German Mittelstand and US manufacturing

[Indy Texas]

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.