Mittelstand Secrets of German SME success revealed

A large number of small and mid-sized German firms have become global market leaders. How? A new study comes up with five answers – and a list of companies to watch.
How do you get to the top of the heap?

Germany's small and medium-sized enterprises are the envy of the world and the backbone of the German economy. The country's “Mittelstand” companies, as they are known, include more global market leaders than those of any other nation. They tend to be firmly anchored in their region and to have a strong connection with their employees and the local community.

But why exactly does Germany have so many global leaders? And what lessons could the rest of the world learn from them? Christoph Müller, a professor of business economics who specializes in small and medium-sized enterprises, or SMEs, at the HBM business school in St. Gallen, Switzerland, has attempted to answer these questions. Mr. Müller talked to some of the most successful German SMEs and tried to work out the secrets of their success.

Founding families tend to be more committed to long-term goals and are not as beholden to investors.

Only companies with the highest or second-highest market share in their segment, with annual sales of at least €50 million, operating on at least three continents and generating half of their sales abroad, were included. Mr. Müller found that there were 461 global market leaders and he also listed "future champions" that have the potential to become leaders.

The business studies professor noted that over half the companies are still owned by their founding families, which he believes gives them a competitive advantage. "New customers are more likely to trust the owner than a manager who might not even be there any more in a year's time," he said. Walter Döring, founder of the Academy of German World Market Leaders, explains that founding families tend to be more committed to long-term goals, pointing out that they don't just look at quarterly figures and are not as beholden to investors.

"They give business time to develop," Mr. Döring said. This also has an impact on investment, with families often prepared to put a large proportion of their profits into the company.

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The will to expand and to innovate is at least as important as the ownership structure, as companies that do not grow will be taken over or driven out of the market, and those that do not develop new products will lose any technological edge. Mr. Müller has identified five recipes for success that seem to give SMEs a particular advantage. "Following them won't guarantee you a leading position on the global market," he said, "but they will always be helpful."

Adapt for clients

The first strategy is to adapt your products to different markets. BHS Corrugated, based in Bavaria with 1900 staff and sites in the US, China, Brazil and the Czech republic, among other places, makes machinery for producing corrugated cardboard. Company head, Christian Engel, spends about a quarter of his time traveling the world, working out what customers in different countries want.

BHS Corrugated has discovered that even such a standardized product is manufactured differently in different regions, with European and US customers wanting high-performance machines with lots of settings, while customers in Asia and Africa are willing to accept slower machines that are cheaper. At one stage, BHS Corrugated had trouble getting orders from Chinese customers. Since they adapted their machines for that market, though, they have had no problems.

As Mr. Engel argues: "You won’t become a world market leader with one product for all markets."

Leave the country

Companies need to open branches in other markets in which they operate. Stern-Wywiol, a company that produces food additives, has set up subsidiaries in its most important foreign markets, favoring regions where the population, and in particular the middle class, is growing rapidly. It’s incredibly important for the additives company to know what clients want: For example, to be sure that mayonnaise doesn’t freeze as it is being transported around Siberia or that cream doesn’t curdle as it is trucked through Africa. Today, the company has 15 international sites and only around a fifth of the firm’s €500 million turnover comes from Germany.

"Many global market leaders have recognized that exporting often isn't enough," Mr. Müller said, explaining that only companies with a local base will "get the business."

Buy up the competition

A third formula for success is to acquire other companies. Alfred Weber, head of Mann+Hummel, the world's leading manufacturer of filter systems, said a takeover "makes sense if we have the core expertise and need access to the market, or if we want to expand our portfolio." Additionally, the added distribution channels and newly gained products should also make sense to the buyer.

After having trouble getting a foothold in a competitive US market, the company made its biggest ever acquisition in May 2016 when it took over the filter division of the Affinia Group in the United States. Since then, turnover in the US has risen 10 percent.

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Acquisitions are a cornerstone of Mr. Weber’s management strategy. Since he started in the job in 2010, the company has taken over 11 other firms and grown from 7,000 employees to 20,000.

And Mann+Hummel is not alone: In a 2015 survey by the audit firm Warth and Klein Grant Thornton, 57 percent of managers at SMEs said they had looked at a takeover within the last year.

Occupy a niche

The fourth strategy is to try to occupy a niche market. Wiesheu, a company that makes ovens for in-store bakeries, decided over 30-years ago to specialize in this machinery, having previously also made butchery equipment. It was a risky decision, as it was rare at that time for bakery chains to prepare their products in-store. But company founder Karlheinz Wiesheu was convinced of the benefits of this new subset of the business in which there was no significant competition.

Today the company continues to try to innovate within its niche, for example, by coming up with creations like an oven that pops the buns out of the oven by itself when they’re done. “It’s not enough to look at statistics or analyze markets,” Mr. Müller says.

Develop new technologies

SMEs can also gain advantages by developing new technologies, often working together with one of Germany’s many research institutes. “Many business founders don’t fully consider who could help them,” says Mr. Döring, advocating for more networking between researchers and SMEs.

German industry association, the BDI, says around half of the country’s Mittelstand companies work continuously on innovations, and according to sector analysts, the leaders among SMEs have five times as many patents as ordinary companies.

One example: Plasmatreat, which makes plasma surface treatments for various products, cooperated closely with researchers at the Fraunhofer Institute for Manufacturing Engineering and Applied Materials Research to refine the processes they sell.

"It was only through this cooperation that the idea really gained potential," managing director Christian Buske said. To protect its advances, the company invests about 12 percent of its sales in research and development each year, and it currently holds 150 patents.

“If we did not make that investment repeatedly, we would lose our position as market leader,” Mr. Buske said.

Kristin Schmidt and Jan Guldner are editors for Handelsblatt’s sister publication, WirtschaftsWoche, specializing in stories on management and success. This story was adapted in English for Handelsblatt Global. To contact the authors: [email protected]