Finding Hidden Gems in the German Mittelstand
On the other side of the ocean, a group of small and medium-sized companies are doing great business despite a downturned economy; IT companies can learn some valuable lessons from them
By Sreedhar Kajeepeta
A decade ago, in all the business and technology journals, there was a lot of talk about Jim Collins’s seminal book on corporate leadership/management, Good to Great. Through those discussions, we all explored the findings of five years of research from Collins and 21 of his associates. One of the key takeaways of the very insightful analysis that permeates the book was the simple yet compelling observation that companies that consciously sought greatness and actually got there (“cumulative stock returns of => 6.9 times the general market growth” was the yardstick used in the research) showed a paradoxical combination of humility and willpower. (See Fig. 1.)
But far from the spotlight of stock markets and publicly traded companies, which were (and had to be) the subjects of the study by Collins and his team, there has been a huge ecosystem of companies in German-speaking Europe (Germany, Switzerland, and Austria, primarily), popularly called the Mittelstand, that bears similar testimony to this particular finding.
Except in this case, they have been doing so not just for 15 years (the criteria applied in Collins’s research) but for centuries—and through two world wars, many economic ups and downs, and socio-political upheavals, such as the division and reunification of Germany.
More recently, the resilience of the Mittelstand has been credited as a key factor in Germany’s bucking the trend of the current global downturn and holding unemployment at 7.5 percent in 2010 (with a downward trend). Meanwhile, unemployment is at 7.9 percent, 9.5 percent, and 9.9 percent, in the UK, U.S., and France, respectively. (See Fig. 2.)
Late in December 2010, Germany published figures showing its unemployment data for the preceding November. It showed a month-over-month decline in the jobless total by 14,000, to a new low of 2.93 million (from 2.95 million in October), which indicates steadily declining unemployment for Germany, while the total number of jobless has been held below 3 million for two years.
So, how do you explain this accomplishment in the midst of other negative indicators, such as the European Union’s (EU’s) 10-percent unemployment rate and the Euro falling 15 percent for the year? Part of the answer is the robustness of German exports, largely as a result of the products and services of the Mittelstand.
Definition: Words vs. Numbers
The term Mittelstand simply refers to small and medium-sized enterprises or businesses (SMEs or SMBs). The word “mittel” is used to refer to anything that is midrange, and the word “stand” has its roots in the medieval model of society, when it was used to refer to the position or rank of an individual or entity.
That definition doesn’t help us much, though, beyond letting us know what SMBs are called in that part of the world. And the translation we are after is really about parsing and processing the best practices of this sustained ecosystem of companies and understanding the power of their positive impact on one of the leading economies of the world.
That’s the same reason the global community of business and economic analysts is turning its attention to the Mittelstand these days — to learn how it is able to play such a key role in helping Germany cope so well with an economic downturn that has the rest of the world in its grip.
The real defining characteristics of the Mittelstand companies are found more strongly in what current statistics say about them and the German economy. Here are some of those highlights:
The Mittelstand forms the backbone of the German economy, which is Europe’s largest, with a group of more than 3 million companies (99.5 percent of all German companies; public companies here are only in the hundreds). Eighty percent of the world’s SMB leaders are based in Germany and Scandinavia.
Mittelstand companies employ 70 percent of Germany’s workforce and contribute to 50 percent of its gross domestic product (GDP, $3.3 trillion).
Despite higher labor costs and a stronger currency, Germany is the world’s second-largest exporter of goods (the first being China).
Mittelstand companies will have created as many as 100,000 jobs by the end of 2010, the German Chamber of Industry and Commerce said in August.
Mittelstand companies recruit 83 percent of all apprentices in Germany by actively participating in the country’s formal and unique apprentice system, which ensures a steady supply of qualified workers.
Though the rather large pool of Mittelstand companies does include small and parochial firms, the most interesting ones are rather big and more outward-looking, reports The Performance Institute, a global leader in human capital and business development. According to the institute, 90 percent of Mittelstand firms operate in business-to-business (B2B) markets and are based in the countryside.
Leveraging a federal short-work plan, called Kuzarbeit, Mittelstand companies saved 500,000 jobs during the tough recession of 2009.
Germany is planning to achieve a balanced budget by 2016.
List of Companies
The list of Mittelstand companies doesn’t include such global brand names as Allianz, Volkswagen, Bayerische Moteren Werke (BMW), Siemens AG, Swissair (which is now called just “Swiss”), or Austrian Airlines. Instead, the roster contains names of anonymous niche companies that, while making unique things happen around the world, prefer to remain quietly backstage as unsung heroes. Below are a few examples of such contributions.
The rescue last year of 33 trapped miners in Chile that united the whole world in celebration was aided by precision tools that are critical for holding equipment vertical in such deep-drilling efforts. Micon, a Mittelstand company in the town of Nienhagen, designs and builds this equipment.
“We’re engineers at heart. By focusing on technology, we’ve turned a small and highly specialized company into a world leader in our niche,” says Micon founder Rainer Juergens in a Businessweek article from last fall.1
Most high-end restaurants in the U.S. and Europe use a professional-grade oven (called the “Combi Oven”) from Rational. By going after specialty markets, Mittelstand companies avoid competition with global giants. The Performance Institute has remarked that Mittelstand companies tend to adhere to the slogan “Don’t dance where the elephants play.”2
Lunor supplies high-end eyeglasses to the whole world. Businessweek notes that South Korea is the company’s fastest-growing market, and that Lunor’s customers include such celebrities as Steve Jobs, Tom Cruise, and Madonna.
What Skeptics and Enthusiasts Say
Through the decades, much has been studied and said about the Mittelstand by detractors and supporters alike. But of late, based on how well they have performed during the last two years of gloom and doom elsewhere, the voice of their supporters and advocates has been gaining an upper hand. Here are the some of the key arguments for and against the Mittelstand culture.
The Mittelstand companies couldn’t handle the credit-crunch days and the slow bureaucracy of official agencies (due to the impact on cash flow from bills not getting paid on time) during the 1936-39 German recession. Many of them went bankrupt. They took a similar hit between 2002 and 2003 when, according to Financial Times, around 45,000 companies went under.3
They tend to be run by families and lack formal succession plans.
They are often hampered by high labor costs.
Basel II (and now Basel III) capital adequacy requirements will considerably increase the cost of bank loans to risky Mittelstand borrowers.
They can eventually become victims of globalization when emerging markets get up to speed on fulfilling their own needs for high-quality machine tools, internally.
Their secret to survival is continuous innovation, maintaining an optimal size, and a commitment to meritocracy.
Statistically, SMBs in the U.S. do employ a similar percentage (albeit a little lower, at 50 percent) of workforce, but the Mittelstand’s differentiator is that they focus on employment and growth by first focusing on products/solutions.
They pick niche areas in which to excel — machine tools, auto parts, chemicals, and electrical equipment.
They go after their passions, not after glamour.
They think long-term and avoid catastrophic risks. “The continuity of Germany’s Mittelstand is a pillar of society that has helped avoid a surge of unemployment during the latest crisis,” says Hans Jäckel, an economist at DZ Bank in Frankfurt, in Businessweek. “The labor market has been lucky because of the Mittelstand’s long-term focus.”4
Answering the call to rebuild the country after the destruction caused by World War II, the Mittelstand rebounded to take the lead in postwar industrialization; it appears that the same spirit has been on display now for the last couple of years in navigating the current economic crisis.
Mittelstand companies are free from the tyranny of the bottom-line focus of publicly traded firms.
If the way in which the Mittelstand took advantage of growth prospects in the EU in the last seven to eight years (of what has essentially been globalization on a small scale) is any indication, the Mittelstand are poised to benefit from, not be challenged by, broader globalization.
Mittelstand companies have been opening subsidiaries in other countries — as many as 24 other countries, in some cases. Koenig & Bauer, a manufacturer of printing presses, gets 95 percent of its revenue from outside Germany.
Mittelstand companies have been expanding into services markets. They have entered sophisticated niches and are relentless about customer service.
How Technology Helps the Mittelstand
Connectivity and consumable IT — being connected with worldwide markets through social networking and using IT as and when needed in a pay-as-you-go style — are perhaps the strongest of the Mittelstand’s technology needs. These technologies help Mittelstand companies to be agile and yet highly visible without draining their limited resources. The timing for both technologies couldn’t be better, given the state of the art of the Internet, mobility and broadband services, and cloud computing.
Connectivity projects for the Mittelstand benefit from the support of federal agencies, which have created an export infrastructure that small firms can use to connect with their big customers and with customs/export control agencies. The result of these government-sponsored projects is that all German companies, not just the large enterprises, receive the benefits of ease of use, faster response times, and electronic data transfer to customs.
Even better, this infrastructure doesn’t assume the use of specific, proprietary, onsite enterprise resource planning (ERP) systems. It works well with the newer software-as-a-service (SaaS) ERP/customer relationship management (CRM) applications; it also works well with established for-license ERP products. Companies can use it to get quick answers to questions or to check for missing pieces of information through workflow and business process management (BPM) features. These features benefit those Mittelstand companies that only occasionally apply for export permissions and thus lack an experienced and well-trained department to handle these processes.
From a consumable IT perspective, an entire array of pay-as-you-go cloud offerings for collaboration, ERP, CRM, and BPM (including small situational custom applications) would be ideal for this market. The fact that their use of IT is limited and is very tactical makes them a perfect fit for this market.
How to Benefit from the Mittelstand
Non-Mittelstand IT providers must target offerings toward multitenancy if they want to benefit from being suppliers to the Mittelstand companies. (Multitenancy brings the average prices of cloud computing down to a level that is attractive for the Mittelstand.) SAP and IBM already target multitenancy.
Cloud offerings from Google, Microsoft, VMware, and Salesforce.com (such as Gmail/Google Apps, Office 365/Azure, SpringSource, and Force.com) are great examples of multitenant solutions that can help Mittelstand-like companies — i.e., SMBs with a max of a couple hundred people selling a product or service that has global appeal—stay focused on their core business competencies and not be bogged down by technology as they scale up their market reach.
IT providers must also attend/organize Mittelstand trade fairs (such as those in Germany and similar forums for SMBs in the U.S. — for example, Microsoft Dynamics’ Small Business Centre) and show the more nimble, elastic, and easier-to-do-business-with side of their personality if they wish to appeal to such clients. The best way to benefit from the Mittelstand is to invest in Chris Anderson’s famous “long tail” model of doing business5 — meaning smaller unit prices and exponentially larger volumes of sales. (See Fig. 3.)
Jim Collins’s “good-to-great” companies and the Mittelstand leaders seem to have a lot in common. Whether they operate under the harsh glare of quarterly public scrutiny, or as quiet, anonymous niche firms, they seem to share the same values.
By continuing to hold on to those core values, while learning from each other’s best practices, they can attain their goals of scalability and efficiency. Public companies, for instance, can learn to invest in innovation like Mittelstand companies for the long haul, even though doing so might not look good on the scorecard for the given quarter.
Mittelstand-like companies can learn to seek global markets for one niche and from one geographic area as actively as the public companies, replicating the Mittelstand model in many more markets and niches.
Sreedhar Kajeepeta is global VP and CTO of technology consulting for GBS at CSC. CSC’s consulting groups across North/South Americas, Europe, Asia, and Australia specialize in cloud computing, SOA, enterprise transformation, data warehousing and business intelligence/analytics, and application consulting. Sreedhar can be reached at email@example.com.
Oct2011, Software Magazine