines for our fabric production. I recalled that the company is located in Albstadt in the southern part of Germany. The article wrote about the succession of the son, Benjamin Mayer, from his father who was against the idea, who obviously was in the family business for too long. Prior to that Benjamin went to work for BMW and decided to go back to the family business in 2013.
The company was in a crisis mode as it was hit badly by the global recession in 2009 and lost market share against cheap Chinese rivals.
After aggressive restructuring, Mayer & Cie is back in business again. Benjamin tried to revive the family business. It has a turnover of €100 million. Mayer & Cie was founded by his great-grand father in 1905.
In Germany there is the archetypal Mittelstand company, which means a small-medium size company, normally based in a rural German town, making a piece of equipment few have heard of, but it is crucial for goods worldwide as they are in the niche market. These companies provide the majority of Germany’s economic output. They employ 60% of its workers and make up 99% of its private sector. It is a highest percentage than in any industrialized nation in the world.
Most of these companies were found after the WWII, they were the postwar entrepreneurs who come through the seven decades and many companies are in their third generation. They have been striving very steadily as they are good in what they have been doing and have also become the column in the manufacturing field.
The Mittelstand has formed Germany’s economic backbone and these family-owned companies generate more than a third of corporate revenues and provide more than two out of three jobs in Europe’s largest economy.
The Mittelstand companies are made up by around 3.7 million small and medium-sized family-owned companies who are usually unlisted companies. They employ close to 31 million people and accounted for 35% of the corporate revenues and generate 70% of jobs and provide nine out of ten apprenticeships for young people. But more than four-fifth of these companies earn just up to €1 million in annual revenues and have less that five employees. They have strong balance sheets, little debts and stay clear from the international capital market.
Even as the tech revolution and climate change that added the strain to the industry in recent decades, the German manufacture model continued to make profit. But the recent Moscow’s invasion in Ukraine increased the price of Russian natural gas by five-folds. The Covid-19 disrupted the supply chain and caused the collapse of China market. Both have caused the national anxiety. Like the German population, the business owners and entrepreneurs are aging and the average age of Mittelstand association member is now 55. And there are about 100,000 entrepreneurs due to retire in the next two years yet to find successors. We have to admit that Germany has a very low birthrate since the 1970s will have difficulties in the supply of potential successors.
The German government is still using an outdated business practice in record keeping and maintain to a paper-work-based bureaucracy. In 2017 it vowed by 2022 the most used services would be digitized and yet it is only 22% of those services are online today. The businesses don’t see the transformation yet.
This makes the company doesn’t want to expand in Germany and some are considering relocation.
They have seen the geopolitical events disrupting business with China. In recent years Germany found itself having a vast exposure in Germany as it started during the former chancellor Angela Merkel’s government. The current government is talking about “de-risking” in case there is a war in the Taiwan Strait and by finding alternatives to trade is becoming desperate.
But the German conglomerates like Volkswagen, Mercedes Benz, BMW, Siemens, and BASF, insist that China, as the second-largest economy is too important for them. These German multi-nationals are responsible for a 20% rise in foreign direct investment in China this year.
The government is promoting trade relationship with India and Vietnam and the Mittelstand companies are following and they are also looking for North America as well. The Mittelstand companies have to look beyond where their first generations started in a very different world today.
China is Germany’s largest trading partner, with the volume of bilateral trade reaching a record of €300 billion in 2022. Lastly, we have to say that the geopolitical tension between the Western world and China increases, the German foreign minister warned the companies to be less independent on China knowing that it is the country’s largest trading partner. It was already in 2019 that the EU labelled China as a systemic rival and the idea of de-risking has been the most sensitive approach.
Germany’s largest business association with 40 industry associations and more than 100,000 companies for eight million employees in Germany, said that the de-risking is the strategy struck the right balance between addressing geopolitical risks and express German’s interest in continuing substantial economic relationships and cooperation with China.