Germany's Mittelstand Still Thrives

These midsize companies are nimble, hungry, and global

The 33 Chilean miners trapped since Aug. 5 in a copper mine 2,300 feet below the earth's surface are relying on a tiny German company more than 7,000 miles away to help get them out.

Micon, a family-owned firm with about 60 employees in the northern town of Nienhagen (population 6,300), designs and builds the precision tool that is aiding the rescue effort for the men, who became stuck after a cave-in. The equipment, made to keep deep-drilling machines vertical, is one of a range of Micon products used in mines from Chile to Mongolia. "We're engineers at heart," says Rainer Juergens, 69, who founded the company 16 years ago and owns it with his son. Micon exports more than 90 percent of its output. "By focusing on technology, we've turned a small and highly specialized company into a world leader in our niche."

Micon belongs to Germany's famous Mittelstand—more than 3 million small and midsize enterprises that form the backbone of Europe's largest economy, 82 million people and 2.4 trillion euros strong, sprawling from the Rhine to the Oder—the hinge between the European Union's east and west.

Outsiders may think of global champions like BMW (BMW:GR) and Siemens (SI) roaming this landscape, but it's the Mittelstand—family-owned companies with fewer than 500 employees and annual sales of less than 50 million euros—that employs more than 70 percent of German workers and contributes roughly half of the country's GDP. Although big German firms aren't part of the Mittelstand, some still think of themselves that way because they remain family-controlled, with small-company habits. "Mittelstand is a philosophy rather than an order of magnitude," says Ralph Wiechers, chief economist at the VDMA machine makers' association, which represents 3,000 mainly midsize companies. In September, the group doubled its growth forecast for the year, predicting that German plant and machinery output will increase 6 percent in 2010. "The Mittelstand is the defining element of our economy," he says. Collectively, Mittelstand companies plan to create as many as 100,000 jobs by the end of 2010, according to the German Chamber of Industry & Commerce.

Apprentice System

Germany's apprentice system, which doesn't have an equivalent in the U.S., ensures that Mittelstand companies have a steady flow of qualified workers. They take on 83 percent of all apprentices in Germany, more than their share of total employment. The apprenticeship system has roots in the Middle Ages, when master craftsmen across Europe taught young men the skills of stonemasonry, carpentry, and roof-making.

Tital GmbH, a company of 420 employees that makes precision-cast products for the airline and race-car industries in North Rhine-Westphalia's Sauerland region, is training 16 apprentices. Two will be offered a scholarship to study engineering at a nearby university in exchange for returning to the company after graduation, says General Manager Philipp Schack, who, along with five colleagues, owns 80 percent of the company. "People who live here usually stay but convincing somebody to move to the countryside after finishing a university degree is difficult," he says. "We're located in the middle of nowhere. We have to raise our own young talent."

Statistically, the corporate landscape in the U.S. doesn't differ much from that of Germany. Small and midsize enterprises employ slightly more than half of the U.S. workforce and contribute roughly 50 percent to GDP, according to statistics of the U.S. International Trade Commission, similar to Germany's numbers.

Tinkerers vs. Entrepreneurs

Philosophically, though, the two countries' small and midsize businesses couldn't be further apart. "In the U.S., the focus is on entrepreneurship—it's important to be a businessman and self-employed," said Volker Wittberg, professor at a university of applied sciences in Bielefeld, which trains future Mittelstand employees. "Germany is a tinkering country, where you found a company once you've made an invention. Mittelstand is about products, not so much about the people behind."

The Mittelstand has survived many changes. With the rise of iron, steel, and coal production as well as the chemical and electrical industries, and the establishment of stock corporations, capital shifted away from family-owned businesses to larger private companies. Nazi control of business during World War II led to the strengthening of industrial conglomerates. The Mittelstand rebounded after the war, when the country's destruction required Germans to start over, and small businesses slowly began to flourish again.

Mittelstand companies prove that you don't have to be big to export. Lunor AG, a six-person manufacturer of high-end eyeglasses, generates half its business abroad. South Korea is its fastest-growing market. Customers include Steve Jobs, Tom Cruise, and Madonna.

Political Clout

The Mittelstand has plenty of political clout and isn't afraid to use it. Last spring, when Germany was called on to assist Greece, the BVMW German Association for Small & Medium-Sized Businesses complained that the rescue package would worsen financing conditions for them. More recently the organization criticized the emerging Basel III international accord on bank capital standards, saying the new standard continues to treat loans to Mittelstand firms as riskier than they really are.

One challenge for the Mittelstand is its heavy concentration in four sectors that have moved down the value chain over the past half-century: machine tools, auto parts, chemicals, and electrical equipment. While the Mittelstand includes world-beaters, there's no statistical evidence that the sector as a whole is an overachiever, says Adam Posen, a senior fellow at the Peterson Institute for International Economics in Washington. Given Germany's high savings rate, strong educational system, and other advantages, the country might be performing even better if its corporate sector were organized in a more modern way, Posen argues.

Mittelstand backers, though, insist they already have a winning formula. Just ask Micon, the company whose equipment is being used to rescue the Chilean miners. "If we can just keep developing our equipment and make it even more reliable than it already is, then I think we have a good chance to keep growing over the next 10 years," says founder Juergens. Tinkerers, it seems, still have a future.

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