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Think Small


The Corporation

THINK SMALL

If you want to get a close look at Germany's export juggernaut, don't go any farther than the Glasbau Hahn factory on the outskirts of Frankfurt. Although it has only $12 million in sales, Glasbau Hahn is the Mercedes-Benz of glass showcases. Its products are jammed with technology to protect the world's most valuable art objects--such as the bust of Queen Nefertiti at Berlin's Egyptian Museum. Top-drawer customers such as New York's Metropolitan Museum of Art and London's British Museum eagerly fork out up to $100,000 apiece for custom-built wall-size showcases from Hahn, complete with heat-free, fiber-optic lighting and precision climate control. "Museums always ask us to do the impossible," says CEO Till Hahn.

About 300,000 other small and midsize companies such as Hahn--collectively dubbed the Mittelstand, meaning midranking--perform Mission Impossible on a daily basis. Although Daimler Benz and Siemens are best known abroad, it is these companies with fewer than 500 employees that produce two-thirds of

Germany's gross national product, train 9 out of every 10 apprentices, and employ 4 out of every 5 workers. They make everything from the predictable motors and machine tools to such consumer goods as camping equipment and high-fashion garments. Some, such as Krones, a maker of bottle-processing machines, have become major suppliers to U. S. industry. Says Klaus-Peter Muller, a board member of Frankfurt's Commerzbank: "Germany's postwar economic miracle is a Mittelstand miracle."

The Mittelstand are a major reason Germany is likely to fare well in the 1990s, despite the pain of reunification. They may even be a key to turning around the former East Germany. These companies are already powerful exporters, used to competing with Asia's and America's best. They know how to use innovation and applied research to overcome some of the world's highest labor costs and a strong currency that makes their exports more expensive.

BETTER MODEL. In the U. S., a small but growing number of executives and gurus think the Mittelstand provide a far more relevant model for American exporters than the Japanese trading companies and industrial groups often held up to business students as organizations to emulate.

That's because the U. S. has hundreds of thousands of small and midsize companies that, given the proper orientation and support, could become export powerhouses. "We've got this huge midsize sector, but it falls through the cracks," says management consultant Tom Peters, co-author of In Search of Excellence. "Before we leap overboard and say we require the Japanese model, let's look at the German model."

Unlike Japan's export leaders, the Mittelstand have collectively grown big by thinking small. They work out of small plants often located in towns you've never heard of, and they target small but highly profitable niches in global markets. Their bosses belie the cardboard-cutout image of German managers as narrow-minded corporate bureaucrats, scared to jeopardize their salaries by taking risks and unable to innovate. Pouring huge portions of their revenues into research and development, Mittelstand companies routinely beat the biggies to market with new products. One reason is that they are mostly run by owner-managers who have their families' wealth on the line. They are, says Bonn-based management consultant Wolfram Hatesaul, "the terriers of the German economy."

FREE SPIRITS. While a relative handful of U. S. companies accounts for the lion's share of exports, thousands of Mittelstand companies collectively generate 30% of German exports. To be sure, there are some who refrain from direct exports, choosing instead to give a helping hand to the big guys. Munich-based luxury-automobile manufacturer BMW, for instance, uses 1,000 suppliers. Daimler Benz's Mercedes-Benz auto and truck unit buys more than $15 billion worth of supplies annually from 50,000 companies inside Germany. That is similarto the Japanese model in which smaller companies supply big exporters in their keiretsu, or industrial group. But in contrast with Japan, the vast majority of Mittelstand companies are fiercely independent.

The economic payoff from these companies is huge. At $1.4 trillion, Germany's economy is less than a fourth the size of that of the U. S., and its work force of 34 million is dwarfed by America's 115 million. Yet year in and year out, Germany has vied with the U. S. to be top gun in the export battle. Now, with unification, it's pulling in front. Last year, Germany sold $421 billion worth of exports, comfortably ahead of America's $394 billion and Japan's $286 billion. Those numbers show that dominating hundreds of small

niche markets works well for Germany.

Part of the Mittelstand's success stems from the German business culture itself. Unlike their Yankee counterparts, Mittelstand chiefs aren't obsessed with quarterly earnings growth. Instead, they are devoted to quality, profits, and family ownership. They place a major emphasis on training apprentices. In their terms, success means handing a healthy company on to the next generation, not making a fast buck selling off shares to the public once they take off.

But aside from culture, the Germans also have built an export infrastructure that greatly assists smaller companies (table, page 59). Part of it dates back to the banking and trading system established during the last century, but other aspects developed during the grim days following World War II when Germany faced an export-or-die imperative. The result is a sort of "export CIA," peopled by diplomats, bankers, and trade-association officials, that helps spot, process, and finance export orders. German embassies aggressively promote exports, and industry associations, usually little more than lobbying groups in the U. S., pull out the stops to facilitate their members' sales overseas.

While experienced exporters soon come to rely on their own resources, the network gives neophytes a head start. "You don't have to pay -- most of the information is free," says Andreas Mai, a German banker who helped the New York-New Jersey Port Authority's Xport trading company improve its export-promotion activities.

There is now an effort in some quarters of the U. S. to create the same kind of support system for an American Mittelstand. The thinking is that with a bit of tinkering, U. S. entrepreneurs and policymakers could give rise to a growing core of small and midsize companies that would be competitive in global markets. Already, a coalition of businesses, universities, and local governments in the Pittsburgh area is trying to build an export machine based on the German experience. From Oregon's sawmills to New Jersey's electronics companies, the Americans are quietly seeking lessons from the German experience (page 64).

A key factor in the German companies' success is a willingness to pour big money into R&D. Take Karl Mayer-Potschak and his cocoa-bean-roasting machinery. When the 51-year-old chief executive risked $1.8 million on complex new technology to boost the yields and fine- tune the temperature control of his machines during the 1980s, other makers were skeptical.

Now, his competitors are scrambling to catch up. Mayer-Potschak's Ludwigsburg-based G. W. Barth, the smallest company in the industry with 65 employees, has 70% of the global market, up from 25% 10 years ago. Mayer-Potschak's infrared technology narrowed the variance in roasting temperatures from 5C to 1C -- a precision edge that gave customers such as Ghirardelli Chocolate Co. and Hershey Foods Corp. added control over the taste of their chocolate. "Barth is really strong in roasting machines," admits a European competitor.

RICH WATERS. Another tried-and-true Mittelstand strategy is to be the big fish in small but rich ponds. Munich-based Panther, for example, and its high-tech equipment unit make state-of-the-art cameraman's chairs. They were the first to install a computer in the chairs used for filming movies--giving photographers the ability to program the chairs' movement. Panther equipment has already been used on a string of hits, including Working Girl and Broadcast News. The 5-year-old company now has 50% of the European market for such chairs and is battling to boost its 10% share in the U. S. "In 10 years, I'll be the world leader," says founder Erich Fitz, surveying his world map on which colored pins represent sales.

Mittelstand companies often take their ideas to market so fast that they don't bother to patent them. For instance, Dortmund-based Geers moved the world's smallest hearing aid, which uses a microchip, from drawing board to retail shops in just nine months. The new model, which first appeared in 1986, now generates 30% of Geers's $34 million in sales. Geers, which claims former President Ronald Reagan among its satisfied customers, is racing to fill new markets in the east, opening shops in Kiev, Prague, and Warsaw. By contrast, rival Siemens took nearly three years to get its micro hearing aid to market. "We don't need patents" with that kind of competition, says owner Volker J. Geers, also head of the ASU, the German Association of Entrepreneurs--a lobby for Mittelstand owner-managers.

Mittelstand companies couldn't cash in on their specialized products without investing big marks in flexible production lines. That makes short runs of such products economical. In 1983, when Heinz Greiffenberger took over ABM Baumuller, an ailing $40 million maker of motors and gearboxes for cranes, he did away with standard products and focused on tailoring motors and gearboxes to customers' wishes. Revamping production, he installed $20 million in highly automated machines. "I can switch production to a different product within seconds," boasts Greiffenberger. That strategy worked. Within one year of a $6 million loss, he was in the black.

By steadily infusing manufacturing with high technology, Germany's little-known tigers are holding their own in surprising markets. Wilhelm Zuleeg, an $18 million textile company, has no problem fighting low-cost Asian textile giants as well as high-end Italian and French rivals. In the middle of the Bavarian countryside, computer-controlled looms whir, churning out high-fashion fabrics for some of the world's swankiest designers, including Cerruti, Anne Klein, and Georges Resch, with just 85 employees. "We have the most modern factory and no machine older than five years," says Stefan Zuleeg, who has built up exports from zero to 20% in three years.

In concert with hundreds of similar companies, Zuleeg has powered Germany to a surprise position as the world's No. 1 textile exporter, selling more than $11 billion worth a year--a third more than Hong Kong. Indeed, Far East rivals show respect for the Germans. "They have very strong technology," explains Masanori Yamamoto, an international-affairs official at the Small & Medium Enterprise Agency of Japan's International Trade & Industry Ministry. "In Japan, we tend to use German machines where making good, precision products is important."

All these successes increase the Mittelstand's political weight at home, assuring plenty of government support. Small companies are eligible for up to $ 6 million in cheap funding from the government-owned Kreditanstalt fur Wiederaufbau. And the government reserves a fat slice of research funds for Mittelstand companies. Those with annual sales of less than $590 million can get grants covering 40% of the costs of developing and implementing modern biotechnology-production methods. The growth in R&D outlays for companies with fewer than 1,000 employees is a stunning 21% a year. So it's no surprise that nearly two-thirds of German exports are technology-intensive.

Moreover, industry associations produce standard contracts translated into different languages and offer legal assistance in reading foreign contracts at no charge to members. They also allow German companies to use their foreign offices when negotiating deals, especially in places where the infrastructure is poor, such as Moscow.

When a deal needs financing, companies can turn to a banking system sensitive to the needs of exporters rather than takeover artists. Deutsche Bank, for example, offered Barth's Mayer-Potschak use of an office and secretary while prospecting for business in Indonesia, Nigeria, and Russia.

EXTRA MILE. But the vast majority of Mittelstand CEOs argue it is their own efforts, not this infrastructure, that make the difference between success and failure. Consider the role of unions. Mittelstand companies seem to enjoy better labor relations than most foreign competitors. Under a costly social security and health system, employees shell out 18.4% of their annual wages up to $45,900, a contribution matched by employers. But this helps German companies minimize confrontations with labor. Only 30% of Mittelstand companies are unionized compared with the national average of 70%.

The Mittelstand work force is highly trained, thanks to apprenticeship programs. Training an apprentice costs $18,000 a year for two to four years, roughly the same a year as an Ivy League education. Although trainees are not required to stay on after completion, many remain for life.

The lack of comparable training programs in the U. S. may account for the problems Germans say they encounter when trying to find suppliers for American operations. For instance, Hans Knurr, owner of a Munich-based electronics components company, spent two years scouring the U. S. for suppliers to his subsidiary there. In the end, he sent Bavarian punching, bending, and drilling machines to the U. S. facility. "Americans don't take the time and trouble to make a really good product because they want an immediate return," Knurr says. Now, he makes a profit selling components to customers such as NASA, Hughes Aircraft, and Texas Instruments.

The Germans are having to apply the same determination in eastern Germany. Not surprisingly, Bonn officials see rebuilding the Mittelstand there as the fastest way to turn around a collapsed socialist economy. The Treuhand privatization agency is helping former owners buy back companies that were nationalized and run into the ground. Already, management buyouts total 500 out of 3,000 companies sold in the past year. Employment in small and midsize companies is up to 20% of the work force, from almost nil. In the east, "the Mittelstand companies already are the most successful ones," says Treuhand head Birgit Breuel. She is now racing to chop the former state Kombinate, or conglomerates, into smaller, more competitive companies to be sold to their old managers.

With the collapse of the Soviet empire and the need to transform centrally planned economies to a market system, policymakers throughout Europe are watching Breuel's efforts closely. The Mittelstand were crucial in transforming Germany's war-ruined economy in the 1950s. Now, the Germans see them as a model for rescuing eastern Germany and indeed much of Eastern Europe from the economic wreckage of communism. Given the reluctance of Western European and U. S. governments to pour in massive amounts of foreign aid, there may be no other option.

HOW GERMANY'S EXPORT NETWORK DOES IT SPOTTING THE DEAL

Embassies, banks, trade associations, and chambers of commerce in dozens of

countries funnel details of potential export deals to companies back home via

newsletters, data bases

DOING THE DEAL

Trade associations, export trading companies, and banks help with

documentation, translation, legal, and shipping services. They also provide

office space and secretarial help in far-flung markets

FINANCING THE DEAL

Specialized banks or Mittelstand departments of big banks provide export

finance and arrange credit and political risk insurance through government-

backed Hermes export credit agencyGail E. Schares in Munich and John Templeman in Berlin, with Robert Neff in Tokyo and William J. Holstein and Stanley Reed in New York


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