Publication

SMEs, the basis of the German export power

31 July 2019
INCAE Executive Education

This is the German paradox: it is the country of small and medium-sized companies, the vast majority of which are family-owned, which are at the same time the source of its great international prominence.

The particularity of Germany is that their participation in the process of global integration of capitalism through trade and investment is not carried out primarily through large transnational companies, but through small and medium-sized companies (responsible for 68% of total external sales).

Germany's medium-sized manufacturers, known as Mittelstand, form the backbone of the world's fourth largest economy. It is about 3.000 companies that have revenues between US $ 150 million and US $ 1.500 million per year. They are companies that are extraordinarily specialized in a single product of high technological value and global reach, which compensate for the high risk inherent in extreme specialization with a notable international diversification (an average of 16 countries each). 

These highly knowledge- and capital-intensive transnational SMEs, specialize in the production of advanced machinery, auto parts, chemicals, and automated electrical equipment. Their leadership in these global niches is assured because they compete for quality and brand (usually centenary or more), and not for price.

The Mittelstand refers to an alternative economic model to the Anglo-Saxon industrial organization model, and its small and medium-sized companies share aspects of corporate culture:

Long-termists. The long-term vision of small and medium-sized companies is one of their most characteristic features, basing on this aspect the quality of the product and the after-sales service they offer, as well as their relationships with suppliers, customers and employees.

Hyperspecialization. They are niche companies and, generally, intermediate products with low visibility for the general public, but fundamental for the operation of consumer products. Germany is the European leader in patent registration.

Innovation. They are aware of the importance of investing in R&D as it allows them to advance and transform their production processes, positioning themselves as leaders in their hyper-specialized market. Germany invests 2,94% of GDP in R&D, above the European average, which is 2,03%.

International vocation. Generally, they operate in highly concentrated markets that border on monopoly, diversifying abroad thanks to economies of scale.

Family management with German rigor. They are run by their own owners and companies pass from generation to generation, which focus on creating personalized, lasting and sustainable relationships with both customers and suppliers, becoming loyal distributors.

More medium than small. The size of the SME does matter. The larger the company, the more diversified the sources of financing are and it is more common for them to be exporters. In addition, the larger the company, the longer the company usually has, which means more consolidated production capacity and market penetration.

Sense of belonging. Motivation and identification is a key aspect of this type of German company, which has loyal workers with high performance that is reflected in business profitability. Family management bodies strive to create lasting ties not only with their suppliers and customers, but also with their employees.

Excerpt from articles published in the Argentine newspaper Clarín and blog of Luis Pardo Céspedes, CEO - EVP Sage Iberia. 

 

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