The German Mittelstand: The backbone of Germany’s economy and driving force behind its recovery

Signs of resilience and recovery

The economy is in recession: global economic output is predicted to decline by $8.5tn over the next two years. All major countries in the OECD saw negative GDP growth in the second quarter of 2020. However, Germany saw much less contraction that other European countries, only shrinking minus 9.7%.

We must now aim for a sustainable and strong recovery, which means resilience to the vulnerabilities exposed by the pandemic. The economy has taken a hit, but companies need to stay proactive. We need to find new ways of doing business, be more efficient in our daily activities and expand internationally with new trading partners.

Mittelstand will drive growth

The German Mittelstand has been remarkably resilient. lf the economy is to rebound quickly; it will be the Mittelstand driving it. The backbone of Germany's economy, Mittelstand companies are conservative, privately held and known for precision engineering and quality.

More than half of German SMEs (54%) who make up the Mittelstand see new tech as necessary to remain competitive. Digitalization is a strategic priority for 76%. Their situation is similar to most businesses around the world.

Technology is the foundation for business resilience. Investments in digital transformation are why companies can still perform in difficult circumstances. The insight to make quick decisions and the agility to make rapid changes might look simple, but don't be fooled. lt's only possible because of continued digital investments throughout the business.

A good example here is ADAMOS, a joint venture between German machine builders and software & service companies. Manufacturers like Dürr & DMG Mori have invested in technology to connect their robots/ machines, develop solutions for digital manufacturing, drive new business models and set a standard for the industry. This has allowed them to be digital-ready and more resilient overall to deal with the physical restrictions due to this pandemic. The current situation is particularly hard on small family-run businesses to balance the safety of their workers while focusing on getting to a point of normality in their production. For example, the G?becke bakery in Leipzig, Germany is using a solution with smart badges to automate social distancing and alert them when they are too close to a colleague for too long. This is an example of how technology is enabling people to get back to work safely.

The digital iron curtain

Mittelstand growth will need trade beyond our borders. Therefore they must find new partners around the world. Digital maturity will be critical for quick set up and easy integration in these new relationships. However, there are other forces at work that make this a challenge.

A 'Digital Iron Curtain' is descending across the world. Competing geo-political objectives and tensions are creating two systems that are increasingly incompatible. On one side you have US sanctions that will restrict Chinese companies reliant an US microchips and software. On the other, you have China developing its own systems and software. Slowly but surely, you have two parts of the world who are not able to work together. Companies must therefore either find a way to work with these different systems or choose between them.

Recovery is at risk when you can't trade with half the world. Digital companies are actually the best positioned to reach through the 'Digital Iron Curtain', because they are more flexible when it comes to new technology. For this reason, they are also more resilient to the effects of the pandemic and recession.

Government has an on-going role in the kickstart

The German Government acted swiftly and decisively during the crisis and the country has avoided the levels of turmoil seen elsewhere. Soft lockdowns and stimulus packages helped support people and business. The recent decision to extend the Kurzarbeit (the furlough scheme) into 2021 demonstrates an on-going commitment to averting further economic hardship.

The support is there, but governments need to follow through and help guide enterprise – either through directives or financial incentives – towards the right investments. For their part, companies must also consciously commit to more digital practices. That will make sure that the support available translates into the best possible outcomes.

When technology is the foundation for change, companies can evolve quickly. Technology can negotiate digital barriers and contracting economies. Digital businesses are able to see and seize opportunities as they arise. A strong and sustainable recovery relies on more companies doing this, from the Mittelstand in Germany to all businesses around the world. Next year will be a continued test of their resilience.

Read the German version here: Der Mittelstand: Das Rückgrat der deutschen Wirtschaft und die treibende Kraft für die wirtschaftliche Erholung