GOOD CHEMISTRY: Germany is home to BASF, the world’s largest chemicals company.

Size matters when you are competing on the global stage, and Germany has its fair share of business giants. The country is home to the world’s largest chemicals company, BASF: Its Ludwigshafen site is the biggest integrated chemical production facility on earth. In 2016, Volkswagen Group edged ahead of Japanese rival Toyota to become the world’s largest automaker by volume. Robert Bosch is the number one supplier of automotive components. Software company SAP is the market leader for the enterprise resource planning systems big companies use to manage their operations. 

Even if they can’t claim the global number one spot, plenty of Germany’s other multinationals are among the world’s biggest in their respective industries. There’s Allianz, the second-largest insurer, for example, and diversified industrial manufacturer Siemens, Europe’s largest such company by far. Carmakers BMW and Daimler may be smaller than VW, but they are still major global players. Continental AG holds the number three position in the league table of automotive suppliers.

The “Mittelstand” model

The big names are important, but focus too hard on them and you miss half the picture. According to Germany’s Federal Ministry for Economic Affairs and Energy, the 3.6 million companies that make up the country’s “Mittelstand” provide more than 60 percent of German jobs and contribute 52 percent of the country’s total economic output. And that output is formidable. Germany has the largest economy in Europe and the fourth largest worldwide. It is set to grow another 2 percent in 2017 as compared to its 2016 level of €3.14 trillion.

The “Mittelstand” is tricky to define. Most of these companies are small and medium-sized enterprises (SMEs) with fewer than 500 employees and a turnover of less than €50 million. They are often privately owned and may stay in the hands of family owners for generations. The positive connotations associated with the term means some much larger companies also claim to be part of the Mittelstand, aligning themselves with a set of values that includes a long-term strategic perspective and a focus on product quality and process excellence.

CRAFT WORK: Small and medium-sized companies provide more than 60 percent of German jobs.

While most Mittelstand companies may be small, they are often effective and ambitious. Plenty of them are global market leaders in their chosen niches, and the specialized products they manufacture are sought by customers across the world. Take BOGE, for instance, a firm based in Bielefeld, North Rhine-Westphalia. The company is an archetypal Mittelstand business that celebrated its centenary in 2007. It is run today by the great-grandchildren of its founder Otto Boge, who built the business making automotive tools and motorcycles. By the 1920s, he had moved into the production of air compressors, where the company found its niche. Today BOGE’s 750 employees design and make a range of high-performance compressed air systems used by 100,000 industrial customers in more than 120 countries. The company has embraced new technologies along the way: Its latest models come equipped with internet connections that allow remote monitoring and predictive maintenance, for example. 

It is thanks in no small part to the efforts of the Mittelstand that Germany has become an export powerhouse. In 2016 the country exported goods worth €1.2 trillion and its 2016 trade surplus of €252.9 billion was the largest on record anywhere in the world.

MEETING OF MINDS: A brainstorming session at online retailer Zalando. Online retail is growing fast in Germany.

Startup culture

Alongside its traditional strengths in physical products, especially sophisticated engineering products ranging from machine tools to medical devices, Germany is embracing the digital revolution. Increasingly, breakthroughs are driven by startups, with Berlin’s status as a hotspot for millennials from all over the world providing especially fertile ground. The German capital hosts the third-largest cluster of IT programmers in Europe and is number two in attracting global talent after the U.K. The country’s universities are another big asset: With Munich, Karlsruhe and Aachen, three of the top 10 European IT faculties are located in Germany. According to the business consultancy EY, growth in Germany has outpaced other European tech regions such as London, Stockholm and Paris and thousands of jobs have been created at companies such as Zalando, Awin, Delivery Hero, Home24 or ResearchGate.

Online retail is growing fast in Germany. Sales of physical goods (not counting digital products and streaming services) grew 9 percent in 2016 to a total of €35.5 billion, according to EHI Retail Institute. “The machine is humming. Germans are spending money and the majority of our eCommerce customers are reporting double-digit growth,” says Markus Reckling, Managing Director, DHL Express Germany. “The sheer size and economic power of the country make it very attractive for logistics providers.”

Long-established Mittelstand companies are getting in on the action too. Benefiting from the 9 percent annual growth rate in online sales, Otto is Germany’s second-largest online shop after Amazon, with 50,000 employees and a turnover of €2.7 billion. The company was founded by Werner Otto in 1949 as a mailorder retailer and is now in its third generation of family ownership.

Germany’s digital transformation is very much a work in progress, however, and accelerating the change is likely to be high on the government agenda in the coming years. The term Industry 4.0 was coined by a German government-sponsored group, but not every company has been as quick to embrace digital opportunities as Otto or BOGE. “We estimate only 5 to 6 percent of companies in Germany are really digitalizing their processes,” says Michael Hüther, an economist and director of the Cologne Institute for Economic Research. According to Rico Barth from the Open Source Business Alliance, it is primarily a few big companies that have embraced digitalization. “The larger part of German business, and especially the very important German Mittelstand, has hardly any experience with the internet of things so far,” Barth told BusinessInsider.de.

Moving ahead

But economic reinvention isn’t just about software. The Ruhr region in western Germany was the country’s first industrial powerhouse, but the heavy coal and steel industries that once dominated the region have faded over the years in the face of declining raw material resources and competition from Asia. 

Now the region is redefining itself for a new era. Landlocked Duisburg is now home to the second-biggest port in Germany, for example, handling 133 million metric tons of freight in 2016. Each week, 20 trains transport goods between Chengdu, Chongqing and Ürümqi in western China and Germany’s fast-growing inland terminal. The city is currently developing its sixth logistics area, with 26,000 new jobs generated since 2000.

Thanks to its strong exports and wealthy consumers, Germany is an increasingly important center for the ­European logistics sector. The country is also an at-
tractive location for pan-European distribution centers due to its location right in the heart of Europe. 

PORT OF CALL: Duisburg in the Ruhr region is home to Germany’s second-biggest port.

But the 25 percent of European logistics activity the country generates has brought a significant increase in heavy traffic. Following reunification in 1990, the dilapidated former state of East Germany had to be intensively rebuilt. Today, however, infrastructure investment is increasingly concentrated in the west of the country. This will continue in the coming years, with bridges and the Autobahn network undergoing repair and even rebuilding.

In 2017 alone, infrastructure spending was up 10 percent on the previous year, bringing the total to €14 billion. While some critics say this is not enough, the government has repeated that infrastructure spending will be a priority for the years to come and is set to increase spending by an additional 5 percent per year until 2020. 

Nor is the startup culture restricted to the co-working spaces of Berlin: It is also helping the country address its logistics capacity challenges. Duisport, for example, just announced the creation of “Startport”: Startups can work there for one year free of charge and develop innovations in logistics. The first company to join the program is looking into the optimization of cranes and storing strategies at container terminals.

Germany must overcome other challenges if it is to continue its seven-year run of strong economic expansion. At 5.3 percent, unemployment is the lowest since reunification in 1990, for example. While that’s good news for citizens today, it means potential headaches for growing companies in need of new workers. And in the long term, Germany’s aging population is set to exacerbate labor shortages.

Careful navigation

In their annual report to the German Parliament last year, the country’s Council of Economic Experts warned that the current economic boom might cause the economy to “overheat,” as the combination of rapid growth and low interest rates pushes up prices and leads to increased stress on the financial system.  

Then there are the neighbors. Germany’s outsized surplus is creating tension with trading partners around the world. Europe, the destination for the majority of German exports, is wrestling with political and economic uncertainty, including the nature and impact of Britain’s exit from the EU. 

Karsten Schwarz, CEO, DHL Supply Chain Germany & Alps points out that some of that uncertainty may turn out to favor Germany, with international companies valuing its relative stability, even in turbulent times. “Recently, we’ve seen quite a lot of interest from British companies who have to deal with Brexit,” he says.

Ensuring the continued smooth sailing of the country’s economy will require careful navigation by Germany’s political and business leaders. But many of the country’s companies, both large and small, have already survived and thrived through plenty of previous economic peaks and troughs. There’s little reason to suspect they won’t do so again. —  Margaret Heckel  

Published: January 2018

Images: Hans-Juergen Doelger/dpa Picture-Alliance; Adobe Stock; Zalando; Imago