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The Model Behind German Economic Myth:”Der Mittelstand”

“Pencil-makers were first recorded in the city of Nuremberg around the year 1660. Numerous craftsmen also set up shop in the surrounding villages, but especially in Stein. Here artisans were not subject to the same strict controls as in Nuremberg, so they had a competitive advantage.

One of them was the cabinet-maker, Kaspar Faber. At first, he worked for local traders, but in his spare time, he produced pencils for his own. Soon he became so successful that he was able to set up his own business. Starting with these baby steps it was to develop into a company known all over the world, so-called Faber Castell”.

The success story of Faber-Castell is the very picture of Der Mittelstand, in other words, family-owned SME’s in Germany. They generate more than one out of every two euros, and providing well over half of all jobs in the German economy. Not mentioning 99.6% of all German companies, belonging to Mittelstand.

In a formal definition, SME’s are companies with a maximum of 249 employees and a turnover of up to €50 million or total assets of up to €43 million. Yet, as Fabian Wehnert, head of the department for SME`s in German BDI put it: “Mittelstand isn’t a structure, it’s a culture,”. Large firms like car-rental company Sixt, employing 4300 people, consider themselves Mittelstand because it is owner-managed and embraces a Mittelstand management approach. The classic Mittelstand model, the backbone of the German economy, was characterized by the identity of ownership and management with strong emotional investment by owners and staff. An official survey found that 97% of SME employees felt a sense of community at their company while 97% felt that the values of their company are related to their own values. SME directors are known to form a family-like working atmosphere, providing personalized training. Those companies tend to prefer remaining solvent over fast growth (no wonder why German companies have the lowest debt ratios around the world) and become a world leader in niche markets.

For instance, Sennheiser provides high-quality sound equipment since 1945. Miele built its first washing machine in 1910 an is currently a worldwide player in home appliances. Herrenknecht is a leading manufacturer of drills for the past 45 years. Blohm+Voss is specialized in building steel-hulled ships since 1877. They are known as the builders of legendary WW2 battleship ”Bismarck”.

Looking at the big picture, those highly specialized medium enterprises make up the German economy like a puzzle. Every part of that puzzle is well aware of their duty. Adding this picture large companies like Daimler, VW, Bayer and Siemens and integration of Industry 4.0, pioneered by Angel Merkel in Europe, the silhouette of a well-oiled machine is already formed.

Though Industry 4.0 and employee training culture is slightly mentioned, they form the basis of an unprecedented efficiency phenomenon. Germany has the shortest working hours in the world. An average German works 350 hours less than Canadian in a year, while at the same time producing almost three times more.

“Although 74% of the companies have strategically embedded digitalization, only 39% manage the different aspects of digitalization with a strategy across all departments,” says Sapthagiri Chapalapalli, TCS Vice President and Managing Director, Germany and Austria. In automated manufacturing, Germany well outcompetes its European acquaintances. Amongst the sluggish and saturated EU economies who spend the biggest portion of capital on maintenance and social welfare, Germany took the natural economic lead by investing on the technology factor of production, therefore growing its output exponentially.

However, the current picture is not so blue looking at the GDP output. In 2018, the German economy witnessed the lowest GDP growth in five years, even a contraction in the Q3 of 0.2%. Some say it is the pressure on the automotive industry due to strict pollution regulations, some say it is the world economy squeezed between Brexit and trade wars… Germany makes up around 25% of the EU economy alone. There is one fact that the German economy has to remain strong for the European economy to remain strong. The Euro Area (EA19) GDP remained at 0.2%, making Europe one of the weakest links in the world economy in terms of growth.

That looks like one of the reasons Mittelstand turned its face outside Eurozone. Germany’s export of goods to the rest of Eurozone was worth 472 bn € in 2016, while 529 bn € for countries outside Eurozone and EU. German imports from Eurozone hikes as well, due to the rise of the demand for intermediary goods to manufacture towards developing countries. Not surprisingly, German imports from the rest of Eurozone was 23.3 % higher in 2017, compared to the beginning of the global crisis at the end of the year 2007.

So does Mittelstand and the German economy actually benefit the European economy? Well, a 10 % increase in German exports leads to a 9 % increase in intermediate goods imports to Germany from other EU member states.  The fact is that export myth of Germany might deserve the analogy of a “locomotive”. On the other hand, German workers have become utterly competitive. The wages have been rising rapidly as productivity rises. At this point, it is almost impossible for other EU countries to catch up German workers in competitiveness. That is why Germany government introduced a wage cap, leading to substantially lower wages. That way countries competing with low unit wages like Eastern European countries enjoy the slight benefits of manufacturing similar goods for cheaper within their borders.

The question Eurozone asks Germany is: Where is this money going? Germany is often accused of harming the European economy through the wealth it accumulates and does not spend. Domestic savings well exceeded domestic investments in Germany and other countries are aware of the fact that a surplus in one country means a deficit in another country to keep up the aggregate demand. Indeed, they may have a point but as German officials put it: “What do you want us to do — export less?”

There is one thing though, that puts everybody on the same page. Germany’s economic surplus was not created through certain economic policies, rather through its well-established economic model driven by Mittelstand and large corporations becoming world leaders in their own fields. This business culture gave birth to a globally competitive workforce accompanied by automation.

Currently, according to Diagnose Mittelstand survey, 54% of SMEs see the trade war with the United States as the biggest global risk for their future development. These macro effects may slightly alter the business strategies of SMEs however the Mittelstand economic model rooted in German history will as always adapt, rather than cease to exist…


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