The German Small and Medium Enterprises (SME) Story

Germany has the second largest exports in the world. They are second only to China. This is remarkable given the fact that Germany is a first world country with very high labor costs. The Chinese pay slave wages to their workers and make them work for longer hours. On the other hand, the Germans pay generous wages to their employees and only make them work for 8 hours a day, 5 days a week!

What’s even more fascinating about this story is the fact that Germany’s exports are not the result of the success of one company or a handful of companies. Instead, there are several small and medium enterprises (SME’s) that are the reason behind this impressive performance. Germany does have its share of brand-name multinationals. However, the real engine behind Germany’s growth is their small and medium enterprises.

In this article, we will understand how German SME’s are helping the economy move forward.

Definition of a Mid-Size Company

To be on the same page, it is necessary that we define what a mid-size company means:

  • The turnover of the company should not be more than 5 billion dollars

  • The company should be amongst the top three companies in the world in the products they make

  • The company must be export oriented i.e. deriving 50% or more of its revenues from export sales.

It may be surprising to many that almost all of German SME’s are not conglomerates. This means that they manufacture a very narrow range of products. Germans believe that focus builds excellence. As a result, they concentrate on a small number of products. However, from a sales point of view, focus reduces the size of your market! German companies target global markets to offset this. They first create excellence in a single product. Then they export the product all over the world and end up generating sizeable revenue as a result. This combination of focus and globalization is unique to the German SME’s and has been the harbinger of their success.

More Manufacturing

The interesting thing about Germany is that most of their exports are generated from their manufacturing sector. This is unusual given the fact that in most advanced economies, the service sector makes up the majority of GDP and exports.

Germany exports twice as many manufactured goods as the United States. This is despite the fact that the size of the American economy is larger. This means that on a percentage basis, Germany is way ahead of other countries when it comes to manufacturing.

Although only about 1% of the world’s population resides in Germany, close to 50% of the world’s leading SME companies are from Germany. The emphasis on manufacturing can be seen from the fact Germany derives 25% of its GDP from manufacturing. The United States and other developed nations generate only about 10% from manufacturing.

Training & Job Creation

Another point to be noted is that Germany does not have a student debt problem like the United States does. This is because these SME’s fund the education of their employees. Instead of spending money on useless college degrees, the German SME’s spend an enormous amount on the vocational training of their employees. These companies then use the system of paid and unpaid internships to help employees learn on the job and perfect their skill. Once the skill has been perfected, these people are hired by the companies.

Several productive years of the students’ lives are not spent making debt payments on a college education that has little to do with their job. Instead, their education is concentrated and imparts them the skills that are required to excel in their careers. German SMEs have ended up created a whopping 1.5 million jobs. We can also be sure that these jobs have been filled by competent people because these employees file 5 times as many patents when compared to American corporations.

Tax Breaks

The German government has also played an important part in the development of this SME sector. They have not directly interfered but instead, have played more of a passive role. The tax rate sin Germany are reasonable for SME’s. This is the reason that these SME’s have been able to accumulate the amount of capital to become billion dollar enterprises. Germany has increased the tax rates on individuals as well as large corporations. However, they have been mindful enough to keep the tax rates low for the SME’s.

Inclusive Growth

The proliferation of SME’s has led to inclusive growth for Germany on many levels.

Firstly, the German industry is not concentrated in urban areas only. There are employment opportunities available in the rural areas as well which helps in ensuring that there is an equitable distribution of incomes and growth all over the country.

Also, the SMEs have created a culture of entrepreneurship. Hence apart from the multinational companies, there are many small to mid-level German enterprises that are very successful. All this has led to many benefits. There is less pressure on urban areas. Also since most people can take care of themselves, the state does not have to spend money on their welfare.

To sum it up, the German economy is on a strong footing. This is because their economic activities are not concentrated but rather dispersed thanks to the SME sector.

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