Analysis: The demise of the Mittelstand-I

By SAM VAKNIN, UPI Senior Business Correspondent  |  Jan. 29, 2003 at 4:19 PM
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SKOPJE, Macedonia, Jan. 29 (UPI) -- German business confidence rose in January for the first time in eight months -- albeit imperceptibly, from 87.3 to 87.4, according to a survey of German executives by the influential Ifo think tank. A poll conducted by ZEW, another brain trust, confirmed these findings. On past form, though, this confidence level heralds a contraction of 5 percent to 6 percent in industrial production.

This is consistent with other dismal figures: negligible growth, stiflingly high real interest rates imposed by the European Central Bank, an export-discouraging strong euro and a disheartening surge in unemployment to more than 10 percent. German woes are compounded by a global recession, the evaporation of entire industries (such as telecoms) and a sharp, universal decline in investments.

The main victims are the Mittelstand -- the (depending on the definition) 1.3 million to 3.2 million mostly family-owned German small to medium enterprises, or SMEs. Of every 1,000 German businesses, 997 are Mittelstand by one liberal definition. The real figure is closer to one-third. Strict criteria reduce it to one in 30 firms.

These differences of opinion reflect the fuzziness of the concept, which has more to do with the style of ownership and management and with a unique historic-cultural background than with objective, economic yardsticks.

The Mittelstanders form the backbone and trusty barometer of the German economy. They engage close to 22 million workers and apprentices as well as well over 3 million "self employed" (owner-employees) -- 70 percent of Germany's total active workforce. More than two-fifths of all commercial turnover in the country is generated by them as well as half the value added and one-third of all exports.

The investment requirements of Mittelstand firms total $20 billion annually. But access to capital is narrowing. Tottering local banks are risk averse, the capital markets are lethargic, private investors are scared and scarce. The Basel 2 capital adequacy requirements will considerably increase the cost of bank loans to risky borrowers, such as are most Mittelstand firms.

According to a survey by Kreditanstalt für Wiederaufbau, the German state-owned development bank, one-third of all companies found access to bank credits restricted last year. In the 12 months to March 2002, German banks approved 7 percent fewer new credits. Listed banks reduced lending by a debilitating one-sixth.

According to The Economist, lending to Handwerk (craft) companies declined by half in the last 10 years. Public sector savings banks, hitherto the main source of Mittelstand financing, are hobbled by an increasingly intrusive European Commission. The Neuer Markt, touted as Germany's answer to NASDAQ, slumped by a staggering 96 percent and is about to be merged out of existence.

The family is not what it used to be. Less than 40 percent of Mittelstand businesses are handed down the generations nowadays. Many are forced to introduce pesky outside investors and directors, or hired management. The banks are far more inquisitive than they used to be. A traditional long-term, epochal business horizon gives ground to a quasi-American focus on the tyranny of the bottom line. Capital spending, product development and job security all suffer.

Founders are often to blame, unable as most are to calmly contemplate their own death or retirement and prepare a plan for orderly succession. It is at these junctions of regime change that most business failures occur, according to Sir Adrian Cadbury, author of "Family Firms and their Governance."

According to Creditreform, quoted by The Economist, a record 37,700 companies went under last year. The Financial Times puts the figure at 45,000. This year will witness another bumper crop. The figures, according to the Institut für Mittelstandsforschung in Bonn, are even more harrowing. In 2001, 386,000 startups were liquidated and 455,000 formed to yield 69,000 new firms.

New startup formation is at a low ebb. In 1991, net creations amounted to 223,000, in 1995 121,000, in 1998 100,000. The picture is especially grim in the east. About 129,000 net new startups sprouted there in 1991. But the dilapidated east succeeded to spawn only 6,000 a decade later, with its bloated and venal construction sector all but wiped out. Last year was only marginally better.

Half-hearted measures declared by the fragile coalition government on Jan. 6 -- grandiosely titled the "Mittelstand Offensive" -- are unlikely to reverse the tide of red ink. Less red tape, more generous financial support, simplified accounting and a fusion of the country's cumbersome development banks will do little to help the flood ravaged east, for instance, where crumbling domestic demand cripples local entrepreneurship.

Eastern businessmen sorely lack management experience and skills. Their networks of customers and suppliers are thin on the ground. Most of them are single-product outfits. Successes are few and far between and usually involve foreign equity-holders. Luckily, the labor market in the east is more flexible than its ossified and bureaucracy-laden western counterpart. Hourly labor costs -- wages plus inanely generous social benefits -- are also substantially lower in the eastern Lander.

Part 2 of this analysis will appear Thursday. Send your comments to:

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