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A Primer on German Mittelstand Companies

When German companies come to the US, they tend to look at this country from a federal perspective; however, they will be much more affected by actions taken at the state and local levels when they invest in America.

Q1 2020
Martin Polivka, Manager - EY Global Location Investment, Credits & Incentives Services, Ernst & Young LLP, spoke with Area Development about German mittelstand companies, after his presentation, “Mittelstand companies investing in the US” at our Charlotte Consultants Forum. This article was based on an interview conducted by Margy Sweeney, Founder and CEO, Akrete, Inc. and Area Development Editorial Board member.
What are German Mittelstand companies?
“Mittelstand” means “middle class” or “middle of the market” in an entrepreneurial sense of the word. It generally refers to a company from the German-speaking area of Europe whose owners are part of the family and actively involved in managing the company. Most of these companies have been around for decades or even hundreds of years, really. They pass on from one generation to another, and still are run based on that family credo of being very innovative and doing well in the long term, as opposed to preferring short-term benefits.

Some Mittelstand products in the US
Regarding Mittelstand products US consumers might recognize, it’s very interesting that many of them may not be very visible to the average person. That’s because the companies will produce parts and components found in the middle of the value chain.

US location preferences for Mittelstand firms
Being close to customers and also suppliers is important to Mittelstand companies, but they also look for places where they can be with other companies from their region; they tend to cluster. They also look for US locations where it’s easy to get to and from Germany. A lot of the companies locate to the Southeast United States, the Carolinas and Georgia partly because of good domestic air connections there.

Labor, of course, is a number one issue right now for anybody — and these companies are no exception to that rule. Communities need to explain some of the differences between the US and Germany: in particular, the fact there are contracts that can be terminated at will. Another topic is the role of unions, which are very different in Germany than in the US.

On the topic of visas, I think the German Chamber of Commerce in the US did a poll very recently that found 78 percent of their membership believe it’s gotten difficult or more difficult in the past year to get visas. State and local economic development authorities sometimes don’t know how to address visa questions from German companies. So it’s a good idea for US economic development authorities to definitely have a few answers ready for them.

Importance of keeping their German ties
Mittelstand companies are from all over Germany, which is comprised of 16 federal states. They tend to be tucked away in sort of smaller communities where they’ve been for many decades, even centuries. In some cases, they’re well-tied to their home base back in Germany. For example, they may use local financial institutions or sponsor local sports teams and also work with local schools to train the workforce. Germany is very well-known for its apprenticeship system, which is copied all around the world.

And interestingly, Mittelstand companies represent more than 80 percent of the apprenticeship jobs in Germany. So again, they’re very strongly tied to the local German community.

The successful German apprenticeship system
Mittelstand companies want to bring German apprenticeships to US workforce development. They definitely want to do that. When they go on American site tours and meet with communities, they will look not only for the typical incentives, but also will try to work with the local community college on plans to train young people and get them up to speed in a particular area. In many cases, a Mittelstand company will be the first one in a US community to start that kind of system — and then others will follow suit.

If you ask me what is the one big idea from the German apprenticeship system that should be adopted in the US, I’d say it’s to get young high school kids trained at a craft while they’re still attending school. They need to get on a job or career path before they graduate.
...the EY organization runs an annual survey of Mittelstand companies, and mergers and acquisitions often represent their key growth strategy right now.
The apprenticeship programs in Germany allow, even after high school graduation, to pursue college education — even up to an engineering level. So it’s a good career path in the long term. It’s not just that you learn something, then you’re doing it for the rest of your life; it's really a lifelong process that an apprentice can follow if he or she chooses to do so.

Investment growth strategies
Many German Mittelstand companies that invest in the US get involved with greenfield investments or acquire existing facilities. As a matter of fact, the EY organization runs an annual survey of Mittelstand companies, and mergers and acquisitions often represent their key growth strategy right now. So you see both of those activities here in the US as well. The typical Mittelstand company will experience a lot of the same issues experienced by similar family-owned companies in the US, like those concerning succession, growth strategies and financing questions.

When German companies come to the US, they tend to look at this country from a federal perspective. They will listen to the President and some of his messaging. But the truth is also that they will be much more affected by the state and local levels when they invest in the America. And that's something they tend to underestimate in their first approach to the market.

Regarding tariffs, they’re looking very closely at a landscape changing almost every day now. Interestingly, many of them are not only affected by tariffs imposed by the US on the EU and certain sectors in Germany in particular, but also are indirectly affected by tariffs imposed on countries such as Mexico or China. As site selectors and global advisors to Mittelstand firms, we get a lot of questions about how they can strategically position their operations around tariffs, free trade zones and related trade components.

Role of community ties in site selection
A perfect location for a Mittelstand company would be perhaps not a large metropolitan area, but somewhat close to it. It also would have other companies, small or large, from Germany, including suppliers.

These companies are very strongly focused on relationships developed with the local community and the area’s quality of life, meaning that if they send over expats, they want them to have a certain level of comfort with the local cultural and natural scene. It doesn’t have to be anything fancy.

Incentives are really only the cherry on the cake, meaning they definitely will be something German companies look after for mitigating certain costs. But having said that, they want to be in a community where they feel like it’s their second home and they get a warm welcome; where the chemistry is right with the state and local representatives; where they can get a qualified workforce; and where travel is easy to Germany and within the US, too.

The views expressed by the presenters are their own and not necessarily those of Ernst & Young LLP or other members of the global EY organization.

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