German Mittelstand and US manufacturing
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  German Mittelstand and US manufacturing
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Storebought
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« on: July 08, 2020, 01:01:24 PM »

I will bring up a topic near to my own interests that I just know will be of colossal interest to you all here.

The German Mittelstand consists of private, usually small to medium sized companies that form the backbone of the German (and thus, EU) economy. The vast majority of businesses in Germany are of this type, and altogether they employ some 60% of the labor force.

They are not "small businesses" in the way we think in the US: struggling mom-and-pop diners, grocery stores, laundromats, auto body shops, etc., serving local small-scale service oriented ends. Far less are they the often times debt-ridden small and mid cap companies defined solely by market capitalization listed in the US stock mutual funds and ETFs.

Mittelstaendler are private, usually family-held, concerns that hold scarcely any debt and characteristically fill some niche in the industrial economy. They range from having only a few dozen employees to thousands employed internationally, distorting what we mean by calling them "small and midsize companies".

By far the largest contingent specialize in engineering and high tech applications. Over 50% of the Mittelstand group are in industry, with the remainder in service industries (30%) or consulting (15%).

This is a site of the 10,000 top Mittelstaendler (in German). Relatively few of them have names or sell products that the general consumer recognizes: Birkenstock (shoes), BRITA (water filters), Faber-Castell (pencils and art supplies), Sennheiser (speakers and audio equipment), HIPP (baby food), Big Dutchman (feed lots), etc. The remainder are highly specialized. Here is a representative list with their company website from the linked German-language site:
Reinhausen (transformers)
Pepperl-Fuchs (optical sensors)
BOS Gruppe (car fixtures)
Weidmueller (connectivity and networking)
Burkert (fluid sensors)
Schunk (robotics)
Reifenhauser (plastic extrusions)

In general, the industry Mittelstand is concentrated in machinery, electrical equipment, automotive parts, and chemical.
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Storebought
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« Reply #1 on: July 08, 2020, 01:29:15 PM »

That was background. These are my own thoughts on the matter.

There have been articles published periodically in the UK about these German midsize companies, but they tend to focus on the "impending demise" of the whole system as the family patriarch leaves his company without heirs. That is less of an issue now -- the patriarchs nowadays are far more willing to leave control of the company to their daughters than the generations previous.

The far more interesting articles, though, question how these companies thrive so vigorously in Germany, yet fail to be established anywhere else. Britain tried to emulate the success of these companies by government support of small business; while funding did increase the number of small and midsize companies (SMEs) in the UK, British SMEs are not the market leaders of the German Mittelstand type.

But what does this concern the US?

The German Mittelstand, as a specific business model, is hardly known in the US or even reported on, unlike in Britain. Additionally, the Mittelstand model conflicts with the Silicon Valley business model that is so powerful in the US: small businesses (above the derisive 'mom-and-pop' level) are 'supposed' to grow into monopolistic behemoths with enough venture capital or after a hyped up IPO. And the US in general listens to the big guys over everyone else and pays scant attention to mid-caps anyway.

There are further issues.

The US has shed a great deal of its manufacturing capacity, in a dramatic fashion, from 2000 on. The largest companies faced this onslaught the best while the smallest the worst. The technological base of the firms that remain is (comparatively) primitive in operation and low in productivity. Company performance is given in terms of sheer volume sold and not in terms of product quality or reputation.

I tried to find material on the current strength of small US manufacturing companies like the list of he German Mittelstand champions, but was coming up short. One US company that is comparable in size and scope and 'feel' of a Mittelstand company (but not in management!) is Bose. Another that I knew was Sigma-Aldrich, but that was bought up by the German Merck. If readers know others let me know.

Just for reference, here is the list of the 50 best US manufacturers (see article for criteria). It's hard to make a comparison between these companies and those of the German Mittelstand since these are multinational market listed companies, some of them relatively recent divestments of even larger companies. In general these companies dominate their respective markets by being behemoths like I mentioned before.

I accept that the US should develop a manufacturing base that is more widespread, more comprehensive, and less monopolistic than what is most common now, and doing that through the mechanism of small business creation should not be impossible. But I have no illusions that rebirth of small and midsize manufacturing companies will be easy. Foremost, our image of small business in general as meaning "small potatoes" has to go, and quickly, since small companies are easier to start, capitalize, and respond to the market better than large ones.

Our image of manufacturing has to change as well: the image of sweaty guys punching metal in a hot dark place is dated yet widespread. Likewise, the simplistic image of 3D printing as the panacea of US manufacturing needs to go as well: the products made by the typical Mittelstand company cannot be 3D printed!

Manufacturing in Europe and East Asia 'looks like' the engineering facility of a university, and I expect the same to be true in the US. Technicians will need to be at least as competent as university undergraduates.

Another major issue is funding. The Silicon Valley model, or even the Wall Street quarterly earnings "model", is poisonous to manufacturing ethos and ethics over the long term (see Boeing). A source of funding away from Wall Street and Silicon Valley and its equivalents has to be created for US manufacturing to come back in any meaningful sense. (Why should manufacturing "come back" at all? Answer: because the US will not magically stop needing physical goods). Here, the comparison of a plant with a university engineering department is apropos -- federal grants could be given to engineering facilities which allows engineers to research materials and devices with less risk than the open market. The same model is used with pharmaceuticals and biotechnology research. It's an open question, though, whether firms founded from university research will be able to escape EU rules about "illegal" subvention, but the US has to do something.

Even with these difficulties, I think there is some hope to exploit US a competitive advantage. Germany's Mittelstand is heavily concentrated in machinery, auto parts, chemicals, and electrical equipment. Note that computers and digital media are not on this list, but that classification is listed several times on the list of 50 best US manufacturers. That is America's competitive advantage. America's rebirth of manufacturing should (re)start in general -- I think it poor that a supposedly advanced country can't make its own razor blades and washing machines -- but with particular focus on small and medium sized companies focused in digital media that won't be so easy for Germany to outcompete.
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Indy Texas
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« Reply #2 on: August 12, 2020, 01:13:51 AM »

We used to have Mittelstand-type firms. Small cities in the Northeast and Midwest were dotted with them.

Beginning in the 1950s, these firms were often taken public as an earlier generation of family management retired and their children did not want to go work for the family firm.

Then, one of a few things could happen: they might have gotten bought out by a larger firm looking to capture market share or diversify its product line; they might have been subject to a hostile takeover in the 1980s or later and ended up in the hands of a private equity firm (or possibly the company management via a management-led buyout). If the latter, the company would often get the Mitt Romney treatment: sell everything that's not nailed down, pull as much equity out of the company as you can, and whatever's left over ends up in bankruptcy and liquidated.

There were a lot of things working against the Mittelstand model here.

(1) The victory in World War II and the subsequent launch of the Cold War created a permanent demand for military-industrial products and encouraged the development of large, diversified conglomerates. A company could sell truck transmissions to the Army, avionics to the Air Force, and mainframe computers to the Social Security Administration.

Meanwhile, Germany was decimated after World War II and the Allies took a conscious interest in them not building up a big industrial base that could be repurposed for military use. So instead, those companies focused on more innocent things like elevator motors and hydraulic valves and home appliances.

(2) I would imagine that the American tax code over the mid-late 20th century has probably been friendlier to corporations taking on debt and realizing capital gains than the German tax code has.

(3) The qualitative aspects of American "culture" versus German "culture." Especially regarding short-sighted corporate planning and an "if you're not growing, you're shrinking" mentality that encourages firms to spend money trying to enter new markets or buy other companies instead of just focusing on what they do well and continuing to do it well and quietly chug along.

(4) The way labor relations work in the US versus in Germany. Suppose you're a small widget maker with one or two plants. If one of those plants is unionized and goes on strike, the shutdown could destroy your company. But if you're a big company with a lot of plants making a lot of different things, you can deal with one of them being offline due to a strike if the others are still going. (This was a big impetus for companies to start opening factories in the South - those plants were typically non-union and could pick up the slack if a Northern plant's workers had walked off.)

Labor relations in Germany are done at the sectoral level so a specific firm's size doesn't help them in terms of bargaining power. The labor movement in Germany was less empowered and adversarial than it was in the US or the UK because it was brutally suppressed during Nazi Germany, and was then suppressed in East Germany while in West Germany it adopted more of a collaborative approach with management.

You could argue about whether that approach has worked. Germany is often held up as an example of how to nurture an industrial base while the US and the UK allowed theirs to wither away, but the Hartz IV reforms and Germany's austere, export-driven industrial policy have allowed the Mittelstand families to do extremely well while Germany's working class has done...less so.

The article you linked is paywalled but I would imagine the UK's especially militant labor unions were part of the reason you didn't see much success of small British industrials in the 20th century. Look at the British car industry after WWII - it was a fragmented group of small companies where constant strike actions led to shortages and quality control problems. The government stepped in and merged them into larger companies because that was the only way they could stay in business. And then after the 1980s, they moved toward a more American-style financialized approach to corporate governance and there isn't really a place for the Mittelstand model in that either for the other reasons above.
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Benjamin Frank
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« Reply #3 on: August 12, 2020, 06:50:31 AM »

Search for this study online.

How Strong is the Link between Internal Finance &
Small Firm Growth? Evidence from Survey of
Small Business Finances
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