Germany’s small and medium-sized firms are subject to hero worship. Proud, nimble, and primarily family-owned, these so-called Mittelstand companies are said to employ more people, in total, than their larger rivals listed on stock exchanges. The Mittelstand supposedly invests more, enjoys greater productivity and for as long as anyone can remember, forms the backbone of the German economy.
But how much of their reputation is fact? Difficult to say, since most of these firms don’t publish annual reports, unlike Germany’s 550 publicly-listed companies. However, a new survey obtained by Handelsblatt affords a rare insight into the performance of mid-sized firms. The data was collected by the German Savings Bank Association, or DSGV, from 300,000 of its commercial customers.
The results show the Mittelstand clearly punches above its weight. “The Mittelstand is tougher than ever,” said Georg Fahrenschon, DSGV president. “Their expansion is an expression of strength and reliability, not anxiety.”
The companies in the survey are unlisted, employing fewer than 5,000 people and generating revenues under €750 million (roughly $900 million). Thanks to clever management and the fruits of Germany’s robust economy, their balance sheets are healthier than they’ve been in a long time. In 2016, these pint-sized powerhouses retained 75 percent of net profits, allowing them to be re-invested in the company. In previous years, that rate was even higher.
Likewise, equity ratios – the proportion of owner capital, such as direct investments or capital provided by shareholders, used to fund a company’s assets – are around 30 percent, an incredibly high level for small, private companies. Just 15 years ago, the average was a mere 3 to 4 percent. By comparison, 50 percent of listed companies’ net profit goes towards paying stockholders’ dividends, and that figure is increasing.
Listed companies tend to invest more money: usually twice as much as the Mittelstand, and sometimes three times as much. But on the whole, the business of medium-sized companies is growing much faster. Their sales have risen 33 percent since 2010, compared with just 25 percent for big multinationals in the same period. In other words, Mittelstand companies produce more with less – the very definition of efficiency.
“Many medium-sized companies are highly specialized. Although they produce a small number of products, they are often world leaders,” said Jan-Alexander Huber, a finance expert at consultants Bain & Co. Many such firms occupy a lucrative niche and take advantage of booming markets around the globe, particularly Asia.
Take Igus, the world’s largest manufacturer of “energy chains” or cable-management systems. Based in Cologne, the company – which was started in a garage in 1964 – had revenues of around €600 million last year, up an average of 12 percent a year since 2004.
“Mid-sized firms invest in a more focused and long-term fashion than listed companies.”
At Beumer, a fast-growing logistics and conveyor-belt firm in the western state of North-Rhine Westphalia, sales have risen 15 percent a year since 2002. With more than 85 percent of its business located overseas, Beumer, with annual sales of €750 million, has subsidiaries on every continent.
Igus and Beumer are fine examples of mid-sized companies integrating into supply chains, large and small, across all sectors of the economy. Because of tighter specialization and close relationships with customers, these firms often make better investment decisions than larger, lumbering rivals. Market opportunities can be used more effectively, and risks minimized.
Take Meindl, a German manufacturer of high-end hiking shoes. Based in a tiny village in the Bavarian Alps, the company built a huge state-of-the-art logistics center deep in the mountains. This was not an overnight decision, but one made with its long-term prospects in mind, in order to link the company’s future to its traditional location, and to its past.
“Mid-sized firms invest in a more focused and long-term fashion, because their more specialized business models can be projected further into the future,” says Andreas Strobl, a private equity analyst at Berenberg Bank. Publicly-listed firms tend to be spread across sectors and look to takeovers to grow, although that’s no guarantee of success. More than half of all mergers and acquisitions end up destroying, rather than creating, value.
In 2006-7, industrial conglomerate ThyssenKrupp built steel works in Brazil and the United States in the hopes of producing more cheaply than in Germany. They could have remembered the old saying that “cheap is expensive.” Against its earlier estimates, construction costs ballooned. Earlier this year ThyssenKrupp ended up selling its North American facilities at a considerable loss.
Even blockbuster companies have their share of investment horror stories. In 2005, Adidas spent a whopping €3 billion to acquire rival sporting goods maker Reebok, which continues to limp from one revamp to the next. A prudent Mittelstand firm would have moved more cautiously.
Doubtful investments are often financed through corporate bond markets, the place large-cap companies go to fill their kitties. By contrast, smaller firms tend to depend on bank loans, giving financial institutions more control over rent and repayment schedules than bondholders can wield over corporate clients. “That’s another reason why mid-sized companies have to think more closely about investment decisions,” said Mr. Kral, the DSGV expert. “Patience and deliberation are not a bad thing.”
Ulf Sommer reports for Handelsblatt on companies and financial markets. Brían Hanrahan and Jeremy Gray adapted this story for Handelsblatt Global. To contact the author: email@example.com