Handelsblatt Explains

What Makes Germany's Mittelstand Special

Wuerth factory PR
Just another "medium-sized" firm. Source: Würth PR
  • Why it matters

    Why it matters

    Many companies in Germany’s vaunted “Mittelstand” layer of small- and mid-sized businesses are actually larger businesses, but claim membership in the traditional entrepreneurial culture.

  • Facts

    Facts

    • There is no uniform definition of Mittelstand, but the owner also being the manager is a vital criterion for many experts.
    • More than 95 percent of German firms are part of the Mittelstand.
    • The vast majority are based in rural areas, despite being global exporters.
  • Audio

    Audio

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“Big business” is a loaded term in Germany. The more sought-after corporate moniker is being “middling,” as in: belonging to the nation’s vast collection of “Mittlestand” firms. The word has an aura about it, as though it were a synonym for Made in Germany. Usually family-owned and often huge, these businesses include many of Germany’s most profitable and successful exporters. Depending on the definition, between 95 percent and 99 percent of German firms, or 3.7 million businesses, belong to the Mittelstand, and almost 60 percent of all employees work at one of these companies.

What technically makes a firm a member of the Mittelstand is a matter of debate. The official definition of small- and mid-sized enterprises used by the European Commission includes only companies with fewer than 250 employees and sales of less than €50 million a year. But the German Institute for Mittelstand Research, or IfM, defines the term to apply to firms with up to 500 employees. “Mittelstand in Germany has always been bigger than SMEs in other countries,” said Eva May-Strobl, a senior researcher at the IfM in Bonn. However, even some firms with thousands of employees and millions of euros in revenue still call themselves Mittelstand.

“The German Mittelstand doesn’t look at quarterly figures, but thinks in generations.”

Fabian Wehnert, German Industry Association

Typical Mittelstand firms have been in a family for generations, and are run by one or more family members according to conservative business philosophies, with a focus on quality over quantity. Moreover, the owners usually bear the full risk, unlike shareholders of companies that are listed on the stockmarket or funded by venture capital. Mittelstand owners “put all their private property on the line for the firms,” said Eberhard Vogt, spokesman for the German Association for Small and Medium-Sized Businesses (BVMW) and editor in chief of Mittelstand magazine. “If a Mittelstand entrepreneur makes a wrong decision, things can get dire.”

“Mittelstand isn’t a structure, it’s a culture,” added Fabian Wehnert, head of the department for SME and family businesses at the German industry association BDI. Outwardly, large firms like car-rental service Sixt, which employs thousands of people, may not look middling. But it considers itself Mittelstand because it is owner-managed and shares a Mittelstand management approach.

This philosophy entails more than just owning the assets and running the show. Experts stress a long-term outlook, innovative attitude, export orientation, strong regional ties and social involvement as key characteristics of Mittelstand firms. “The German Mittelstand doesn’t look at quarterly figures, but thinks in generations,” said Mr. Wehnert. The goal is to build a stable business that will grow over time and can be handed down to the founder’s children. This is in stark contrast to the U.S. start-up scene, for example, where the goal for entrepreneurs is often to sell their firm to a bigger corporation for a handsome sum after just a few years.

That’s why the owner family usually shapes the culture of any given Mittelstand firm. Lambertz, for example, was founded in the city of Aachen close to the Dutch border more than 300 years ago and is still led by an heir of the founder, Hermann Bühlbecker. Lambertz makes Aachener Printen, a kind of gingerbread, as well as Stollen bread and chocolates. Mr. Bühlbecker took over the family business in 1978 from his mother, aunt and uncle, when the firm was losing money and faced bankruptcy. He turned things around, and in 2014, Lambertz sold sweets worth €585 million per year.

That’s mostly thanks to Mr. Bühlbecker’s personal commitment, company spokeswoman Elena Kleiber told Handelsblatt Global Edition. “At trade fairs, he’s always the first one there in the morning, already working before the rest even arrives,” she said, adding, “Even if he attends charity events until late at night, he’s at the office before 9 a.m. every morning.” Mr. Bühlbecker, she said, is a very demanding, but also caring employer.

Mittelstand in Germany-01

The German Mittelstand is also credited with driving the country’s innovation, with more than half a million patents registered with the European Patent Office. “These companies keep Germany competitive,” Mr. Wehnert of the BDI told Handelsblatt Global Edition. “If you take a car, for example, that is made up of many small components, then many of these parts will have been built and refined by the Mittelstand,” he said. Mittelstand firms tend to specialize in niches where they are market leaders.

Of the world’s estimated 2,700 “hidden champions” — i.e., relatively unknown global leaders in a segment — about 1,300 are German Mittelstand firms, according to the BVMW. One of these hidden champions is EMKA headquartered in Velbert, close to Düsseldorf in North Rhine-Westphalia. The company makes locks, latches and hinges and turns over €237 million per year, making it the global market leader in that field. Like EMKA, a large proportion of Mittelstand businesses are strong exporters. About 350,000 companies in Germany export their goods, according to the BVMW, and of those 98 percent are Mittelstand firms, selling machine components, tools, auto parts or pharmaceutical products abroad.

Yet, despite their international success, the companies tend to be found in rural areas rather than metropolises like Berlin or Hamburg, and tend to keep their factories in Germany. “These firms are deeply rooted in their hometowns,” said Mr. Wehnert of the BDI. “They stay there and invest there even when the firms have grown to be international,” he added.

mittelstand2
Screws, latches and sweets – the German Mittelstand makes them all. Source: PR

Take the Mittelstand firm Würth, for example, which is famous for its screws. Located in Künzelsau, a tiny town in Baden-Württemberg in southern Germany, it never considered leaving its home, even when it recently decided to build new offices in the state capital Stuttgart. “Künzelsau is where home is,” said Stefanie Koch, a spokeswoman. Würth has not only spent €25 million on new office buildings but also invested in the roads and highways in the region, she added.

In typical Mittelstand fashion, Würth, which employs almost 68,000 people worldwide, more than 21,000 of them in Germany, supports sports and the arts, donating to local soccer clubs and housing museums in its office buildings, which are free of charge for anyone. “The world of German sports clubs and cultural associations as we know it today wouldn’t exist without the Mittelstand,” said Mr. Vogt of the BVMW.

“The Mittelstand is very, very important for Germany,” Adrian Toschev, a spokesperson for the economics ministry told Handelsblatt Global Edition. For example, the Mittelstand maintains and runs Germany’s vaunted dual-education system, in which apprentices spend three years training on the job while also going to school at least once a week. According to BVMW data, Mittelstand companies invest between €30 billion and €40 billion per year in training their employees and apprentices. “That led to our youth unemployment being the lowest in the European Union,” Mr. Toschev said. Indeed, only 7.7 percent of German youths were without a job in 2014, compared to a 22 percent average across the E.U.

“The German Mittelstand has really become something of a legend by now.”

Eva May-Strobl, German Institute for Mittelstand Research (IfM)

With its long-term outlook, the Mittelstand also stabilizes the economy through business cycles. Many Germans credit the Mittelstand with helping Germany weather the financial crisis of 2008/2009 comparatively well. “Mittelstand entrepreneurs injected their own capital into their companies throughout the crisis,” Mr. Wehnert of the BDI said. That way, many even emerged stronger from the turmoil, because they were able to retain their skilled workers and didn’t have to start looking for new talent once things looked better.

So far, so admirable. Yet Ms. May-Strobl of the IfM has one complaint: “It’s really hard to put the concept into statistics,” she said, as many of the qualities are not measurable. No wonder it’s been so hard for other countries to copy the success story of the German Mittelstand. Said Ms. May-Strobl: “The German Mittelstand has really become something of a legend by now.”

 

Franziska Roscher is an editor with Handelsblatt Global Edition in Berlin. To contact the author: roscher@handelsblatt.com

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