The Mittelstand Takes A StandKaren Lowry Miller
For two frantic years, German entrepreneur Harald Korte took painful measures to steer his $80 million auto parts maker, Schuneweiss & Co., through the recession. Axing a quarter of his workforce, he automated the metalworks that his family has run for three generations in Hagen, a town in Germany's industrial heartland. Then, just as the company's outlook was brightening, trouble struck again in March: The big wage hike won by the German metal workers union will push Korte's labor costs up a shocking 11% by yearend.
It's a major blow for Korte--and for the 2.5 million small and medium-size companies known as Germany's Mittelstand. The double whammy of the wage hike, plus this year's 10% rise of the German mark against the dollar, have knocked the wind from small manufacturers just as they were staggering out of the recession. But the feisty leaders of this sector, which accounts for two-thirds of Germany's economy, are not taking the challenge lying down. Korte, for example, is ordering new equipment to replace 12 more workers and checking out production in Britain, where labor is cheaper. "We have to be flexible to survive," he says.
HOPPING MAD. The fate of much of German industry rests on the Mittelstand entrepreneurs. While giants such as Siemens and Daimler Benz are also pinched, they have more cash and have already launched production overseas. To fight rising competition from Asia and survive soaring costs, the Mittelstand managers must reach for radical solutions.
Some companies--perhaps several thousand--could go under. But the survivors, by bending the rules and bucking tradition, may alter the face of German industry for good. Their efforts may lead to more companies going public to raise new capital and more professional managers being hired to strengthen the family operations. Many companies are looking to expand offshore. They are even threatening to crack the monolithic structure of wage negotiations.
Already, Mittelstand companies are challenging the wage settlement. They are hopping mad at the rigid, pricey outcome. Some argue that employer representatives considered only the pocketbooks of large companies when they negotiated a two-step raise this year on top of a planned cut in the workweek to 35 hours. Others think they simply crumbled in the face of a strike.
So the Mittelstand companies are taking matters into their own hands. Probably only 5% will pull out of the employers association: While they could then freely negotiate, they would also be more vulnerable to strikes. But Thomas Bentz, president of the Association of Entrepreneurs, estimates that as many as 50% of smaller companies are stretching the rules to the limit.
A typical case is J.N. Eberle, a strip-steel maker near Munich. It plunged into the red in 1993 when Swedish competitors flooded the market after the krona was devalued. But owner Heinz Greiffenberger and his 250 workers, braving vicious picketing from IG Metall, agreed that for 1994 they would clock 40 hours at 36 hours' pay. It worked. All jobs were saved. The company is back in the black. "You have to have a strong spirit," he says. "But if we don't change the system, we will all suffer."
Those companies that can are following the German giants' lead and producing overseas. While many in the Mittelstand have long exported world-class products, fewer have offshore production. But the pace of overseas investment is picking up. Coffee-machine maker Melitta, for example, started assembling household machines in Portugal in January.
NICHE SEARCH. Trumpf, a maker of machine tools, is also expanding overseas. After a slump that forced him to lay off 400 people at his plant near Stuttgart, Trumpf owner Berthold Leibinger was poised to post a profit again this year. When the wage deal was announced, he became so depressed that he left work early to take a walk in the woods.
Now, he may pump an additional $2 million into Trumpf's laser-machine plant in Connecticut--on top of an already planned $6 million expansion there--to make the U.S. a major export base. That would leave just research and the most complicated production in Germany. "Germany's time as an exporter is over," he declares.
Not all family companies can afford such overseas investment. Those that can't must increasingly sacrifice their prized independence. J. Eberspacher, which supplies exhaust systems to auto makers, has sales of around $4 million in the U.S. and hopes they will hit $10 million once Mercedes-Benz opens its plant in Alabama. Still, "that's not enough to justify building my own line," says Chief Executive Gunter Baumann. With the hefty mark slamming exports, he has licensed production to Calsonic, a Nissan Motor Co. subsidiary with a factory in Tennessee. He is even looking into a joint venture in China.
Most important, the Mittelstand companies must improve even on their traditional strengths of flexibility and innovation. Companies such as Cologne-based Igus are breaking with convention. The maker of plastic chains that secure cables en machines now plans to stay open late and take orders of any size until 8 p.m. on weekdays and on Saturday mornings. And Prinz, a onetime utensil maker near Frankfurt, has expanded into solar heating tubes and glass fibers. Says Chairman Hellmuth Huser: "The only way to survive cost pressures is to jump into niche markets with high-tech products."
For many Mittelstand companies, the new economic pressures are aggravating a generational crisis. About half of the 600,000 largest companies in the sector are seeking a successor to the current owner or manager right now. That opens the door to more professional managers--sometimes from within the family. Gunter Blase, an engineer who founded Igus in 1964, still handles production at age 64. But now son Frank, 35, who has an MBA, is building up marketing and sales.
ON THE BLOCK. Other companies must go outside for new blood. Schuneweiss' Korte, 64, has two sons, but neither is interested in taking over. So next month, he is bringing in a 43-year-old manager experienced in metalworking--the first time in 130 years that someone outside the four owning families took the helm. "We need professionals now," he says.
That sentiment, combined with the need for fresh capital, also means more companies will go on the block. London venture capitalists are already looking for investments. "Five years ago, we were dismissed as exotic, now they want to hear all the options," says Stephen Behr, a consultant at DGM, a unit of Deutsche Bank that specializes in the Mittelstand. Gebhard Reusch is one. To raise capital to expand his small company internationally, the 47-year-old maker of soccer and ski gloves sold 100% of his shares last year to Britain's Pentland Group, but he stayed on as president. Now he is launching production in the U.S.
The coming months will be tough for Germany's Mittelstand. As they cut costs, export jobs, and change their management styles, they are sure to have an impact on Germany's economy. Tens of thousands of jobs could be lost in the next few years. But the betting is that the majority of the Mittelstand companies will survive the crunch. In the process, they may teach Germany's giant companies and its inflexible unions new ways to stay competitive.
GERMANY'S POTENT MITTELSTAND...
-- Includes 2.5 million companies, nearly 40% family-owned
-- Accounts for 80% of employment in the private sector
-- Comprises two-thirds of GNP
-- Relies on exports for 40% of sales
...FACES MAJOR CHANGE
-- Movement of more production to Southern and Central Europe and Asia
-- Delays in investment and hiring plans
-- Sacrifice of traditional independence to form strategic alliances
-- Sales of ownership stakes to raise capital