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The strength of Germany’s economy has long been in the Mittelstand. The amorphous group of small and midsized enterprises, often family-owned, that are often world leaders in their niches make up the backbone of Germany’s postwar success.
So as worries grow over the future of Europe’s largest economy, there are concerns about the Mittelstand — and in particular whether German metal bashers can withstand the increasingly fierce competition coming from China.
Bertram Kawlath is typical of the Mittelstand entrepreneurs. He studied in the UK and Switzerland as well as Germany before joining the family company Schubert & Salzer, which makes industrial valves, where he is now chief executive. It cannot compete with the biggest valve manufacturers in terms of size with just 150 employees and revenues of more than €50mn, but its products are found in Formula 1 and Las Vegas’s Bellagio Fountains among others.
“There are reasons for optimism. But there is not much time to lose,” said Kawlath, who is also president of the VDMA, the association representing Germany’s machinery industry.
Much of the gloom around Germany has centred on its carmakers, which are struggling to keep up with Chinese rivals whose electric vehicles are often cheaper and more innovative. The Mittelstand machinery companies have more going for them, but the warning lights are flashing here too.
The German metal bashers are in a fight to marry AI to their equipment, and need help from national and European policymakers, as well as upping their own companies’ speed considerably.
The competitive threat from China is growing daily. The VDMA said its own machinery exports to China fell 8 per cent last year and by the same amount so far this year, while Chinese equipment imports to Germany rose by 14 per cent in the same period.
The gloom was underlined by a recent survey by DZ Bank and industry bodies for co-operative banks. The investment appetite among German SMEs has fallen to its lowest level since the survey began in 1995 — lower than during the financial crisis, the Covid-19 pandemic or the energy crisis following the start of the war in Ukraine. Only 52 per cent of companies polled still plan to invest in their operations over the next six months and only 26 per cent anticipate an improved business situation in that time.
Much of what needs to be improved is at home, said Kawlath. He says corporate taxes are about 5 percentage points higher than the average of rich countries in the OECD. Other problems in Germany include a high total cost of labour as well as “gold-plated” regulation, where EU rules are added to with further standards.
At a European level, the Mittelstand bemoan ongoing issues with the single market, be it in capital markets or goods, which means that they fight at a considerable disadvantage compared with Chinese or indeed US rivals.
But there are also specific complaints against China, where German SMEs want Brussels to be more savvy. Multiple industries complain of Chinese goods that can no longer be sold in the US due to tariffs being diverted to Europe.
Kawlath argues that the EU needs to have more targeted, flexible and quick tools to use versus Chinese companies, both on dumping and over subsidies. Too often, the current rules end up being too costly and time-consuming for smaller companies. And any action tends to come after the damage has long been done. He also calls for China to open up public tenders to foreign companies, saying that smaller businesses without a presence inside China are being shut out.
All this takes place against a geopolitical backdrop that is moving against Germany and its companies. “What we have seen over the last years is the weaponisation of dependencies,” bemoaned Kawlath, pointing to US trade tariffs, Russian oil and gas restrictions, and China’s dominance of rare earth minerals.
Smaller German companies have a formidable innovation record, and saw off worries of a wipeout from Japanese rivals decades ago. Now, though, the competition from China is even more intense, and so is the urgency for both the Mittelstand and Germany to reform as Europe also tries to stand more on its own feet in terms of defence.
As Kawlath said: “In terms of European security, we need an industrial base that is competitive and fast. We are far from perfect but we are walking in that direction . . . We have to run.”
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