According to estimates for 2012 from the Mittelstand Research Institute in Bonn (IfM), 99.6% of the 3.7m companies in Germany are small to medium enterprises (SME). With 21m employees, 80% of Germany’s employed workforce, they are cumulatively the largest employer in the country. They educate another 1.3m young people as a part of the dual education system, thus ensuring consistent regeneration. Moreover, with a 52% share of net value added, SME contribute significantly to the success of German companies.
High equity ratios ensure Mittelstand’s financial independence
German Mittelstand companies are exceptionally robust financially, according to a KfW Banking group survey in 2013. 84% of the surveyed companies were able to report an equity ratio either equivalent to last year’s (40.3%) or better than last year’s (44.4%). Small German companies – 10 employees or fewer – have developed especially well over the past few years. According to the KfW’s Mittelstand panel in 2012, they had increased return on sales from 9.9% to 11.4% between 2005 and 2012, significantly more than the overall Mittelstand figure of 5.5%.
Medium-sized companies (with 50+ employees) are also distancing themselves from external capital financing, with an equity ratio of 28.1%. SMEs prefer to finance themselves with their own resources. Every other Euro of investment comes from SMEs’ own wallets. So it follows that German Mittelstand companies are also in a good bargaining position when it comes to talking to banks. 29% of their investment comes from credit institutions, while the rest comprises, among other things, of government incentives (11%) and venture capital (6%). The KfW’s survey showed that the companies found both acceptable credit terms and a turnaround time of 13 days for processing important.
High R&D investment and cluster activities
With an ever-increasing integration of Mittelstand suppliers into the value chain of large businesses, the demand for products is growing consistently. In industrial joint research and in countless clusters there are a number of academic research institutions working on the improvement or invention of new products and services. This creates plenty of chances for SMEs to participate in the R&D without capital-intensive construction of new R&D premises. Mittelstand companies thus work their way into international business doing this and are thus investing ever-increasingly in R&D. SMEs currently count 85,200 people working on R&D and invest about EUR 9.5bn on innovation, 85% more than in 2004. The High-tech Foundation fund set up in 2005 by the BMWi and private investors has hitherto been able to finance or aid 250 innovative companies to the tune of EUR 570m.
Germany’s Hidden Champions
The success of Germany’s Mittelstand often goes unnoticed, because the companies often settle in niche markets – most of them industrial goods markets instead of higher-profile consumer goods markets. For this reason they are known as ‘Hidden Champions’. Leading business advisor Hermann Simon reckons that Germany has 1,307 of a global 2,700 Hidden Champions, the leading number for one country by some distance. The USA is second with 366 companies.
Some of them are larger companies, but one in every five Hidden Champions is a company with 200 employees or fewer – worldwide leader of roller-coaster planners Stengel Engineering has only 10, but has planned 600 roller-coasters and 600 other rides since foundation in 1965. Simon points to a location advantage for many of these companies: Germany’s dual education system, central Europe location and strong industrial climate.
Success through extra-European export
Simon also points to the export orientation of companies as a factor in their success. Some 40% of medium-sized companies in Germany export, while the 345,000 German Mittelstand companies are, at 97.6% of exporting companies in Germany, the largest group. Mittelstand companies earned around 20% of their turnover through exports in 2010 – around EUR 186bn – a 13% increase since 2004.
Mittelstand companies are targeting extra-EU exports more and more in the long-term. While European markets are generally saturated – with the only visible kick-start likely to be a free trade agreement between the USA and EU – Mittelstand companies are looking further afield to countries like India. The Federation of German Industry’s (BDI) Mittelstand panel has said that more than three-quarters of Mittelstand companies are looking at doing business in the BRICS (Brazil, Russia, India, China and South Africa) countries within the next two years.
Germany Trade & Invest
Germany Trade & Invest is the foreign trade and inward investment agency of the Federal Republic of Germany. The organization advises foreign companies looking to expand their business activities in the German market. It provides information on foreign trade to German companies that seek to enter into foreign markets. All inquiries relating to Germany as a business and investment location are treated confidentially. All investment services are available at no charge.
Contact
Germany Trade & Invest
Marc Lehnfeld
T. +49(0)30 200 099-501
F. +49(0)30 200 099 77-501
Email: marc.lehnfeld @gtai.com
