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Risks to the Mittelstand

Nils ZimmermannJuly 23, 2015

German industry and government leaders are worried about a shortage of new-generation leaders and investors for the small and mid-sized industrial firms that are the foundation of the country's powerhouse economy.

Deutschland Mittelstand F. Dick GmbH & Co. KG
Image: picture-alliance/dpa

Too little investment, too much bureaucracy, greying CEOs, and a shortage of up-and-coming managers: Those are some of the threats to Germany's small and mid-sized companies (SMEs) that the country needs to address, industry groups told Vice Chancellor Sigmar Gabriel at a meeting in Berlin on Thursday.

Gabriel, who is also Germany's economy minister, made it clear that he was an ally of SMEs and - with a touch of partisan bravado - made the same claim for his party. "After all, August Bebel, the founder of Germany's Social Democratic Party, was a successful small businessman," Gabriel said of Bebel, a wood-turner who started his own shop in 1864 at the age of 24 before founding the SPD a few years later.

Germany's SMEs - or "Mittelstand" - consists of hundreds of thousands of small and medium-sized companies, often family-owned industrial and technology businesses. They employ 60 percent of German workers, train 83 percent of apprentices and account for more than half of the country's GDP. Quite a few of them are world leaders in specialist manufacturing or production technology niches.

Hannover Messe Highlights 2015
Germany is known for its trade fairs - but Mittelstand firms (SMEs) often can't afford to set up displaysImage: Arburg GmbH

Reluctant heirs

But an aging population is emerging as a major threat to their long-term viability.

"Some 600,000 Mittelstand CEOs are set to retire by 2017," said Eric Schweitzer, CEO of the German Chambers of Commerce and Industry (DIHK). "A great many of them haven't been able to find successors."

The children of retiring company founders are often more interested in cushy, stable jobs as civil servants or academics than in taking over a family company that makes specialist gaskets for the aircraft industry, CNC machine-tool components, or high-sensitivity pressure-differential monitoring devices, Schweitzer said.

Their reluctance is all the greater if they're facing the prospect of a crusty old patriarch hovering in the background, telling them they're doing this, that or the other thing all wrong - which is often the case, he added.

"Another problem is inheritance taxes," Schweitzer said. "We need to change the inheritance tax system so that it encourages heirs to take over family firms, rather than confronting them with a huge tax bill that could force them to sell the company."

Underinvestment in Germany

With no successors in sight and their career's end approaching, Mittelstand founders often hold back from investing savings or raising fresh funds to expand their businesses.

That has led to a big investment gap. Many firms don't fully exploit market opportunities, and fewer jobs are created in Germany than there might be.

Hannover Messe Highlights 2015
The Chambers of Commerce says Mittelstand industries need help with digitizing their operationsImage: Deutsche Messe AG/R. Jensen

"A recent study estimated there's about 60 billion euros too little domestic investment by the private sector in German businesses every year - and in addition, the government invests around 20 billion euros less than it should in infrastructure," said Volker Treier, DIHK's deputy CEO.

Lonely company seeks loving partner

One response to the challenge of finding a successor is nexxt-change.org, an online marketplace where Mittelstand owners looking to sell their companies can try to find willing and qualified buyers.

At time of writing, the website listed 7,710 offers of businesses for sale, each providing detailed corporate information, against 2,942 often rather vague inquiries from people claiming to be interested in buying a business.

That's not nothing, but it doesn't yet solve the succession problem posed by 600,000 retiring business owners.

30.10.2014, an apprentice at work
Germany's dual-track training system is a pillar of the economy, but there's a shortage of willing apprentices

Activating untapped German savings

For the past few years, industry and government have been chanting catch-phrases about the need to foster a "founder culture" or "entrepreneurial spirit" in Germany.

They're encouraging universities, trade schools and startup incubators to try to wean young Germans from a traditional, conservative preference for a steady permanent job with a solid company and instead spark up something like a Silicon Valley spirit.

But startups need funding, and there's a huge shortage of venture capital in Germany, DIHK's Volker Treier said.

That shortage exists despite an enormous and rapidly growing pool of household savings. At the end of June 2015, German households had more than 2 trillion euros stashed away in their bank accounts - an all-time high, and 3.9 percent higher than just six months earlier. In addition, they own about 3.2 trillion euros' worth of stocks and other investment papers.

Treier suggested counterproductive Ministry of Finance regulations make it difficult for venture capitalists to accumulate losses over multi-year periods and book them off against profits when they finally come - usually when the company is sold. That's a big problem, because losses are almost inevitable in the early years of any startup business.

Gabriel vs. Schäuble?

The Chambers of Commerce and Industry hopes Sigmar Gabriel - whose job entails traveling the world promoting business ties with Germany, as he did this week in Iran and last week in China - will lobby in the German Cabinet for the tax accounting changes they say are needed to boost venture capital investment in Germany. But there's a snag: Gabriel would have to win over a skeptical Wolfgang Schäuble, Germany's powerful minister of finance.

That may prove difficult, since Schäuble - who at 72 is well past normal retirement age, but has shown no signs of looking around for a successor - is proud of having brought the federal government's books into the black for the first time since 1969. Green-lighting proposals for new tax breaks may not be high on his agenda.