Another Look at the Mittelstand

 

A recent article in The Economist [1] discusses the growing international interest in the Mittelstand manufacturing firms. An earlier post to this blog describes the Mittelstand: what it is, how it works and why it matters. That post, “Focus and the Mittelstand”, is reproduced below. Additional commentary, sparked by the Economist article, concludes this post.


Jera Logo white with caption centeredFocus and the Mittelstand

From: 30 May 2013

Surviving, Striving and Thriving

The 21st century has been tough for U.S. manufacturers. During the 2000s, the U.S. lost 5.7 million manufacturing jobs — roughly one job in three –, a rate of decline that exceeds even that experienced during the Great Depression [2]. The sharp decline in manufacturing jobs began well before the recent recession, although the recession did accelerate it. While there has been some mild recovery over the last year or so, the underlying downward trend continues.

For many smaller manufacturers, simply surviving remains tough. Changing focus from surviving in the present to striving for improvement is tougher still. And actually taking steps to thrive in perpetuity may seem quite a challenge. Nevertheless, tough though it may be, there is really no alternative. The global competitive environment isn’t going to get easier.

It is useful to study what others are doing in today’s global economic situation. In fact, smaller manufacturers in some developed, high wage countries are doing quite well. Consider the Mittelstand:

The Mittelstand

The term Mittelstand refers to small and mid-sized business enterprises (SMEs) in Germany, Austria and Switzerland. The size of these SMEs quite closely corresponds to “small business” as defined by the Small Business Administration in the U.S. The Mittelstand, especially the roughly 25% of German SMEs that are engaged in manufacturing, have earned much of the credit for Germany’s economic success in recent decades and today, Europe’s present economic woes notwithstanding.

Here are some characteristics of Mittelstand firms: [3]

>> Almost all Mittelstand manufacturing firms are family owned (~95%) and most (>80%) are managed by their owners.

>> Most Mittelstand manufacturers are conservatively financed through equity (including retained earnings) and bank loans.

>> Due in large measure to stable management and strong balance sheet financing, Mittelstand manufacturers take a long-term approach to business.

>> Most Mittelstand manufacturers sell to other businesses, rather than to consumers. Customer relationships are deep and durable.

>> Many Mittelstand manufacturers pursue a strategy of extreme focus. [4] Mittelstand manufacturers succeed by dominating niche markets, often on a global scale. In 2012, the German Mittelstand featured 1,307 “hidden champions” — global market leaders. Austria’s Mittelstand added 128 and Switzerland 110. By comparison, the U.S. had 366.

>> Mittelstand manufacturers are export oriented. They grow by increasing international reach, rather than scope of product offerings.

>> Mittelstand manufacturers actively innovate. About 54% of German Mittelstand companies brought a product or process innovation to market during the period 2008 – 2010, while to European Union average was 34%. German Mittelstand R&D spending increased by 71% between 2004 and 2010, compared to +19% for large German firms.

>> Many Mittelstand manufacturers produce sophisticated products, notably machine tools and electrical equipment. The skills required for such work are developed through apprenticeship training. In 2010, more than 1.35 million of 1.62 million German trainees (about 80%) received their training at Mittelstand firms. Due to the success of Germany’s Mittelstand firms and the availability of apprenticeship training that leads to high paying careers, Germany (along with Austria and Switzerland) have low youth unemployment rates. Their current unemployment rate for job seekers under 25 is under 8%, while youth unemployment in Spain is over 50%, Portugal almost 40% and Greece a crushing 64% (February 2013).

For American Firms

The Mittelstand isn’t some sort of centralized organization with rules and requirements. Instead, it is a generalization of the individual choices and behaviors of thousands of independent firms. Those choices and behaviors are rooted in and nurtured by a regional culture. There are many SMEs in countries outside of Germany, Austria and Switzerland that act and behave much as Mittelstand firms do.

The Mittelstand approach works — so learn from it and use what you find useful!


More on the Mittelstand (added 24 July 2014)

Consider these figures:

Capture - GDP Comparisons

>> Regardless of what “everybody” knows, manufacturing can prosper in developed, high wage countries. Switzerland, for example, has a higher per capita GDP than the U.S. At the same time, a substantially higher percentage of Switzerland’s GDP comes from the manufacturing sector.

>> Austria, Germany and Switzerland all export substantially more, as a percentage to GDP, than does the U.S. Manufactured goods account for a big portion of those exports. Strong export figures contend that manufactured goods from Mittelstand countries are globally competitive. China and South Korea are both studying the Mittelstand for ideas on how to continue to succeed when as their labor costs increase.

Chuck - Austrian AlpsThoughtful comments and experience reports are always appreciated.

…  Chuck Harrington (Chuck@JeraSustainableDevelopment.com)

P.S: Contact me when your organization is ready to pursue Sustainability … CH

This blog and website (www.JeraSustainableDevelopment.com) are intended as a resource for smaller manufacturers in the pursuit of Sustainability. While editorial focus is on smaller manufacturers, all interested readers are welcome. New blog posts are published on Wednesday evenings.


[1] Schumpeter’s column, “German Lessons”, The Economist, July 12th – July 18th 2014 issue.

[2]  Atkinson, Robert et al, Worse Than the Great Depression: What the Experts are Missing About American Manufacturing Decline, Information Technology & Innovation Foundation (www.itif.org), Washington D.C., March 2012.

[3]  The statistical information presented here is primarily from German Mittelstand: Engine of the German Economy, a set of presentation slides by the German Federal Ministry of Economics and Technology. Available for free download at: http://www.bmwi.de/English/Redaktion/Pdf/factbook-german-mittelstand,property=pdf,bereich=bmwi2012,sprache=en,rwb=true.pdf

[4] “Extreme focus” is from Karan Girotra and Serguei Netessine, Extreme Focus and the Success of Germany’s Mittelstand, Harvard Business Review Blog Network, 13 February 2013. Available at: http://blogs.hbr.org/cs/2013/02/good_old_focused_strategy.html