The phenomenon of the German "Mittelstand"

During a period of worldwide financial instability German SMEs (Small and Medium-sized Enterprises), the so-called Mittelstand, are leading the way in Europe’s largest economy and are the answer to financial recovery and prosperity.

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I. Definition of the German Mittelstand

What exactly is an SME though? According to the German definition, the term primarily applies to firms that employ up to 500 members of staff and have up to € 50 million annual turnover, whereas, the European definition reduces the number of SME employees up to 250 while remaining faithful to the € 50 million annual turnover mark. An impressive 99% of German companies belong to the German Mittelstand, employ 15,5 million people and contribute almost 52% of  Germany’s total economic output.

II. Promoting the younger generation

What is most important though is the German Mittelstand’s contribution to the decreasing rate of youth unemployment. While the number of unemployed young people in the EU reached a disheartening 18.7% in 2017, in Germany it remained at low levels, namely at 6.7% throughout the same year. Admirably enough, German SMEs employ the majority of trainees (83.2%), thus making space for the next generation of highly skilled and in-demand future employees.

III. The secret of success

The reasons that the model of the SME flourishes in Germany lie mainly within its family-oriented core. 95% of all German companies are family-owned and 85% of them are also managed by their owner. This allows the creation of a stronger employer-employee bond, as the personal relationships that emerge lead to the undertaking of more responsibilities, whereas, at the same time the flatter hierarchies within the business contribute to flexibility in the work place, which in turn could advance into higher productivity.

IV. Investment policy and sources of income

The concept of the German Mittelstand is indeed highly humancentric, a notion that widely reflects in the fact that it also undertakes medium-term as well as long-term investments, and serves the financial support of the region in which it is based. These financial assets mainly come in the form of loans that are granted to the SMEs. According to the facts published from the European Commission, the number of rejected loan applications from German SMEs reached the percentage of 7.1 of total applications in 2015, a slight but significant improvement from the EU average (9.6% in the aforementioned year).

The state financial assistance is also considered as an important factor for the growth of the German SME, mainly in regards of accessing available funding opportunities. One example is the founding of the ‘ERP/EIF Co-investment Growth Facility’ with the purpose to improve conditions for venture capital. The volume of the fund is EUR 500 million, funded by the Federal Ministry of Economic Affairs and Energy on behalf of the European Recovery Programme and by the European Investment Fund. The expansion of the INVEST grant, a grant specifically designed for Angel investors – a society of affluent individuals who provide capital for a business start-up - as well as the tax reduction plans for those so-called business angels reflects the Government’s expectations to fuel private initiative and increase the flow of income within a SME.

V. (Not so) Hidden Champions

The leading companies that belong to the Mittelstand are particularly successful in the fields of electrical engineering and industrial products, a fact that is showcased in the example of ifm electronic, a German SME that manufactures speed sensors, 3D cameras and systems for vibration monitoring and diagnostics among others. Ifm electronic currently holds the first place in the DDW-Mittelstandsranking, but if the name sounds unfamiliar to most people, then they might be surprised to know that well-known companies which are almost part of everyday life like Zott and Rational AG belong to the German Mittelstand. Zott, for example, is one of the largest diary companies in Europe with estimated sales of €856 million in 2016, whereas, Rational AG is a manufacturer of kitchen-associated products, namely combi steamers and ovens, which employs almost 2,000 workers and exports its products to more than 100 countries. These two SMEs are based in Bavaria, while its capital Munich holds the third place on the list of the German cities with the most SMEs. Hamburg and Berlin hold the 1^st and the 2^nd places respectively.

VI. New challenges ahead

Nevertheless, the concept of the German Mittelstand faces its own challenges. As the German SME is primarily a family business, issues on succession may arise, which might lead to a company’s disintegration. Another important problem is the bureaucratic burdens that affect the German SME. The Federal Ministry of Economic Affairs and Energy (BMWi) in its effort to reduce red tape, has cut the cost of compliance for companies (by some 2 billion euros in total) and promotes tax reduction through the two Cutting Bureaucracy Acts and the mandatory SME test, through which the legislation in relation to SMEs will be assessed before further action can be taken. Last but not least, finding enough skilled staff could also prove to be a challenge for the German Mittelstand. In the globalization era, Germany faces tough competition to acquire the most brilliant minds and the need for more information about living and working in Germany is necessary in order for the country to attract a new wave of talented and hard-working personnel. The utilisation of refugees is, according to the BMWi, a major factor of support of the SMEs from the state, since the latter offers around 150 refugee recruitment advisors based within the regional business chambers and organisations, which in turn provide their professional expertise by assisting the SMEs in recruiting and training refugees, an intelligent plan that also serves the purpose of their social integration.

V. The future of the Mittelstand

Despite the obstacles that the Mittelstand has to overcome, the fact that many German firms, which have long outgrown the definition of the original SME due to their important financial success, choose to nevertheless remain faithful to the concept of the SME is a solidifying sign of the positive influence this model has for the German economy. It nevertheless should be noted that the government and the EU’s main aim should remain the support of the Mittelstand against market-listed mega-companies and the avoidance of its derogation in favour of the latter. This will set the base for the other EU-Members to follow Germany’s example by investing in human resources and thus set the foundation for a healthy business model and financial development.