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PARK June

Lessons Learnt from Germany’s Mittelstand

PARK June

Aug. 27, 2013

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As industrialized nations scramble to regain meaningful economic growth, Germany's small and medium-sized enterprises, the Mittelstand, are attracting widespread attention. Korea also has taken note, viewing the German SME structure not only as a way to bolster manufacturing sector and exports but also as an answer to widening socio-economic polarization and stubbornly high youth unemployment.

Members of the ruling Saenuri party have even established a study group to examine the Mittelstand and Germany's economic model. And in its quest to have thriving "hidden champions" as in Germany, the government is looking to foster small global companies.

Mittelstand companies are a product of economic practicality, cultural identity and regional government support. They emerged in the 19th century in the agricultural region, south of Germany. At the time, the traditional way of Realteilung, the act of splintering their land to give to their heirs, had limited the income of farmers. Despite this, their unwavering middle-class identity kept them from leaving for urban factory jobs. Instead, they supplemented their livelihood with handicraft businesses and a division of labor ensued among the family-owned small enterprises.

Of course, the artisan producers also had to contend with Britain's capacity for mass production in the emerging Industrial Revolution. Mindful of how German textile makers and other large-scale operators were struggling against Britain's low-priced products, Mittelstand companies realized their survival depended on developing niche products rather than be drawn into bruising competition based on mass production. Thus, high-priced customized products such as the silk hats from Barmen and kitchen knives from Solingen appeared.

As for regional government-led support, it came to the fore when Germany was divided into smaller states and economic competition between regions intensified. Specifically, in 1834, Germany established the Zollverein or Customs Union, which economically integrated the states and escalated the competition between them. Regional governments began to aggressively promote industrialization to shore up their economic and political power. The governments in southern Germany, including W체rttemberg, where a Mittelstand-centered industrial structure had already taken root, established savings banks, provided financial support for job training, and implemented technology transfer to strengthen their competitive advantages.

Today, the Mittelstand account for most of the companies and employment in Germany, and they retain the hallmarks of the 19th century. Product development is performed in what the Harvard Business Review calls "Extreme Focus," and regional networking is extensive. By concentrating their capabilities on producing customized products such as premium consumer goods, machine tools and parts, and materials, the SMEs enjoy competiveness in high quality-high-priced markets. Prime examples are Henckels who has insisted on producing primarily kitchen knives since it was founded in 1731 and Winterhalter, which has poured its efforts into producing dishwashers for hotels and restaurants.

Meanwhile, cooperation among Mittelstand companies ensures a steady labor supply and technological standardization. Currently, there are 327 industrial clusters across Germany with one-fourth of them in the southern provinces of Bavaria and Baden-W체rttemberg. Through regional chambers of industry and commerce, the SMEs participate in a national vocational training system that provides youths with both theoretical classes and on-site practical training. And their participation in various industrial associations such as the engineering association VDMA leads to industrial standards that align with technological advancements and regulatory changes.

To offset inherent vulnerabilities in having a thin product range in a domestic market, the Mittelstand have globalized aggressively. The process includes overseas productions to realize economies of scale and many Mittelstand are now large companies. Car parts maker Bosch started in Stuttgart in 1886 with just 2 employees. It now has 300,000 employees around the world. Bosch's development of the ignition system which brought about the innovation of the automobile engine launched the company onto the global stage and helped it to become a multinational corporation.

The core element of the Mittelstand's success is their bold entrance into the global market through the production of highly specialized products. As such, it is important to actively benchmark not only Germany's support systems and policies but also their business strategies. With an adequate product for the global market, Korean SMEs must concentrate on one area and aggressively pursue globalization. In doing so, they may also succeed in becoming hidden champions.

Furthermore, Germany's artisans were able to cultivate strong small companies by taking pride in their work and having a dynamic business mind. These values underpin the success of the Mittelstand business strategy. But, Korea lacks such Mittelstand values and vocational tracks to become craftsmen are not socially held in esteem. Instead, Korean youths feel tertiary education is imperative to achieve middle-class status. Ergo social and cultural norms need to be reconfigured in order to enhance and develop Korea's SMEs. And similar to Germany, a social climate wherein artisans, or meisters in German, receive preferential treatment must be established so that that both artisans and SMEs alike can take pride in their social status and profession and spearhead the specialization of their respective fields.

The column originally appeared in JoongAng Daily

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