Understanding Germany and its Mittelstand ethos

Germany is right: there is no right to profit, but the right to work is essential

The strength of Germany lies in its medium-sized manufacturing firms, whose ethos includes being socially useful

• 
• • John Studzinski
  • The Guardian, Wednesday 6 February 2013

'The objective of every German business leader is to earn trust – from employees, customers, suppliers and society as a whole.' illustration by Belle Mellor

 

People talk too much about the economy and not enough about jobs. When economists, academics and bankers are allowed to lead the debate, the essential human element goes missing. This is neither healthy nor practical.

Unemployment should be our prime concern. Spain, with youth joblessness close to 50%, is in the gravest crisis, but there is hardly a government on the planet that is not wondering what it can do to guide school-leavers into work, exploit the skills of older workers, and avoid the apathy and alienation of the jobless, which undermines not just the economy but also the social fabric.

There may be no definitive answer but, over the past half-century, Germany has come closest to finding it. Its postwar economic miracle was impressive, but its more recent ability to ride out recessions and absorb the costs of reunification is, perhaps, even more remarkable. Germany was not immune to the economic crisis of 2008-9, but the jobless rate rose more slowly than elsewhere in Europe. Although in recent months it has edged up towards 6.9%, it remains well below the euro area's 11.7% average. Germany's resilience springs from the strength of its medium-sized, often family-owned manufacturing companies, collectively known as the Mittelstand, which account for 60% of the workforce and 52% of Germany's GDP. So what can we learn from the Germans?
The enduring success of the Mittelstand has been well documented but rarely emulated. The standard excuse is that it is rooted in German history and culture and therefore unexportable. At a time when so much business is conducted on a global scale, via globally accessible media, this excuse is wearing thin.

Let me highlight some of the features unique to the Mittelstand model that I believe everyone should learn from – and imitate if they can. The first is what we might call the Mittelstand ethos – that business is a constructive enterprise that aims to be socially useful. Making a profit is not an end in itself: job creation, client satisfaction and product excellence are just as fundamental. Taking on debt is treated with suspicion. The objective of every business leader is to earn trust – from employees, customers, suppliers and society as a whole. This ethos chimes with the values of prudence and responsibility with which every schoolteacher hopes to imbue their pupils. Consequently, about half of all German high-school students move on to train in a trade. Business and education are natural bedfellows.

The second essential feature of the Mittelstand model is the collaborative spirit that generally exists between employer and employees. This can be dated back to the welfare state that Chancellor Otto von Bismarck established in the late 19th century to head off what he saw as the menace of socialism. Its modern-day equivalent is the system of works councils, which ensures that employees' interests are safeguarded, whether or not they belong to a trade union. German workers expect their employers to keep training them, enhancing their skills. In the post-reunification recession, it seemed only natural to German workers to offer flexibility on wages and hours in return for greater job security. More recently the government protected jobs by subsidising companies that cut hours rather than staff.

A third feature of the Mittelstand model is the determination of German companies to build for the long term. To this end, they tend to keep core functions such as engineering and project management in-house, while outsourcing production whenever this proves more efficient. Mittelstand companies are overwhelmingly privately owned, and thus largely free of pressure to provide shareholder returns. This makes them readier to innovate, and invest a larger proportion of their revenues in R&D. There are Mittelstand companies that file more patents in a year than do some entire European countries. It is one of the underlying reasons for their exporting success, even when their goods seem expensive.
Finally, German companies work closely with their suppliers. This has proved especially valuable in developing Sino-German trade. Unlike most of their international competitors, they are happy to take suppliers' representatives on trade missions. The result is that they can guarantee swift and sure supplies of components and other products. Chinese customers are not the only ones willing to pay extra for this kind of service excellence.

Of course, there are other factors that lie behind the success of the Mittelstand and of the German economy as a whole. Both the economy and political system are highly decentralised, with the result that local banks, businesses, entrepreneurs and politicians know and understand each other, making everyday co-operation easier – while, at the national level, Germany's leaders rarely miss an opportunity to promote their country's industry abroad.

Nonetheless, there is much that non-Germans could learn from. To close the gap between education and business, companies should take a greater interest in their local schools and colleges. If you haven't got spare cash for sponsoring gyms or computer equipment, go and talk to sixth-formers or degree students about what you do. Find out what graduates aspire to. It will help you to work out how to attract the next generation.

If you want to get more out of your employees and suppliers, consult them; invite them into your confidence. Don't complain: "We're not like the Germans. It won't work here." Think of a different way. Try harder.

The same applies to governments. Let me mention one simple legislative option. In German law, the owner of a family business who passes it on to the next generation can avoid paying inheritance tax if, during their tenure, they have increased employment and thereby benefited the economy. What better signal could a government give than by favouring those who create employment?

There is no question in my mind about which is the single most important feature of the Mittelstand model – its underlying ethos, which is based not on dry economic theory, but on everyday, practical humanity. The notion that business should be socially useful may have sprung from Germany's postwar conscience, but it has resonance now, when so many of our citizens are still suffering from the aftermath of the credit crunch and the failures of leadership it exposed.

There is no right to make a profit, and profit has no intrinsic value. But there is a right to work, and it is fundamental to human dignity. Without an opportunity to contribute with our hands or brains, we have no stake in society and our governments lack true legitimacy. There can be no more urgent challenge for our leaders. The title of the next G8 summit should be a four-letter word that everyone understands – jobs.

We need a revolution in how our companies are owned and run

The second of this series on a new capitalism calls for a culture dedicated to long-term, ethical goals

• 
• • Will Hutton
  • The Observer, Sunday 30 September 2012

Rolls Royce: almost our last remaining great industrial company. Photograph: Simon Stuart-Miller/guardian.co.uk

Twenty years ago, Britain's greatest industrial companies were ICI and GEC. A third, Rolls-Royce, secured from hostile takeover by a government golden share, had a board that was boringly committed to research and development and to investing in its business. ICI and GEC, under colossal pressure from footloose shareholders to deliver high short-term profits, tried to wheel and deal their way to success. Neither now exists. Rolls Royce, free from concerns about hourly movements in its share price, has gone on to be almost our last remaining great industrial company.

Britain, as the Kay review on the equity markets reported, has far too few Rolls-Royces. Instead the report identified a lengthening list of companies – Marks and Spencer, Royal Bank of Scotland, BP, GlaxoSmithKline, Lloyds and now BAE – which have made grave strategic errors, taken ethical short cuts or launched ill-judged takeovers, hoping to benefit their uncommitted tourist shareholders. Their competitors in other countries, with different ownership structures and incentives, have survived and prospered.

It is an unreported crisis of ownership that goes to the heart of our current ills. Over the last decade, a fifth of quoted companies have evaporated from the London Stock Exchange, the largest cull in our history. Virtually no new risk capital is sought from the stock market or being offered across the spectrum of companies. A share is now held for an average of seven months. Britain has no indigenous quoted company in the fields of car, chemical or building materials. They are all owned overseas, with design and research and development travelling abroad as well.

The stock market has descended into a casino, served by a vast industry of intermediaries – agents, trustees, investment managers, registrars and advisers of all sorts – who have grown fat from opaque fees. It has become a transmission mechanism for highly short-term expectations of profit driven into the boardroom. Directors' pay has been linked to share price performance, offering them the prospect of stunning fortunes. As a result, R&D is consistently undervalued.

British companies are now hoarding some £800bn in cash, cash they would rather use buying back their own shares than committing to investment. We have allowed a madhouse to develop. An important reason why Britain is at the bottom of the league table for investment and innovation is the way our companies are owned or, rather, notowned.

It is a crisis of commitment. Too few shareholders are committed to the companies they allegedly "own". They consider their shares either casino chips to be traded in the immediate future or as no more than a contract offering the opportunity of dividends in certain industries and countries; this requires no engagement in how those profits and dividends are generated. British law and corporate governance rules demand the narrowest interpretation of investors' and directors' duties: to maximise short-term profits while having minimal associated responsibilities.

The company is conceived as nothing more than a network of short-term contracts. Any shareholder – from a transient day trader to a long-term investor – has the same standing in law. American directors' ability to defend their company from hostile takeover or German directors having to live – horrors – with trade union representatives on their supervisory boards are seen as obstacles to enterprise that Britain must not go near. But companies and wealth generation, as Professor Colin Mayer argues in his important forthcoming book Firm Commitment, are about co-creation, sharing risk and long-term trust relationships: Britain's refusal to embrace these core truths is toxic. Companies were originally invented as legal structures to enable groups of investors to come together, committing to share risk around a shared goal and so make profit for themselves, but delivering wider economic and social benefits in the process. Incorporation was understood to be associated with obligations: a company had to declare its purpose before earning a licence to trade. There existed a mutual deal between society and company.

No game-changing improvement in British investment and innovation is possible without a return to engagement, stewardship and commitment. Limited liability should not be a charter to do what you like. It must be conditional on a core business purpose, along with the creation of trustees to guard it. Directors' obligations should be legally redefined to deliver on this purpose. What's more, every shareholder should be required to vote, with voting strength, as Mayer argues, increasing for the number of years the share is held.

To solve the problem that individual shareholders – even savings institutions – do not have sufficient muscle nor sufficient incentive to engage with managements, voting rights could be aggregated and given to new mutuals. These would support directors in delivering their corporate purpose, a proposal made by the Ownership Commission I chaired. Companies would become trust companies, with a stewardship code. The priority in takeovers would be the best future for the business, not the ambition to please the last hedge fund to take a short-term position.

Stakeholders should also have a voice in how the company is run. In Germany, a company's bankers and its employee representatives have seats on the supervisory board. Why not copy success rather than continue with our failed system? The Kay review's proposals to stop quarterly profit reporting, while a useful first step, do not address the core of the problem. The company has become a dysfunctional organisational construct that needs root-and-branch reform.

As part of the reform, Britain also needs more co-operatives, more employee-owned companies and more family-owned firms. It needs to be more attentive to which foreign companies own our assets and for what purpose. It is an ownership revolution to match the revolution in finance proposed last week. Together with an innovation revolution – see next week – the British economy could at last begin to deliver its promise.

Germany once admired British workmanship – but that was a long time ago

Over the North Sea lies the richest country in Europe, its success built on the manufacturing industry that Britain has spurned

• 
• • Ian Jack
  • guardian.co.uk, Friday 6 January 2012 19.44 GMT
  • larger | smaller

'The war hadn't been over 10 years and somehow Germany was making model trains more convincing than our own'

We all want to be Germans now: to make, to sell and not to yield. We would like to earn some respect, not least self-respect, and have some idea of our national future. The UK will never replace Germany as the world's second largest exporter, but we can surely manage to manufacture a few more things and "rebalance the economy", as the saying goes, to shrink the influence of the City of London.

So many people have had this dream recently – Vince Cable, of course, and Lord Glasman, no doubt, but also George Osborne when he made his fatuous speech about the "march of the makers". And there over the North Sea is the richest country in Europe: exemplary Germany, with its technical schools and apprenticeships, its respect for engineers, and its layer of family businesses known as the Mittelstand that puts long-term reputation above short-term profit by making the specialised parts that industry everywhere needs. How foolish we were to imagine that national prosperity could be spun from figures on a computer screen, out of thin air. How silly to despise the making of three-dimensional objects as a lowly process that had quit the west for the east. And how wise it would be (so the dream goes) to take a leaf from Germany's book and make manufacturing a much larger slice of the economy, therefore returning Britain to an earlier and possibly more solid version of itself.
That self is a long time ago. I remember watching Edgar Reitz's long and haunting film Heimat in the mid 1980s. Through the life of one family, the history of Germany in the 20th century was related in all its difficulty. At one point in the second world war, two characters find part of an aircraft or a bomb (I can't recall which) in a field. "Look," says one to the other as he handles the object, "such fine English workmanship." There was no irony, though it seemed hardly credible that British engineering could have been prized in Germany only 40 years before, given that at that Thatcher moment the typical British workshop was being sold abroad as scrap.

Germany's technical superiority was plain to see by the 1960s, but my own enlightenment came rather earlier, when I was eight or nine and the recipient of German gifts at Christmas. These came from two sources. In 1945, my family had befriended a prisoner-of-war and stayed in touch with him when he went home to Hamburg. We sent parcels of coffee beans, while a small box of marzipan or a bottle of eau-de-cologne came in the other direction. But as the years passed, the German presents grew more sophisticated. For me, a toy fire engine with a working water pump; for my parents, topographical books of black and white photographs printed on cream paper that felt like velvet. Perhaps these luxuries could also be found in Britain, but we had never seen them.

These were portents. The epiphany – not that I thought of it like that at the time – arrived when my older brother came home on leave from national service in Germany. He was the second source of gifts, and once, from his kitbag, produced two model railway coaches, gauge 00 to match my Hornby set but made by the German toymakers, Marklin. Their detail was superb. My tinplate Hornby carriages relied on painting to produce an effect of windows and door handles, but on their Marklin equivalents the windows really were transparent and the pattern of rivets below them stood out in relief. The war hadn't been over 10 years, and somehow Germany was making things as inconsequential as model trains that were more convincing than our own. Suddenly "Made in England" no longer suggested a singularly high quality, not that in 1954 it was easy in Britain to find goods made anywhere else.

Fear and envy of German manufacturing prowess began a long time before, as any economic history will tell you. Together with the US, Germany began to displace Britain as the world's foremost industrial nation well before the close of the 19th century. Books and newspaper articles sounded the alarm ("American furniture in England – a further indictment of the trade unions," read a Daily Mail headline in 1900), but did little to prevent Britain falling further behind in the new industries that became so important in the 20th century. Germany established a clear lead in chemicals, electrical engineering, optics and instrument-making. At the outbreak of war in 1914, the British government found that every magnet in the country came from Stuttgart, while German chemical works supplied all the khaki dye for British military uniforms.

To a large extent, British decline was inevitable: other nations had learned how to make things and export markets would naturally shrink. But the particular contrast with Germany was instructive when it came to scientific education and the social position of manufacturers and engineers. According to Peter Mathias's classic economic history, The First Industrial Nation, only a dozen students were reading for a degree in natural sciences at Cambridge in 1872. Germany, meanwhile, had 11 entire universities devoted to science and technology. Its educational system embraced the idea of manufacturing, while England's public schools and ancient universities held it at arm's length.
Finance became the acceptable business profession for gentlemen. In the words of another historian, Martin Wiener, finance "involved the extraction of wealth by associating with people of one's own class in fashionable surroundings, not by dealing with … the working and lower-middle classes". In this way, the City became part of the elite and "could call upon government much more effectively than could industry to favour and support its interests".

This is a familiar and by now hardly controversial diagnosis of the British malaise, and every so often a government or a politician promises a fundamental reform in political attitudes, praising the country's long tradition of scientific discovery and technical invention. A few television programmes endorse the same point; Sir James Dyson appears with his vacuum cleaner. But, beyond that, nothing much happens. Look around the frontbenches on both sides of the Commons. Who there dares upset the City? Who there ever made anything three-dimensional, or even had a parent who did? Which of them would risk the chamber pot of failed hopes being emptied over their heads by calling for a national industrial strategy?

It would be lovely to emulate the industrial success of the Germans, but so much history is very hard to undo. The one cheerful note (or perhaps more a vengeful one) is that Marklin, which made my memorable little carriages, is now owned by a private equity company based in London.