Germany's 'hidden champions' of the Mittelstand

Baden-Wuerttemberg has firms which are "hidden champions", says Professor Winfried Weber

Driving along the "romantic road" between two towns in Baden-Wuerttemberg in southern Germany it's easy to admire the lush rolling hillsides, vineyards and picturesque villages.

But peer a bit closer and you catch sight of a factory.

Look harder and you discover that this area between the historic towns of Bad Mergentheim and Wertheim is dotted with medium-sized or "Mittelstand" companies.

"You don't expect to find companies here from the heart of German world class industry but they are just in between those valleys in these hills," says Winfried Weber, professor of management at Mannheim University of Applied Sciences.

His passion for the privately owned - often still family run - Mittelstand companies is personal.

His grandfather was a clockmaker who was forced out of business by Japanese competition in the 1950s.

Today he says his mission is to tell the story of these companies' current success.

'Hidden champions'

He travels the world lecturing and hosts business delegations from South Korea and China.

"I tell them don't go to Berlin, come here to this rural province in southern Germany," he tells me as he drives along the gently winding road.

"You find here a very high concentration of world class Mittelstand companies in relation to the population," he says.

Mittelstand firms often manufacture and sell niche products

About 99% of German companies are small and medium sized. There are about 3.3 million of them.

Strictly speaking, they would have fewer than 500 employees to be classed as Mittelstand, but it's a term that goes much deeper and has come to define a business mindset.

"In Germany a lot of those small and medium sized companies are doing exports from the beginning," Prof Weber says.

"They try to be in the forefront of innovation, and find and define a niche, and then sell on an international level."

And the most successful ones are world market leaders in their niche sectors, which Prof Weber says are "hidden champions".

Prof Weber says small German firms embody "patient capitalism"

This is where he believes much of Germany's exporting prowess stems from.

"In Germany we have only 28 of the global 500 biggest companies but we have around 48% of those small world market leaders," Professor Weber says.

We're on our way to meet Gabriella Koenig, managing director of Koenig & Meyer, a "hidden champion".

Her company makes music and microphone stands. If you're a musician you have probably used one of them.

Slim with shortly cropped dark hair, she fizzes with energy and enthusiasm.

In the car park she introduces me to her 81-year-old father and both are keen to tell me the history of the company.

Gabriella's grandfather started the firm with a business partner in the early 1930s in eastern Germany, but after the Second World War, they moved to Wertheim in the west.

Gabriella is the third generation to take charge.

Gabriella Koenig's firm, which makes music stands, has three factories

She goes into a vast noisy factory full of green metal-bashing machines.

"We have almost every production process in-house to guarantee the best quality so that we can really control every step," she says above the roar of the machines.

True to the spirit of the Mittelstand, exporting has long been vital to the company.

"Already in the 1950s Koenig & Meyer was visiting the first trade shows in Frankfurt," she says, "and found the first international partners."

Today the company employs 280 people in three factories and has a turnover of 38m euros (£34m; $44m).

About 60% of sales are exports to 80 countries worldwide, with 70% of their turnover in Europe.

Gabriella says customers, "accept that the product can be 15-20% more expensive than a competitive cheaper made item."

But has the weakness of the euro helped?

"I would say yes definitely. The euro helps us, as all other Germany companies who are exporting a lot," she says.

Trade surplus

Germany has been criticised by its trading partners for exporting much more than it imports.

Last year it had a whopping current account surplus of just under $300bn.

Wage restraint in the last fifteen years and labour market and welfare reforms are all credited with making Germany more competitive.

Another criticism levelled at Germany is that it's not investing enough at home.

The International Monetary Fund is urging the government to spend more on public infrastructure projects, which it says would encourage German companies to invest there too, and help re-balance its global trade.

But Prof Weber says that in spite of their exporting success, the Mittelstand does face challenges.

Succession can be an issue. Gabriella doesn't have children but says the company will stay in the family.

Finding enough skilled staff is also a challenge - Koenig & Meyer trains employees on apprenticeship schemes.

However, Gabriella says, "it gets more and more difficult nowadays to find young people who will join the company."

While there is clearly innovation in the Mittelstand, at Koenig & Meyer they come up with 20 to 30 new products every year, they are not Silicon Valley.

Prof Weber says Germany has, "fewer IT start-ups, we have less venture capital."

But he says the outlook is long-term and, "You can say that our capitalism is more patient capitalism". He also believes that others can learn from the Mittelstand.

"I think that the future big company will be a little bit like many Mittelstand companies, with a more down-to-earth approach, with flatter hierarchies and more responsibility, and more flexibility for the workforce."

Listen to "The Secrets of Germany's Success".