German SMEs: Is the German recipe for success fit for the future?

13 Nov 2017

German SMEs are regarded as the core and engine of the German economy.

fotolia/Minerva Studio

There are estimated to be 3 million German SMEs and they generate an annual turnover of € 1.74 trillion. They account for 60% of all jobs and, with 80% of all training places, ensure that the next generation of apprentices is provided with specialist training.

SMEs are generally defined as companies with up to 500 employees and a turnover of up to 500 million. Most of these companies have almost 100 years of history and a niche specialisation. Their products, processes and services account for 40% of Germany’s export performance. With an earnings ratio of 13.9% these family-owned companies easily outperform the Dax companies at 10.2%.

Long-term planning and responsibility for the next generation

The biggest difference from the big Dax companies is, however, that the managing director is also the owner. This means that the entrepreneurial activity is characterised by long-term planning and responsibility for the next generation. As a quick dividend is not the commercial objective, SMEs take on lower financial risks.

Perhaps this is one of the reasons why German family-owned companies have proven to be so crisis-proof in recent years.

In recent years, foreign politicians have asked themselves more often whether this successful German model could perhaps also be imported. The extent to which SMEs are a German phenomenon and rooted in German history becomes clear when you realise that a few years ago there was not even a specific word for SMEs in France.

Fit for the challenges of the future?

But despite all the successes, German companies have to ask themselves whether they are fit for the challenges of the future. In the study “The digitisation of German SMEs” from August 2017, for example, the consultants at McKenzie reported that only one in two SMEs sees digitisation as an opportunity.

Reasons for the pessimism include a lack of adventurousness, a lack of willingness to innovate and a lack of financial resources for the implementation of digitisation projects. But even the recruitment of qualified IT specialists is not working for some SMEs.

Only a few industries are already developing new business models for digitisation

At the Digital Summit in June 2017, German Chancellor Angela Merkel called on SMEs to use Big Data’s opportunities wisely. Otherwise, there is a risk that providers of large platforms such as Google and Amazon “will clamber up the value creation chain”. However, according to a survey by Bitkom Research, only a few industries are using Big Data at all. Only a few industries, such as the automotive industry, insurance, chemicals and pharmaceuticals, are already developing new business models for digitisation. Data protection and IT security are also the topics of choice for three out of four.

The low affinity with the digital world is undoubtedly also related to the ageing of SMEs, which are being hit hard by demographic change: according to a study by KfW Economic Research, 36% of SME proprietors are over 55 years old, while those under the age of 40 account for only 12%. And these older entrepreneurs are less willing to invest than the younger generation.

The age structure of family entrepreneurs may also be one of the reasons why German SMEs are improving existing products to perfection, but not creating a truly radical innovation, which is a criticism recently expressed by OECD expert Andreas Woergoetter.