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9 April 2015, Gateway House

Make German Mittelstand in India

Germany’s Mittelstand or medium and small companies are the heart beat of Germany’s successful economy. They will be showcased at the Hannover Fair, which Prime Minister Modi will inaugurate on April 12. It can be the perfect blueprint for his Make in India effort.

Visiting Research Fellow, Institute of South Asian Studies, National University of Singapore

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Prime Minister Narendra Modi makes his first official visit to Germany when, together with Chancellor Angela Merkel, he opens the Hannover Messe 2015 on 12th April. The annual Messe is the world’s biggest industrial fair and India is this year’s partner country. Over 100 Indian CEOs are expected with more than 450 Indian companies, making it India’s largest representation at Hannover to date.  The “Make in India” campaign will be showcased, aimed at raising foreign investment interest in India as a manufacturing destination.

But what ideas might the Prime Minister and his team take back from the host country, Germany? Since being surpassed by China in 2009 as the world’s leading manufacturing exporter, Germany competes with the United States for second position. Its economy is considered strong despite the ongoing Euro crisis. Germany managed to absorb an entire Eastern bloc country 25 years ago, spending an estimated €2 trillion to upgrade and integrate East Germany. These are important achievements and despite obvious differences between them, there are aspects of Germany’s economic success that are of great relevance to India, especially in view of the administration’s stated priority – the need to create jobs for India’s burgeoning workforce.

Germany’s industrial achievements rest upon a combination of state-supported entrepreneurship, decentralised administration and a strong traditional appreciation for skills and craftsmanship. Each is relevant in the Indian context given the country’s engrained entrepreneurial ethos, family firm tradition, vast micro, small and medium-sized enterprise sector and federal political system.

Recognising these parallels, Indian policy-makers should examine the structural features that sustain Germany’s system of industrial innovation and investment.

Industry accounts for almost 29% of Germany’s total GDP and employs 24.6% of the population, much higher proportions than other advanced economies. Germany is one of the world’s largest and most technologically advanced producers of iron, steel, coal, cement, chemicals, machinery, vehicles, machine tools, electronics, automobiles, food and beverages, ships, textiles. Large multinationals like BMW, Volkswagen and Siemens are crucial players but it is the Mittelstand companies that are depicted as the country’s ‘Hidden Champions’. Hidden, because although 99% of Germany’s companies are categorized as Mittelstand (typically a family business with unity of management and ownership and focused on a single product category), their names are often not known. Nevertheless, these companies contribute nearly 52% of the country’s economic output, employ more than 15 million people, and are suppliers to multinational corporations as well as being exporters in their own right. Emerging over more than a century, the Mittelstand model is something that India needs to closely examine.

How and why did the Mittelstand develop into such a resilient and productive pillar of the German economy?

  1. The German Mittelstand are usually long-established, family-owned firms, located often in rural areas, thus spreading employment and investment across the country. Following Germany’s re-unification, the State offered tax and investment incentives to Mittelstand companies to set up businesses in the former East. State inducement has been central.
  2. A decentralised banking and finance system where large numbers of regional and local banking institutions like Sparkassen (independent and locally managed savings banks) and Volksbanken (cooperative banks) concentrate on business activities and Mittelstand clients in the regions where they are situated.
  3. Linking business and community, Mittelstand firms are the main beneficiaries and supporters of the German apprenticeship system. About 60% of young Germans train as apprentices in a range of fields including manufacturing, IT, banking and hospitality. The ‘dual training’ system allows trainees to divide time between classroom instruction at a vocational school and first-hand experience on the job at a company. Employing 83.2% of trainees, the Mittelstand invests in skilled workers for the future. They have been credited for the fact that Germany has a comparatively low youth unemployment rate of 7.9%.
  4. A dense network of institutes support the Mittelstand, for example the prominent Fraunhofer-Gesellschaft (Fraunhofer Society), an independent non-governmental organization providing high-quality, short-term, applied research that small and medium-size firms could not otherwise afford.

These are traditional strengths of the German model that have evolved through history. However, there have also been modern adaptations, for instance, the rise of ‘micro-multinationals’ where a number of Mittelstand companies, headquartered in small towns and rural Germany, are world leaders in specialized, niche products or services, with offices and subsidiaries across the globe. Examples include Kärcher’s high-pressure home and office cleaning equipment, Stihl machinery and tools, PolyClip System food packaging.

These German companies, already advanced, are now studying the next leap forward. The focus of the Hannover Messe 2015 will be on the next industrial revolution – the fourth after the mechanization of production using water and steam power, mass production using electric power and the revolution of electronics and IT. “Industrie 4.0”, as it is known in German, refers to the high-tech strategy of the German government to promote the digitisation and automation of the manufacturing industry.

Asian countries such as Japan and South Korea have traditionally looked to Germany’s industrial sector, importing concepts like the German-style Meister schools to produce masters of a technical trade. More recently, the U.K. has taken note, organising ‘Meet the Mittelstand’ events for British SMEs. In the U.S., the Fraunhofer Society is held up as a model for President Obama’s government-backed manufacturing/technology institutes to be introduced nationwide. Each of these initiatives are equally relevant for India to meet the challenge of generating jobs and a skilled labour force, stimulating innovation in manufacturing and creating a financial, educational and business eco-system that serves company and country.

India’s Ministry of Corporate Affairs and Ministry for Skill Development & Entrepreneurship should be in the front row at the Hannover Fair, and paying close attention.

Jivanta Schöttli is a lecturer in the department of political science, South Asia Institute, Heidelberg University, Germany. 

This article was exclusively written for Gateway House: Indian Council on Global Relations. You can read more exclusive content here.

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