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Investors World Over Want To Know The Secret To Germany’s Economic Success

International investors220px-Mittelstand are often perplexed at the continuing success of the German economy. Even as European neighbors and foreign trading partners are mired in recession like growth patterns the German economy keeps humming forward. The overall statistics for Germany are impressive by any standard. As the worlds 4th largest economy, German prosperity is based on a number of factors that continue to enable manufacturers inside the country to remain competitive.

For a country of just 81.9 million in population, Germany is one of the few countries in the world where the total population of the country is actually declining. Also, individuals 65 and older comprise 20% of the citizenry. That this nation that straddles the middle of Europe is ranked as one of the most important industrial powers in the world, leads one to question how is this possible?

Whereas most nations have large manufacturing companies and a compliment of small businesses there are a dearth of middle sized companies. This is not the case in Germany. Mid-sized manufacturers and businesses collectively known as the Mittelstand. Collectively these entities provide much of the German ability to export, even in tumultuous economic times. There are over 1,000 of these companies in Germany today. Together, they are producing sales that average a growth rate around 12% a year.

Individually these companies are found in small towns and cities and are family owned and managed. Many of them have been in business for generations and have built relationships with customers and suppliers that go back many years.

Many of these companies sell specialized capital goods. That is machinery and necessary components of engines and factory equipment. Some of these items that are produced are world renowned by leaders of various industries. Often they are only familiar to the individuals that have a need for these specialized tools, precision instruments, and machinery components. These enterprises as a whole, have a great deal of concentration in the industries of auto parts,chemicals, electrical equipment and machinery in general.

Nano Technology

Nano Technology

Rapid Prototyping

Rapid Prototyping

More recently industrialists, officials and travelers from around the world, are coming to discover the secret of the Mittelstand in Germany. These smaller specialized companies seem to provide the answer for much that is wrong, with national economies in many nations of the advanced and emerging world.

For one thing it allows a country to spread industry and thereby economic growth, throughout the nation. There is no longer the need to have a country’s manufacturing base concentrated in a number of large cities. This forces mass migration within a nation and leads to depopulation and high unemployment in many of the more rural areas.

Youthful unemployment and underemployment is a growing problem not just in the emerging markets, but in the advanced part of the world as well. Yet there continues to be a shortage in skilled and specialized labor.

Medium sized companies in Germany deal with this issue quite effectively. The long tradition of these institutions provide continuous and ongoing economic opportunity to many local communities. It fosters long stemming relationships between business, government and the individual.

Apprentice Program

Apprentice Program

A unique system of apprenticeship has developed in Germany as a result. Unlike other such programs elsewhere where skills are developed for later employment in the industry, the German model is often more specific. Many young students receive training and internships for specific jobs at a local company. German universities in general, work well with researchers and human resource divisions at local firms.

These Mittelstand companies inspire a great deal of local loyalty in Germany. Many employees spend their entire working careers at the same company in their home town. An average of less than 3% leave these companies per year. In contrast, companies in the United States for example, can sometimes loose ¼ to 1/3 of their staff in any given year. German workers offer flexibility on pay and hours but in return are offered job security. It is important to note that Germans on the whole still have among the highest pay and benefits in the world. In economic downturns many employees are kept on board regardless if they are truly needed. This is out of loyalty and the difficulty in replacing them once orders rebound. These employees are highly trained for specific purposes.

The national statistics tell the story. Youthful unemployment ( aged 16-24) in the United States was 16.2% in 2013. In the United Kingdom the rate registered 17.8%. In Sweden, the level stands at a punishing 22% and in Spain a whopping 54%.

Mineral Powder Press

Mineral Powder Press

How do these German companies do business? Although the products these businesses make are not cheap they are well-engineered and built to last. They are designed according to the specific needs of the customer and are delivered quickly. Delivery can usually be made a month sooner, than your typical Chinese rival, of a similar but lower quality product. Likewise, a contract made with these companies is totally reliable. The German Mittelstand firms have refined their factories, supply chains, and distribution methods so they are able to move more quickly, than larger and less efficient rivals. There is a higher cost for the end product, but in industry as elsewhere, time is money.

Another advantage that has been achieved over time, is how the suppliers have clustered around these manufacturing companies. It enables the rapid turn around time between when an order is placed, and delivery of the end product.

Mittelstand companies are enterprises that employ fewer than 500 workers and earn less than 50 million Euros or $67.36 million USD (United States Dollar). These firms employ 60% of all workers in Germany and account for 36% of all sales. They also train 83% of all apprentices and are responsible for over 50% of economic output in Germany.

Camera Equipment

Camera Equipment

As a result of family ownership these smaller companies use conservative financing principles and can afford to plan for the long term. They use profits earned and make relatively small bank loans when extra funds are needed. This maintains family control.

3D Laser Printer

3D Laser Printer

In an effort to move closer to their international customers a number of these companies will open operations overseas. The preference is always to own the company outright to maintain the family management and ownership. This helps to ensure high quality in production.

Operations that are conducted abroad, are no different to what is expected at home in Germany. The intense focus on service, modifications to meet consumer demands, and a constant move towards making a better more efficient product. Orders can be made on line and are available in different languages particularly English.

The success of these German companies are not easy to duplicate. The unique organization of the German economy permits the country to be an export juggernaut. The German system depends on a unique relationship between the school system and the businesses themselves. It also depends on the German organization of labor and capital. The government at all levels supports the present arrangement of the German economy.

German Tax Rate On Corporate Income

German Tax Rate On Corporate Income

In absolute terms Germany was the world’s leading manufacturing exporter during the years 2003 to 2008, partly because of the success of the Mittelstand. Since China moved ahead in 2009 Germany has been somewhat tied with the United States for the second position. Considering the size of Germany this is absolutely amazing.

At the beginning of this year the German trade surplus in total value, was actually higher than the present world export leader China. Although it must be pointed out that these huge surpluses have become somewhat controversial in Europe and elsewhere. Germany as a nation is frugal, so the increased wealth has not necessarily benefited other nations in the European Community, as much as some foreign politicians would like.

Not being able to duplicate the German model the Chinese, Koreans, and to a lesser extent the Americans, British and Japanese have bought some of these firms. The problem with this strategy is that very few of them are available for sale. Since they are wholly owned by individual families you must find willing sellers. Also, it is hard to maintain all the attributes that made these companies so successful over time.

Although the Mittelstand are changing as well, with new managers and ideas to help these enterprises maintain their market niches in the world, they are still on the whole quite conservative and long term in their thinking. The continuing focus on more globalization will make change in these companies necessary, but it will be incremental and concise. Travelers to Germany will continue to be able to see this export model for growth, for years to come.

 

 

 

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