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5 May

The Miracle of the Mittelstand – Part 1: Family business, supercharged

The funny thing about capitalism is that it comes in many different flavors. While the trajectory for economic development is roughly the same for every developed nation, the means of mobilizing capital and labor are always different.

We've written about Japanese Keiretsus before, and how they enabled corporations in Japan to work with each seamlessly and create synergies that their Western counterparts could only dream of.

In this edition, we shall look westward, Germany in particular.

For the past few decades, Germany has been the undisputed champion of the Eurozone, contributing to about 28% of the total GDP.

On a global level, much praise has been showered on Germany for contributing 5% to global industrial output, despite only having 1% of the global population.

Part of the reason Germany has managed to do so well is because of its unique business landscape. Barring a select few large corporations, many of Germany's prominent businesses are small, mid-sized firms, colloquially referred to as the Mittelstand.

It may be tempting to define Mittelstands as small and medium-sized firms, but they are more than that.

Ludwig Erhard, widely regarded as the architect of the German Economic revival warned against reducing it to a quantitative definition.

He urged that the Mittelstand instead be looked at in qualitative terms, as more of an ethos and way of being, instead of a rigid concept that could easily lend itself to analysis.

Was ist ein Mittelstand?

The first thing to know about the Mittelstand is that it's a quintessentially teutonic word, i.e., it's hard to translate.

Broadly, the term is used to refer to a collection of mid-sized enterprises in Germany that have managed to remain relevant even in the face of massive economic turbulence.

Almost all Mittelstands are family-owned enterprises with roots in the German countryside. In the aftermath of the Second World War, most German cities were razed to the ground, and it made more economic sense for these businesses to set up shops in the countryside, where land, labor, and economic infrastructure were more readily available.

These businesses are generally controlled by a single family, with some tracing their roots to 18th-century Prussia! Despite their small size and resource constraints, all of them are global players, with many of them being market leaders in their respective niches.

In addition to punching well above their weight in economic prowess, these firms also have an impeccable track record of pioneering new production techniques. By some estimates, Mittelstands have about 30 patent applications for every 1000 employees.

This sounds all the more impressive when you realize that large firms such as Siemens, SAP, and Bosch have on average, less than 10 parent applications per 1000 employees.

Many of you might not know this, but beloved brands such as Faber-Castell, Sennheiser, and Staedtler are all Mittelstands. Some of these companies have employees who have been with the firm for 2 - 3 generations!

There are several definitions that have attempted to capture the essence of the Mittelstand, most of them generally agree on the following traits:

  • Owner-entrepreneurial culture
  • Generational continuity
  • Independence
  • Internationally competitive
  • Customer focus
  • Heavy investment in R&D
  • Excellent labor relations
  • Strong local ties

On the face of it, all of this might not look all that special. To understand it’s appeal, we might have to look at the big picture.

As of 2022, exports contributed to a whopping 47% of GDP, far ahead of China and the U.S.A, with 20% and 10% respectively. All of this is impressive, but the question still remains. How do they do it?

Mittelstands, no matter how big or small, tackle resource constraints in a highly specific way. Some of these methods may even run counter to conventional wisdom, and provide interesting insights into how seemingly contrarian business practices can yield fantastic results.

We’ll cover these practices in tomorrow’s edition, while you ponder over how mid-sized businesses can simultaneously be profitable, internationally competitive, and have low attrition rates.

Hint: It’s simpler than you might think.

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