Germany's Mittelstand - What Is It?

Economists study Germany in order to unravel the mysteries of its continued success. Two factors are manufacturing and exporting. Germany has managed to continue to be strong in both of these.

While many first-world, high-tech countries have seen their manufacturing outsourced to nations with lower labor costs, Germany has maintained some level of domestic production. To be sure, German firms have some amount of offshore factories, but relative to other economies - the USA, the UK - there’s more domestic manufacturing.

This trend is powered not only by the big companies - BASF, Bayer, Bosch, Siemens, VW, BMW, Porsche, Audi, Mercedes-Benz-Daimler, Birkenstock, etc. - but also by the small and medium sized companies.

Standing between the large companies and the individual proprietors, these firms are called the Mittelstand and are the source of as much growth and innovation as the big firms.

When recession hits, the Mittelstand allows Germany to bounce back quicker than other nations. The BBC’s Stephen Evans writes:

This recovery is spread widely because every German town seems to have its periphery populated by the famed “mittelstand” of small and not-so-small companies, exporting countless unglamorous but profitable products. These companies are often family-owned and founded on values of quality and investment, combined with a shrewd search for markets.

In addition to policies carefully crafted to encourage a positive balance of trade, Germany also enjoys a superior worker-training system. While the USA and other nations have competitive university-trained professionals and large pools of unskilled labor, they lack the middle level: skilled craftsmen.

Germany’s skilled tradesmen create the legendary quality that goes along with brands like Porsche, BMW, and Zeiss. These artisans are produced by a thorough educational system which siphons good students away from the university-bound track and places them into apprenticeships.

The German economic structure ensures that master craftsmen are paid as well as the professionals coming out of the universities, and sometimes even better. There is no social stigma attached to being a machinist or a tool-and-die maker.

Can other nations replicate the results of the German system? Newsweek’s Rose Jacobs writes:

The Mittelstand is the envy of the western world – and beyond. The Economist reported last week that officials from South Korea, Iran and Egypt have been in touch with the German trade body for mid-sized companies, asking for advice on how to emulate its members’ success. In fact, the German model is already being exported in very concrete ways: several German companies with manufacturing facilities abroad have decided to address local skills shortages by recreating overseas versions of Germany’s apprenticeship system, with future workers recruited young and given a mix of classroom and on-the-job training that both prepares them for solid middle-class jobs and inspires loyalty. It’s proved so successful that, in the US, American firms are following suit, and in China, the government is adapting Germany’s apprentice training exam for its own young people.

The German economy provides a stable and predictable environment, which in turn encourages investors to take more risks, and look further into the future, foregoing short-term results for long-term ones.

The German model works even outside of Europe, as shoppers in North America flock to German retailers like Aldi and Trader Joe’s.

UK's Stewart Wood Analyzes Germany

As a member of Britain’s Labor Party (‘Labour Party’ as they spell it), Stewart Wood has a lifetime appointment in the House of Lords, and is a leader in his party. Writing in the Guardian, a Manchester newspaper with a global following, Wood encourages his fellow Englishmen to consider what they might learn from the example of Germany.

After a few years of prosperity in the 1980s, when real growth in all income groups ignited productivity in the lower and middle classes and encouraged innovation in business, British economic activity has stagnated. Wood sees, in the German system, a motivation for employers to invest in their workers.

The perception that there is potential for growth makes investors more future-oriented. A predictable and stable economic environment, and freedom to innovate, foster a psychology in which management is willing to take risks, because prospects and expectations are better. Wood writes:

What is most inspirational about the German economy is not the policies it has pursued, but the consensus of values on which the economy is based. Germany is committed to a free market economy, but one in which capitalism is organised and responsible. This “social market” rests on widely accepted rules and practices: to encourage long-termism; to promote collaboration rather than conflict in the workplace; to incentivise employers to invest in the skills and productivity of their workers; and to try to ensure prosperity is available to Germans in all regions rather than just one. And when bad times hit, Germans fall back on a welfare system explicitly based on the interlocking principles of need and contribution.

One aspect of the German economy is a strong manufacturing sector. While other high-tech countries have outsourced physical production to offshore sites with lower costs, Germany found ways to keep factories at home: higher productivity and smarter methods.

To be sure, even German companies fight the threat, and the temptation, of outsourcing to third-world sites. But even in the sweatshop-prone clothing industry, German companies like Adidas, Puma, and Hugo Boss have kept at least some operations on German soil.

As German firms continue to expand - Adidas is now the parent company of Reebok, and Americans are now shopping at German stores like Aldi and Trader Joe’s - Stewart Wood wants his fellow Brits to study those examples

Because the truth is that there is much to like and admire about Germany. And – whisper it softly – there is a lot we can learn from them too.

While major names come quickly to mind - BASF, Bosch, Siemens, Lufthansa, T-Mobile, Birkenstock, Hapag-Lloyd, and Bayer - the small and middle sized companies, whose names are largely unknown outside, and sometimes inside, Germany are also crucial to economic success. These small and middle sized companies are categorized as Mittelstand, between the large companies and individual proprietors.

As often as not, the Mittelstand drives economic growth, creating innovative products, new processes, and increasing employment.

Germany’s education system produces superior technicians and highly-skilled craftsmen. While many first-world nations have excellent universities which produce professionals, Germany has paired its prize universities with mid-level training programs for machinists and tool-and-die makers.

Craftsmanship is as important as engineering for the production of legendary brands like Porsche, BMW, and Mercedes-Benz-Daimler. Stewart Wood states bluntly:

It remains the most successful exporting nation in modern European history.

The lesson from Germany: keep domestic manufacturing at home, allow stability and deregulation to encourage investment, and train a solid cadre of skilled craftsmen to complement the university-trained high-tech professionals.