Germany’s Mittelstand: Beating China

Germany’s Mittelstand: Beating China

German family firms are outdoing their Chinese rivals. Can they keep it up?

The Economist
Jul 30th 2011 | BERLIN | from the print edition


ELECTRIC pumps are like burgers, reckons Christian Haag. They should be made at the last possible moment and delivered to the client precisely as he specified. Mr Haag runs a unit of KSB, a German firm that produces pumps and the motors that power them. His business is typical of the Mittelstand (Germany’s legion of small and medium-sized family firms). Its products are well-engineered and built to last. They are not cheap, yet they are holding their own against Chinese competition.

Speed helps. By stripping the manufacturing process to its leanest, ensuring that no component is hanging around for long, Mr Haag reckons he can deliver his products at least a month quicker than any Chinese rival. Quality helps, too. In an uncertain world, many clients opt for German reliability. Mittelstand firms have refined their supply chains, factories and distribution networks to reach far-flung markets more quickly.

Mittelstand companies have long relied on the enviable network they already have at home. German universities work hand in glove with researchers at local firms. Suppliers cluster round big manufacturers. Owner-managers rub shoulders with workers. The Mittelstand model works well, but globalisation is forcing it to adapt.

Many family firms have sales and service outlets and even factories abroad. Even if they have developed their niche and are sticking to it, they cannot compete by staying still. “Companies in emerging markets have a much quicker growth potential,” says Peter Englisch, a partner at Ernst & Young, an accounting firm. “There’s no area of business now that is safe from competition.” To compete, Mittelstand firms need to hire foreign staff and raise new capital, perhaps via private equity, he says.

Others caution against leaving a comfy niche and entering a hypercompetitive mass market. “Look what happened to the photovoltaic industry,” says Thomas Kautzsch, a partner at Oliver Wyman, a consultancy. Small German start-ups jumped into the sizzling global market for solar cells. They prospered for a while. But the Chinese government deems solar power “strategic”, so before long huge, well-capitalised Chinese firms had put them into the shade. There are sectors that the Mittelstand should simply avoid in China, such as machinery for construction, energy or raw-materials extraction, unless the machines are extremely sophisticated, says Mr Kautzsch.

Wittenstein, a maker of high-quality gears and drive systems in Baden-Württemberg, has steered a sensible middle course. Exports make up 57% of its €200m ($287m) annual sales, with most going to Europe and North America, and 9% to Asia. It is expanding its footprint slowly, opening one plant in Romania and another in Switzerland. “We’re not replacing our core production in Germany,” says Manfred Wittenstein, the chairman of the board and a son of the founder. Being in Switzerland gives the firm access to ETH Zurich, a fine technical university, Mr Wittenstein says. It is also a testing-ground for a possible move into China or elsewhere.

Mr Wittenstein was briefly tempted to leave the company’s secure niche and venture into “electro-mobility” (ie, electric cars, buses and bicycles). “But it’s growing at such a pace it’s not for us,” he concluded. “There are other niches.” Mr Kautzsch at Oliver Wyman reckons that China, where millions ride electric bicycles, is already winning the electro-mobility battle.

Despite, or perhaps because of, its caution, the Mittelstand is booming. Sales are reckoned by some to be growing at nearly 12% a year. As René Obermann, the boss of Deutsche Telekom, recently remarked, this “is faster than the Chinese economy.”

The Co-Operative University program that I do works in a way where companies hire somebody and the university doesn't have any say in who they accept or not, it's all up to the companies. Most of those companies that participate are Mittelstand firms. My company for example is still owned by the great-grandson of the founder of it and has subsidiaries in 22 countries around the world. So these small businesses aren't all that small.