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Business

Germany's family businesses reach out to global markets

About 95 percent of German businesses have a family at their helm. That conservative establishment is engaging global markets in surprisingly versatile ways. Their path forward is studded with pitfalls, though.

A robot assembling a car

German food company Dr. Oetker is a family-run business

Despite the globalized economic environment, Germany remains strikingly traditional in one respect. Around 95 percent of the country's businesses are family owned, or are controlled to a large degree by a family.

Some 2,700 of those companies turn over more than 50 million euros per year. They include renowned companies like BMW, Miele and other international players like Bahlsen and Dr. Oetker.

The German economy has relied on these companies for decades to provide domestic jobs, but international markets are becoming increasingly important to them.

Nine out of 10 large, family-operated German companies currently do business internationally. France is their biggest market, although that's likely to change in the next three years, when China is expected to surpass France, the United States and Russia as Germany's most significant export partner.

"We already have the phenomena that small- and medium-sized companies are producing and distributing more in China than in their home market in Germany," Deutsche Bank board member Jürgen Fitschen told Deutsche Welle. "If this development in China continues for several years, then the number of those in the same situation will increase consistently."

BMW logos

BMW is known worldwide, but maintains family ties

Emerging economies gain importance

Just a few years ago, German companies set up production facilities in China with the primary intention of reducing their costs. Now, proximity to the country's booming domestic market is a reason enough to produce there.

Frank Wallau, of Germany's Institute for Small and Medium-Sized Enterprises (IfM) in Bonn, says this tendency isn't limited to China and Russia, but also in India, a future growth market.

"Many (companies) still have misgivings," Wallau told Deutsche Welle. "It's about the legal and political framework, but also about trade barriers and customs duties. Many are still looking for the right regional partners."

The Kirchhoff Group in North Rhine-Westphalia is one example of a family company that knows its way around this tangled international web. With 42 factories in 16 countries, the group primarily manufactures parts for the automobile industry.

"Germany's strength is in that we don't just export. We're also leaders in the integration of value creation," said Arndt G. Kirchhoff. "We import a lot before exporting it again. In the automobile sector it's about 50 percent. When it comes to machine construction, 70 percent of the work is done ahead of time in foreign countries. We integrate it here in Germany before exporting it again."

Eager for new markets

The Kirchhoff Group started putting out its feelers internationally during the 1990s. It began by expanding in Europe, and then made the leap to the United States, Mexico and China.

"The countries learn from the process," Kirchhoff said. "If I buy parts of my machines or cars from foreign countries, then I'm transferring know-how, and that's welcomed. I'm generating purchasing power and demand in the markets that way."

It didn't take long to reach a tipping point, however, and it quickly became necessary for the Kirchhoff Group to serve the foreign markets themselves, Kirchhoff said. "Otherwise one risks losing the high ground in those markets."

100 Yuan banknotes

Dealing with foreign currencies can be tricky and carries a risk

The majority of family-run German companies are likely to agree with Kirchhoff. About two thirds have built external distribution and service operations in foreign countries, and about half already manufacture outside of Germany.

A study conducted by the Institute for Small and Medium-Sized Enterprises shows about 30 percent of companies plan to build additional production facilities in foreign countries; nearly two-thirds are planned for Asia.

Exchange rates crucial

There are tradeoffs to doing business internationally, however, as financial risk accompanies the opportunities offered. Currency fluctuations are one major concern, which is why many companies maintain accounts in foreign currencies.

At Deutsche Bank, plans are underway to begin offering accounts in Chinese renminbi, according to board member Fitschen.

"That means German companies will be able to hold accounts in Germany with Chinese renminbi on them," he said. "It's good news for us as a bank. I'm sure hundreds of small and medium-sized enterprises will have opened such accounts by the end of the year. That will further influence trade positively."

Companies which export to China can spend the money they earn there on raw materials or components, but they can't use their German renminbi accounts to buy euros because the Chinese currency isn't freely exchangeable. Instead, the money must be transferred to a Chinese bank authorize to send back euros, dollars or other tradable currencies.

Author: Sabine Kinkartz (gps)
Editor: Sam Edmonds

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