Digitalisation

Technology innovations and digital transformation will be critical if Mittelstand wants to remain competitive in a world that is increasingly digital. As industries around the world embrace the latest tools like automation, artificial intelligence, data analytics and the Internet of Things (IoT), Mittelstand companies will need to embrace them to increase productivity, output and customer satisfaction. But the road to digitalisation is not easy for most Mittelstand companies. Expenses are very limited, as well as internal digital technologies know-how, and it is not that easy for small companies to move to fully digital operations. Because, while larger corporations have larger budgets and specialist teams to implement technology, mid-sized companies tend to have smaller resources, and so can’t afford the investment and teaming for an entire digital transformation.

The digital expertise skills shortage makes these efforts even more complicated. Mittelstand firms might not have technical specialists on staff with sufficient knowledge to deploy and operate digital tools. The problem of hiring digital employees is another one, as the best talent are often attracted to bigger tech companies with attractive compensation packages. This lack of digital talent keeps Mittelstand from being able to digitalise, optimize and use data for strategic decision making.

In order to fill these gaps, many Mittelstand companies turn to government assistance programs and regional measures to develop digital competences and offer technical upgrades with a financial subsidy. But the pace of digital change is still disproportionate in the Mittelstand, where smaller companies are not keeping up with their big brothers. This technology gap undermines the viability and competitiveness of these SME for the foreseeable future, with digital tools becoming the key to efficiency and speed on the world market. These digitalization roadblocks must be plugged to preserve the Mittelstand’s position as a driving force of the German economy.

Workforce Challenges

Workforce challenges and labor shortages threaten the German Mittelstand because they depend on a specialized, well-trained labor force to stay ahead. The Mittelstand has long benefits from Germany’s Duale Ausbildung, or VET – dual vocational education and training system of classroom learning and practical training at work. This model has been successful in creating skilled labor for Mittelstand companies of a particular nature – namely manufacturers, engineers and technical companies. In the form of work experience and technical training for youngsters, VET has secured a constant supply of qualified workers, well-equipped to make a contribution to Germany’s high-quality industrial production.

But recent demographic and social movements are straining this workforce model. Germans are getting older: as more workers leave, less young people want to work in the Mittelstand causing an increasing skills shortage. More than that, the ambitions of young people are changing. Young people are now drawn towards higher education and the white-collar jobs, lured by the image of status, security and advancement these occupations provide. The result is that fewer youth are enrolling in the vocational training system, so there are fewer skilled laborers in technical and manual jobs in the Mittelstand. This labor deficit is disastrous for Mittelstand companies – particularly in niche production and craft, where technical knowhow and manual labor are needed. These companies can’t produce as much, don’t maintain quality, and they can’t innovate if they don’t have a strong supply chain of skilled employees. The situation is made worse by poor succession management, particularly for family-run Mittelstand companies. As workers and business owners get older, lack of qualified successors only worsens the labor shortage — at the cost of loss of skills and continuity of operations.

To solve the problem, some Mittelstand companies are setting up in-house training, creating apprenticeships, and engaging with schools and universities to source and develop the future generation. So too are government programmes: for example, various initiatives aimed at restoring the vocational training system, encouraging apprenticeships, and encouraging young people to choose technical professions. But these initiatives have their ups and downs, mainly in changing young people’s views about technical careers and in battling with universities and corporations for talent. Solutions for labor issues and skills shortages will be essential for long-term Mittelstand sustainability. To secure a constant supply of highly skilled laborers will preserve not only the quality and innovation the Mittelstand has come to be recognised for, but also keep it as an integral part of Germany’s economic resilience and global competitiveness.

Succession Planning

Succession planning is also a big challenge for Germany’s Mittelstand, and it is important to note that most of these are family businesses. Thousands of Mittelstand companies have been handed down through generations, family ownership being part of their identity, values and future. But when founders or current family executives hit retirement age, who is going to inherit the business is ever more pressing. It is an incomprehensible and hard-nosed transition, which can sometimes mean having successors not only need to know what they’re doing but also need to know the philosophies behind these companies’ success.

The main issue is that the next generation may not want or be ready to step up and lead. Career aspirations today and family change also make younger members less likely to go into the family business and opt instead for other professions or ways of life. Not only that, but many are not equipped to take on the challenges of running a business, especially one with an historical history that’s also susceptible to new threats such as digitalization. Such resistance or failure to lead opens ownership cracks and compromises the viability of the business. It is also difficult to find suitable managers who can retain the Mittelstand’s familial culture and bring the competence and approach needed to modernize the company. These companies usually need to look outside their immediate families to find outside managers or experts who are in tune with the culture and goals of the business. Yet recruiting outside management is also a touchy matter, because it risks changing the corporate culture and the familial trust that is part of Mittelstand companies for so many years.

Succession planning is made even more complicated by the taxation on inheritance and ownership transfers. Germany’s inheritance tax can be especially costly to family businesses as they move from one generation to the next, if the family capital is held in business assets rather than liquid assets. Those taxes can also necessitate the sale of part or the whole company for the sake of this tax, and leaving the family with no control. These tax pressures threaten the continuity of the Mittelstand if succession and finances are not properly designed and planned. If Mittelstand companies fail to implement succession planning, they could be targeted for buyout by large companies or foreign investors. This consolidation is threatening the individual qualities of the Mittelstand: local identity, quality emphasis, familial approach. Such values must be preserved through carefully considered succession planning if the Mittelstand is to remain relevant in the German economy. Such issues will demand not just new family models, but also policies that help smoother transitions and maintain the Mittelstand’s long-standing traditions and strengths.

While companies from Mittelstand may struggle with digital transformation, workforce challenges and succession planning, they are flexible and solid on their foundations. The Mittelstand is an example of long-term economic success, and it shows how SME can continue to develop long-term profitability and social influence without compromising on independence or quality. And that German strategy has much to teach policymakers and entrepreneurs around the world, about the need for a more balanced model of economics that combines social responsibility, financial security and constant innovation.

Germany’s Mittelstand connection with its economy

The German Mittelstand (SMEs)  is fundamental to Germany’s economy, driving jobs, innovation and world market dominance. Mittlerstand companies account for more than 99% of the German enterprises, which are about 60% of the German employees and produce more than half of the GDP. “Hideaway heroes,” these companies monopolize small global markets in industries and manufacturing. One thing about the Mittelstand is that its primary focus is on stability over short-term gains. These companies focus on long-term growth and customer and employee relations, a culture that promotes creativity and technical know-how. The Mittelstand also sits at the heart of Germany’s double training system in vocational education, which makes it a steady source of qualified labor. But problems such as succession planning, digitalization and lack of talented employees threaten their viability. It still relies on the assistance of regional banks (Germany’s public banks, for instance) to secure their economic prosperity by offering customized loans to SME. The Mittelstand also has national effects, since those companies make up around 68% of all German exports. They adapted to the global market and operated as “mini-multinationals”, which boosted Germany’s export-driven economy and cemented Germany’s standing as a European manufacturer leader. The Mittelstand is able to hold its own and keep changing, and that fact confirms the significance it has played in the German economy as a unique business model of both tradition and creativity.

Germany’s Mittelstand is really important in economic contribution, cultural impact and international leadership. Mittelstand is the “center of gravity” of the German economy — not only does it create a lot of jobs and stimulate innovation, but it also allows Germany to stay competitive as an exporter in the global market. They’re often small, family-owned businesses, and the values are development long term and high quality production with customer service and employee loyalty. Because they’re all in niche markets, Mittelstand companies are “secret heroes” of their market segments and hold the world’s leading position.

Mittelstand development is important to the continued economic and social growth of Germany. They do not just keep the local economy strong, but they are also an example of sustainable development and innovation-led development for SME abroad. Globalization and technological disruption place Mittelstand at a crossroads: adjusting to global competition, and digital transformation. Yet, these are the companies that have been very flexible and keep investing in innovation. Changing their business model while staying true to their values, Mittelstand will stay at the forefront of the German and international economy as an invaluable reference and model for the growth of SMEs worldwide.

By Hongyi Gao