The business model “Germany” is failing

15. February 2023

The German Mittelstand is considered the heart of the country’s economy and represents the strength of numerous small and medium-sized enterprises, which account for over 50 % of jobs in Germany. On the website of the Federal Association of SMEs, it is even praised as an “economic and employment engine” that is not only “stable” and “crisis-proof”, but above all “innovative”.

But does this fairy tale of Germany’s good old Mittelstand still correspond to reality?

A look at the developments that have taken place in recent years at least makes the future of Germany’s “economic engine” and therefore the country’s economy in general look less rosy.

Because, what these figures conceal is the actual sales power that SMEs have in Germany. Even though over 99 % of the German corporate landscape is made up of small and medium-sized enterprises, which puts them in the “Mittelstand” category, they recently only contributed 30 % to the economic turnover. No matter how “innovative” SMEs may be – large corporations dominate.

From a global perspective, our corporations, which are generally publicly listed and account for 70 % of German turnover, are almost irrelevant. In terms of market capitalization, all companies listed on German stock exchanges represent only about 6% of the companies listed on US stock exchanges.

But what is the reason for this supposed pride that the majority of our companies are not listed on stock exchanges? Why do the often family-run companies not dare to approach the public capital markets? Do they perhaps shy away from the high level of transparency required by reporting obligations in the public and private equity sector?

Financing and investors are changing the model 

A look at history shows: The German Mittelstand finds its origins as early as the 12th century. Over the decades, countries such as France and England established central places of power such as London and Paris, but this did not happen in Germany. This was a clear economic advantage, as it allowed Germany to develop a diverse and productive economy throughout the country – and establish it for a long time.

Most SMEs, especially family-run ones, are still basking in the “hidden champion glory” of past decades. They are resting on the laurels of the times when they were able to gain a reputation and a position on the global market in small niches not yet occupied by corporations through constant and continuous improvement in engineering over many years.

Nowadays, however, the high speed of innovation with greater scaling usually requires large sums of investment that SMEs simply can no longer afford. As a result, most German SMEs remain in their mostly owner-managed structure and in their tried-and-tested model. Mostly unaware that this model will probably not work for much longer.

Start-ups in Germany have professionalized enormously in recent years in order to be able to raise larger sums of money. They are also increasingly succeeding in convincing American investors. It is doubtful whether this is really positive or whether it is ultimately due to the lower valuations that American investors have to pay for German and European start-ups compared to similar American companies.

In addition, there are occasional roll-ups, for example when companies such as 1komma5 buy up German craft businesses in order to build up a new type of energy company with decentralized generation trials financed with foreign money. The Bavarian battery manufacturer sonnen tried something similar a few years ago but was ultimately bought out by a group. Real innovation that can change the planet cannot be developed in this way.

It is primarily American corporations such as Microsoft, Amazon, and Apple that, as publicly listed innovation machines, are able to attract so much capital and talent that they can drive and maintain real innovation on a large scale with global scaling across several generations of technology.

Without a change in mindset and self-entitlement, we have no chance

We need hungry entrepreneurs and bold investors if we don’t want to miss the boat. Our problems, which urgently need to be solved, are obvious and involve three groups in particular: The SMEs, the startups, and the investors.

  • Too many SMEs are satisfied with a solid business that feeds their own families and those of their employees.
  • Too many SMEs are satisfied if they can sell their business at some point to a listed company that can raise money for its growth via the stock exchange.
  • Too few SMEs want to take on the challenging task of taking their company public and exposing themselves to global comparability and criticism.
  • Too few SMEs have experience of holding their own in international financial market comparisons.
  • Too few start-ups want to change the world with deep tech and scale existing cutting-edge research from Germany worldwide. With agencies such as Sprind (the agency for leap innovation) and Falling Walls, we have two important initiatives in Germany that encourage founders to think bigger.
  • Too many start-ups are still chasing after digital business models and want to occupy global niches that the big American players have not yet occupied. Perhaps, and hopefully, Celonis will one day succeed in becoming a modern replacement for our veteran SAP model on the international stage.
  • Too few investors from Germany dare to venture into the deep tech areas and promote and support globally scaling models.

Knowledge emigration

The last point in particular, the lack of investors, could prove fatal for German SMEs. This is because money not only takes financial strength with it, but also knowledge and expertise. As much as we in Germany strive to be seen as a country with a welcoming culture, we put so little effort into being seen as an attractive location for development expertise.

We all know the history of the “golden age” in which companies such as Würth, Siemens, and Daimler developed a product idea from their own know-how and were able to celebrate their successes. The entire initial stages, from research and design to production, were carried out in Germany. Those days are long gone and, apart from SAP, there is virtually no German company from the last 30 years that has built up a global position in the technology sector.

Instead, just over 20 years ago, we started to build up and integrate global supply chains in low-wage countries in the East in order to establish competitiveness. Almost exclusively with the aging automotive industry, we were able to build global consumer brands with some companies. There are no recent examples where we have succeeded in building up global (consumer) brands with listed companies and developing them into technological innovation machines.

BioNTech is probably one of the most recent examples that shows how difficult it is for us to develop innovation from Germany for the global market. The German company, based in Mainz, announced earlier this year that it is investing in a new research and development center in Cambridge, as well as a regional headquarters in London. In addition, the company is currently strengthening its presence in the USA. However, it is not considering strengthening its branches in Germany – here too, we should urgently ask ourselves why.

The SME concept suits our comfort zone

The strong focus on SMEs, which is slowly but surely becoming an obsolete model, is no coincidence in Germany. Some developments have simply been overslept and it is high time we woke up. We should also better support social impact entrepreneurship, i.e. the ambition to have an impact on burning problems at a global level.

We need to understand, realize, and acknowledge that simply ignoring the Anglo-Saxon financial logic of public stock exchanges and private equity-financed models only makes us more dependent and ultimately only leads to us feeding the US models with our German SMEs.

If we do not actively engage in the global financial game, we will feed start-ups and German SMEs to global corporations that buy up our innovations cheaply and incorporate them into their value creation systems, which will then no longer be German or European.

You have to be a little crazy, obsessed and ultimately willing to make sacrifices to want to compete internationally, not only in the technology environment but also in financial logic.

We can still choose how the German Mittelstand will go under:

  • by systematically denying them money for innovation because we are withdrawing from the international financial system by being too one-sidedly family-oriented.
  • by selling companies for companies to corporations,
  • or by waking up and daring more entrepreneurs in this country to think big. They must actively orient themselves towards financial market-oriented models on an international level and thus adapt the successful SME model to the current situation in a positive way.

No matter what we decide: The German Mittelstand, with its mostly family-run companies that have existed for generations, are constantly evolving and have a strong position on the global market, is increasingly becoming a model that is being phased out. But, we can still develop the model positively and we should seize this opportunity now.

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