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    How Germany’s Mittelstand, the backbone of Germany’s economy prepares the traditional companies for the 4th Industrial Revolution

    April 2018

    When Germany thinks of start-up and high technology, the sleepy town of Allendorf is not the place they usually have in mind. Home to, just over 5,000 people, it is best known as the headquarters of Viessmann, a maker of boilers and heating equipment that has been owned and managed by the same family for four generations. The company is a typical member of Germany’s famed Mittelstand: a privately held business with provincial roots that takes pride in its engineering tradition and sells its goods around the world. We have been investing in such companies plenty of times and our experiences was never the product, the challenge was always to implement a different, more innovative way of thinking.

    In recent years, however, Viesmann has expanded into spheres that are far removed from its boiler – making heritage and very different to its base in rural northern Hesse. It has set up a venture capital fund in Munich to invest in promising start-ups, and a company – builder in Berlin to help new technology businesses get off the ground.

    Viesmann’s latest project – venture can be found in a converted factory in the German capital’s trendy Prenzlauer Berg district: a so-called co-creation space designed to bring together racy start-ups and conservative Mittelstand companies for joint developments.

    The project is emblematic of a generation challenge faced German industry, and by the Mittelstand in particular: how to survive and thrive in digital age.

    The fear in Germany is that many of these companies are ill prepared – which confirms our experience – for the disruptive force of new technologies such as big data, artificial intelligence and automation. Surveys suggest the Mittelstand is becoming increasing aware of both the potential and pitfalls of digital disruption – but that smaller companies in particular are struggling to respond.

    We always use to tell the Mittelstand “just because you were successful in your riche doesn’t mean you will be still successful in the future – especially in the digital world.” Traditional Mittelstand companies have developed organization routine over decades that used to be a recipe for success, without much competition. Today, they are no longer recipes for success as long as you are not innovative and adjust your recipes constantly. But also the government in Germany has woken up to the challenge. Berlin recently unveiled a new “digital hub initiative” aimed at strengthening digital innovation in the industrial heartland. The planned initiative is to link up Mittelstand companies, start-ups and research bodies in 12 places.

    Crucially, they included not just the main technology hubs of Berlin, Munich and Hamburg but also regions and cities such as Dortmund, Erlangen, Ludwigshafen, and Stuttgart that are home to some of the biggest names in engineering, industry, chemicals and logistics.

    “How does the country organize itself so it is prepared for digital disruption? you have the centralized UK, France and to a large extent US model where most activity is concentrated on the west coast. German industry, however, has traditionally been very dispersed and decentralized. So you can’t just have one hub in one city. You have to follow this decentralized model which also applies for countries like Austria and Switzerland for example Germany’s Mittelstand is habitually described as the backbone of the economy, accounting for close to 60% of all jobs and 35% of corporate revenues.

    Its relevance is undisputed, as it is resilience: from the demise of the founder generation and succession planning to the rise of China as an industrial powerhouse and the recent Eurozone crisis, Mittelstand has dealt successfully with disparate challenges.

    Some Mittelstand managers regard the threat of digital disruption as overblown. Everyone in the Mittelstand is somehow working on it but the worry we have is that the Mittelstand is somehow missing the boat because of a lack of coordination.

    However, some of the sector’s traditional strengths could come to be seen as weaknesses. The Mittelstand has to draw attention to the drawn-out product development cycles that are typical for industrial companies, where engineering perfection is often prized above speed of delivery. In the past this was strength for the Mittelstand because it meant they were totally focused but today, the needs and demands change much faster through globalization. Research suggests most Mittelstand companies seek particular excitement around the so-called Internet of things, which seeks to combine physical devices with digital technology.

    In the German Mittelstand put their focus right, they will be the ones making these new products because of the decades of experience they bring to the table.