Don’t go ape over German success

As Britain considers mobilising her own “mittelstand” of growing mid-sized companies into a collective force, Germany’s original model remains the gold standard for success. But it could be folly to try to copy Germany, writes Will Stirling.


Lord Livingston, the newly appointed Minister for Trade, told a conference on Germany’s mittelstand that mid-sized businesses were vital to the UK’s deficit-reduction plans.

“Their success is dependent on expanding beyond domestic markets so we will be making personal contact with all mid-sized businesses to find out what we can do to help them… compete with the best the rest of the world has to offer,” he says.

Mid-sized businesses, or MSBs, are in vogue. Calling them the “unsung heroes of the economy”, the CBI points out that, despite accounting for only 1.8 per cent of the UK private sector, MSBs last year created 185,000 jobs, a 4.1 per cent increase, compared with 1.9 per cent by large companies and 2.8 per cent by small firms. They now employ 4.7 million people across the UK, 16 per cent of our total workforce, the business organisation says.

Comparisons between Britain and Germany here are irresistible. Germany’s mittelstand – a word coined originally to mean small and medium-sized companies, but which today captures larger companies – is universal. It is a vast clutch of mainly technology and manufacturing-focused, normally family-owned, companies that are successful exporters often with foreign partners or subsidiaries. The Institut für Mittelstandsforschung (IfM) Bonn defines the mittelstand as primarily small and medium-sized enterprises (SMEs), but because German companies are generally bigger than those in the rest of Europe, it covers firms up to 500 employees. Interestingly its turnover cap is €50 million, but many €1-billion companies retain mittelstand characteristics.

The latest available figures, for 2011, show these MSBs generated an annual turnover of approximately €2.13 billion, 36 per cent of the total turnover of German enterprises. Since then the proportion of the mittelstand in the German economy has grown year-on-year, but the rate of growth has slowed.

Some say Britain’s more natural, free-market structure of mid-sized businesses serves the UK well, giving growing firms access to capital markets that are largely closed to the mittelstand

Professor Friederike Welter, president of the IfM Bonn, says: “Several countries, especially in Asia including Malaysia, South Korea and Japan, would like to ‘copy’ the model of the German mittelstand, not least because German industry passed exceptionally well through the global economic crisis in 2008 and the debt crises in the eurozone, unemployment is low, and Germany is successful at running a high-wage industrial sector.”

One reason to revere Germany’s MSBs is their export success. German companies export well, often because they define and then perfect a niche technology with a big global market; consider technical fields, such as laser cutting machines, industrial automation, chainsaws and measuring equipment.

Could Britain develop its own mittelstand? It already has one, according to Lord Digby Jones, but it is less visible and does not organise itself in a formal way like Germany’s. Britain has some great mid-sized companies, covering a mix of ownership structures, family owned, private equity, some of each and publically listed.

Some say Britain’s more natural, free-market structure of MSBs serves the UK well, giving growing firms access to capital markets that are largely closed to the mittelstand.

The zeitgeist of interest in the mittelstand is whether Britain could replicate the success of Germany and achieve growth by exporting more technical products, by adopting a mittelstand-like bloc of MSBs. This is not easy.

One reason is that the mittelstand has traditionally played a big role in the German economy, but also its society. “Mittelstand businesses are well anchored in their region; they ‘belong’ there, contributing to both economic and societal wellbeing,” says Professor Welter. “They provide employment and training possibilities for the youth, and support social initiatives at local level. A considerable share of the German mittelstand is family owned, often with a long tradition, having been created during the early industrialisation period.”

Secondly, German governments have always recognised the important role the mittelstand plays in economic and social development. “In fact, SME support and mittelstand policies can be traced back to the mercantilism of Frederick the Great,” Professor Welter adds. “And those German states that industrialised relatively early have a long tradition of industry and commerce promotion. During the 19th-century Industrial Revolution, regional state governments started building an institutional infrastructure needed to support emerging firms and businesses.

“All this contributes to a somewhat unique regional and cultural context for the mittelstand, which must be taken into account and renders transfer of the model difficult, if not impossible.”

Family ownership has merit in sustaining principles, such as good corporate governance. Balluff, a big mittelstand firm making sensors and headquartered in Neuhausen, prides itself on the care it shows its employees, sponsoring local childcare centres and providing flexible working models to help parents. “The global footprint of Balluff and the possibilities of a family-owned, mid-sized company are highly attractive to skilled people in a part of Germany fiercely competitive for skills,” says managing director Florian Hermle.

But with family ownership comes succession headaches. Inheriting donated shares from one family member to another leads to high inheritance tax. “Complex shareholder agreements are often necessary to secure sound corporate governance and to protect the company against its shareholders,” says Dr Peter Ladwig, a partner at law firm GSK Stockmann + Kollegen and expert in finessing the oft-conflicting aims of family and company priorities.

Several countries would like to transfer the German vocational education system, which combines specific education at vocational schools with a two or three-year training period in small or large companies. This has been not copied, but emulated, in Britain with the university technical college system. Excellent examples of these are the JCB Academy and the Black Country University Technical College, which integrate companies into the curriculum from key stage 3.

So is trying to create a “brittelstand” – British version of the mittelstand – pointless? “One feature of the German environment that governments around the world could implement in order to foster their own small businesses, and eventually allow them to develop into mittelstand, is the ordnungspolitik or framework conditions for entrepreneurs,” says Professor Welter. “Government can facilitate the development of small business through an enabling environment which generally encourages potential entrepreneurs to set up a business.”

Das ist eine klasse idee.