Shedding Light on the (Terms) 'Mittelstand' and 'Hidden Champions'

One major reason why the German economy has been, and keeps performing so well, is the German Mittelstand. But what exactly is that, the 'Mittelstand'? Many non-German speakers will have come across this term in the media (it features in non-German business and finance publications with increasing frequency), but may have no (concrete) idea what is in fact meant thereby. In this article, we attempt to shed some light on the German term 'Mittelstand', and the concept behind it.

The term "Mittelstand" - very simply - refers to Germany's substantial contingent of small and medium-sized enterprises (SMEs). It is estimated that approximately 99.6% of all companies in Germany fall into this category, and with 21 million employees accounting for 80% of all employed people in Germany, SMEs are Germany's largest employer. As part of the German dual-track vocational education and training system, approximately 1.3 million young people are trained by SMEs each year, thus nurturing the next generation of employees. The exporters in the Mittelstand generated approximately 18% of their turnover (or more than EUR 195 billion) abroad in 2011 alone. It is therefore not surprising that the German Federal Ministry for Economic Affairs and Energy (BMWi) views the German Mittelstand as the backbone of Germany's economy.

Nevertheless, the success of the Mittelstand often goes unnoticed, as the companies forming part thereof tend to operate in profitable niche markets (frequently for industrial goods) rather than attempting to establish a recognizable brand in the consumer goods market. This is the reason many of them are sometimes referred to as 'hidden champions'. It is believed that Germany leads the global hidden champions ranking by a wide margin with 1,307 of the world's more than 2,700 hidden champions, with the world's largest economy, the United States, coming in second with (only) 366 companies.

The enormous number of hidden champions in Germany is frequently attributed to a number of special factors particular to the country. These include the above-mentioned dual-track vocational education and training system, Germany's central location within Europe, and its strong industrial foundation. Regional expertise also plays an important role. Thus the renowned medical cluster in the city of Tuttlingen in Baden-Württemberg, for example, came into existence back in the early nineteenth century when a growing number of knife manufacturers settled in the region, with the first surgical instrument production company being established in the 1860s. Today, the cluster comprises approximately four hundred medical technology companies, the majority of which are SMEs, which make significant investments in research and development. Another reason for Germany's many hidden champions is the fact that companies in Germany tend to focus on international exports at an early stage already. Today, more than 40% of Germany's medium-sized companies are therefore export-oriented. These more than 150,000 companies forming part of the German Mittelstand comprise 97.5% of all German export companies, making them the largest group of exporters.

We trust that this gives you some background and an introductory understanding of the German Mittelstand and why it is of such importance to the German economy. You can find additional information on the Mittelstand and on investing in Germany on the website of Germany Trade & Invest  (GTAI), and we would, of course, be more than happy to provide you with any legal advice you may require in this regard.