The Demise of Germany's Mittelstand
According to a survey of German executives by the influential Ifo think
tank, German business confidence rose in January 2003 for the first time in
eight months - albeit imperceptibly, from 87.3 to 87.4. A poll conducted by
ZEW, another brain trust, confirmed these findings. On past form, though,
this confidence level heralds a contraction of 5-6 percent in industrial
This is consistent with other dismal figures: negligible growth, stiflingly
high real interest rates imposed by the European Central Bank, an
export-discouraging strong euro and a disheartening surge in unemployment to
more than 10 percent. German woes are compounded by a global recession, the
evaporation of entire industries (such as telecoms) and a sharp, universal
decline in investments.
The main victims are the Mittelstand - the 1.3-3.2 (depending on the
definition) million mostly family-owned German small to medium enterprises
(SMEs). Of every 1000 German businesses, 997 are Mittelstand by one liberal
definition. The real figure is closer to one third. Strict criteria reduce
it to one in thirty firms.
These differences of opinion reflect the fuzziness of the concept which has
more to do with the style of ownership and management and with a unique
historic-cultural background than with objective, economic yardsticks.
The Mittelstanders form the backbone and trusty barometer of the German
economy. They engage close to 22 million workers and apprentices as well as
well over 3 million "self employed" (owner-employees) - 70 percent of
Germany's total active workforce. More than two fifths of all commercial
turnover in the country are generated by them as well as half the value
added and one third of all exports.
The investment requirements of Mittelstand firms total $20 billion annually.
But access to capital is narrowing. Tottering local banks are risk averse,
the capital markets are lethargic, private investors are scared and scarce.
The Basle 2 capital adequacy requirements will considerably increase the
cost of bank loans to risky borrowers, as are most Mittelstand firms.
According to a survey by Kreditanstalt für Wiederaufbau, the German
state-owned development bank, one third of all companies found access to
bank credits restricted in 2002. In the 12 months to March 2002, German
banks approved 7 percent fewer new credits. Listed banks reduced lending by
a debilitating one sixth.
According to The Economist, lending to Handwerk (craft) companies declined
by half between 1993-2003. Public sector savings banks, hitherto the main
source of Mittelstand financing, are hobbled by an increasingly intrusive
European Commission. The Neuer Markt, touted as Germany's answer to NASDAQ,
slumped by staggering 96 percent and was merged out of existence.
The family is not what it used to be. Less than 40 percent of Mittelstand
businesses are handed down the generations nowadays. Many are forced to
introduce pesky outside investors and directors, or hired management. The
banks are far more inquisitive than they used to be. A traditional
long-term, epochal, business horizon gives ground to a quasi-American focus
on the tyranny of the bottom line. Capital spending, product development and
job security all suffer.
Founders are often to blame, unable as most are to calmly contemplate their
own death, or retirement and prepare a plan for orderly succession. It is at
these junctions of regime change that most business failures occur,
according to Sir Adrian Cadbury, author of "Family Firms and their
According to Creditreform, quoted by The Economist, a record 37,700
companies went under in 2002. The Financial Times puts the figure at 45,000.
And 2003 witness another bumper crop. The figures, according to the Institut
für Mittelstandsforschung in Bonn, are even more harrowing. In 2001, 386,000
startups were liquidated and 455,000 formed to yield 69,000 new firms.
New startup formation is at a low ebb. In 1991, net creations amounted to
223,000, in 1995 - 121,000, in 1998 - 100,000. The picture is especially
grim in the east. About 129,000 net new startups sprouted there in 1991. But
the dilapidated east succeeded to spawn only 6000 a decade later with its
bloated and venal construction sector all but wiped out. Again, 2002 was
only marginally better.
Half-hearted measures declared by the fragile coalition government on
January 6, 2003 - grandiosely titled the "Mittelstand Offensive" - are
unlikely to reverse the tide of red ink. Less red tape, more generous
financial support, simplified accounting and a fusion of the country's
cumbersome development banks will do little to help the flood ravaged east,
for instance, where crumbling domestic demand cripples local
Eastern businessmen sorely lack management experience and skills. Their
networks of customers and suppliers are thin on the ground. Most of them are
single-product outfits. Successes are few and far between and usually
involve foreign equity-holders. Luckily, the labor market in the east is
more flexible than its ossified and bureaucracy-laden western counterpart.
Hourly labor costs - wages plus inanely vertiginous and generous social
benefits - are also substantially lower in the eastern Lander.
An arthritic and worker-friendly regulatory framework and a pro-big business
tax regime have, indeed, burdened the Mittelstand. Still, if anything,
Germany's labor market has been liberalized under Chancellor Schroeder's
governments and tax rates went down across the board. One must look
elsewhere for the causes of the inexorable deterioration of the country's
It is remarkable that the decline of the Mittelstand coincides with an
unprecedented surge in small to medium scale entrepreneurship in both
developed and developing countries. It would seem that Germany simply
spectacularly pioneered what has become, decades later, an economic fad.
Indeed, it is Germany's overwhelming success - its post-war industrial
miracle - that harbored the seeds of its decline and fall. Sated, rich
people make bad risk-taking entrepreneurs. Germany's unification was its
last attempt at rejuvenation. It failed because the west chose to smother
the east with an unrealistically priced Deutschmark, a tangle of rules and
regulations, an artificial construction bubble and a forced liquidation of
its industrial base.
If it ain't broke, don't fix it, goes German folk wisdom. On the surface,
everything functions impeccably: German infrastructure is gleaming, its
healthcare efficient, its environment pure, its welfare unsurpassed. Why
tinker with success? - wonders the average citizen of this regional economic
powerhouse. Only lately did a few brave souls admit that the miracle has
been consumed and that Germany, unreformed, may be facing a Japanese decade.
Germany's second attempt at revitalization is unfolding outside its borders.
The enlargement of the European Union to incorporate countries in central
and east Europe is largely a German project. Cheap labor, abundant raw
materials, hungry, growing consumer markets in the new members - promise to
resuscitate the German industrial sector.
Big German firms have taken note of this repossessed hinterland and moved
decisively - but not so the Mittelstand.
Preoccupied by their multidimensional crisis, they failed to colonize the
east. Battered by cost pressures, better-informed customers, aggressive
international competition, dizzying and costly technological changes,
spiraling needs for investment in R&D, vocational training and marketing -
the Mittelstand companies are punch-drunk and more xenophobic and
self-destructively "independent" than ever.
One would be hard pressed to find a substantial Mittelstand representation
in the German drive to diversify abroad either by establishing a presence in
major export markets, or by sourcing from cheaper countries. As the Center
for Advanced Studies at Cardiff University notes, Mittelstanders rarely
out-source to key suppliers, maintain open-book accounting, engage in
simultaneous engineering, sign long-term contracts, or reduce the number of
direct suppliers as part of implementing a lean production strategy.
Many SMEs function as family employment agencies rather than as properly
governed businesses. From hubs of innovation and early adoption of bleeding
edge technologies - the Mittelstanders have lately become the bastion of
paralytic conservatism. Most of them support self-interested liberalization
and deregulation. But few would know what to do with these poisoned
chalices, having become far less competitive than they used to be in the
So, is the Mittelstand sector doomed?
Not according to a report published in 2001 by the Institute for Development
and Peace at the Gerhard-Mercator University in Duisburg. The authors
believe that, despite all the shortcomings of the Mittelstand business
model, it could serve as a blueprint for the countries of Latin America and
other developing regions.
The Mittelstand have survived largely intact wars and devastation, division
and unification. There is no reason why they should not outlive this second
round of globalization - they did marvelously in the first round, a century
ago. But the government must recognize the Mittelstand's contribution to the
economy and reward these struggling firms with a tax, financing and
regulatory environment conducive to job creation, innovation, ownership
continuity and exports.
The reason for hope is that Germany is finally waking up. Universities offer
courses in family-orientated management. Offline and online exchanges - such
as EuroLink - connect German SMEs to willing private equity investors,
strategic partners and fund managers. Small business service centers and one
stop shops proliferate.
An army of consulting and trading firms proffer everything from management
skills to networks of contacts. Others peddler seminars, Web design and
Internet literacy syllabi. Software companies like SAP, IBM and Sybase
maintain special small business departments. Think tanks and scholarly
institutes devote increasing resources to the SME phenomenon. There is even
an Oscar award for Mittelstand excellence.
Initiatives spring in the most unlikely places. DG Bank teamed up with the
German daily "Die Zeit" to "promote small businesses who have innovative
ideas". Mittelstand trade fairs (for instance in Nuremberg last year) are
well-attended. Venture capitalists, portfolio managers and headhunters
monitor developments closely.
The Business Angels Network of Germany (BOUND) is a group of individual
investors who also contribute time and management know-how to fledgling
technology startups. Lobbying and advocacy groups, specialty publications,
public relations firms - all cater to the needs of German SMEs.
It looks less like a funeral than a resurrection.
AUTHOR BIO (must be included with the article)
Sam Vaknin ( samvak.tripod.com ) is the author of Malignant Self
Love - Narcissism Revisited and After the Rain - How the West Lost the East.
He served as a columnist for Global Politician, Central Europe Review,
PopMatters, Bellaonline, and eBookWeb, a United Press International (UPI)
Senior Business Correspondent, and the editor of mental health and Central
East Europe categories in The Open Directory and Suite101.
Visit Sam's Web site at samvak.tripod.com