Why is the German Mittelstand different from SMEs in other countries?
The things are changing for the German Mittelstand. However, so far they have successfully stayed away from the American model of SMEs.
The US has amongst the best models for start-ups which is the envy of the world. You have a brilliant idea. You create a garage shop. The model is based on – setting them up, growing them fast, and selling them off quickly. This model is founded on “market capitalization” and “perceived value”. The mantra is cashing out as fast and as much as possible.
Indian SME model is an ignored one though the SMEs contribute in a big way to the nation by engaging people, generating employment and helping maintain social harmony. Governments after Governments have given lip service to the cause of SMEs but little has happened on the ground. The ecosystem that provides support to the Mittelstand in Germany, and the one that provides to SMEs in other countries is vastly different.
Venture Capitalists (VC) investing primarily in Start-ups, or Private Equity (PE) investing in existing businesses focus on “cashing out” in 3-5 years – at the most. Short-termism is the name of the game. In the Anglo-Saxon model, training, R&D and employee benefits are considered expenses – to be saved in order to polish the quarterly bottom-line. Mitteslstand treats training and R&D as investments, not as expenditure. Investment in employees is for the long run. Mittelstand is not at all focused on maximisation of personal profits. In egalitarian Europe one is often content with moderation of personal benefits. In fact, greed and pomp is scorned upon.
Being less global, less naive, and less funded, Mittelstand may not create Ubers, Airbnbs, and alibabas of today. They may not create Facebooks, LinkedIns, and WhatsApps of yesterday, or for that matter, even the Microsofts, Dells, Ciscos, IBMs and Intels of the day before. That is the tragedy of the Mittelstand! Or, is it? If you go through the list of the companies above, you will find a commonality. All these shining stars are either IT companies or ITES (IT-enabled services) businesses. We are living in the new golden age of robots and 3-D printers, augmented reality and machine-to-machine communication. And yet we need machines that do not-so-trivial jobs as – packaging, wood-cutting, food-processing, metal-processing, printing, transporting, chemical-processing and so on. We need not-so-trivial mechanical processes like cutting, drilling, milling, turning, tapping. We need physical automobiles which run on fossil fuel, (and hopefully soon, on alternative energy sources). We need real food to eat which is picked by agro-equipment, conserved by cold-storages, converted by food-processing machines, packed by food-packaging machines, and delivered to us by the logistic machines and processes.
Mittelstand contributes to all these physical products, equipments and processes in a big way.
Typically, Mittelstand companies are owned by the promoter families with support of Banks. Banks loan, not own, Mittelstand companies. These companies rarely go public. That’s why they don’t have to dance quarterly to the tunes of retail shareholders or analysts. They can, and do, take a long term approach. Though they are family owned, increasingly they are run by professional managers.
The financing structure of the Mittelstand and the societal structure of Germany makes it worthwhile for the owners to be there in the long run, rather than being a “serial entrepreneur”. Owners’ long term commitment to products, to employees to the society makes them invest in R&D, and innovations.
The Mittelstand traditionally places great value on building up financial “buffers” for leaner times. About 55% of investments are financed by its own equity, and about 30% through bank funds. Prudence is the key in financing.
What has Mittelstand achieved? Why is it important for German economy – German nation?
The contribution of the Mittelstand does not stop with the German economy. As mentioned before, Germany is an egalitarian society. Germany is a country which believes in “long term”- for good or for bad!
German folk came in being much later compared to the European powers of those days – Greek, Romans – and later – Spanish, Portuguese, Dutch, French, British. They almost missed the bus of colonisation – which was a norm then. Germany’s rise started post-1871 when Bismarck came to power. 19th century was the century of inventions. Germany was at the forefront of inventions but did not capitalise on those. Germans could not form conglomerates like Standard Oil, United Steel, JP Morgan – mostly based on trading, financing and exploitation of natural and human resources. Instead, they founded companies like Siemens, Bosch, Mercedes and many more – Start-ups of 19th century – which ran on technology. It has been a German habit of inventing and tinkering – improving the product in a casual way. For this the factories needed to train people under the guidance of the in-house expert or “Meister”. From this came the tradition of vocational training as well as incremental innovations. The focus on training, quality, and incremental improvements has sustained the dramatic changes brought by the world wars, division and reunification of Germany, and the digital disruption and so on. The Mittelstand has given Germany the much needed stability during the difficult times.