What is the Mittelstand?

The word itself means roughly "middle class" or "middle standing." It refers to a group of stable business enterprises in Germany, Austria and Switzerland that have proved particularly successful in enduring economic change and turbulence. In practical terms, it is usually defined as small and medium-sized enterprises with annual revenues up to €50 million and a maximum of 500 employees, though the category stretches further than that: depending on the specific definition, the Mittelstand Within can range all the way from small craft workshops to hidden champions worth up to a billion euros.

Why it matters to Germany's $5.5 trillion economy

Over 99 percent of German firms are Mittelstand firms. The German Mittelstand not only accounts for the majority of businesses in Germany, numbering more than three million, but also provides some 60 percent of all jobs and over 80 percent of all apprenticeships. And these are not just domestic players: the Mittelstand accounts for 68 percent of Germany's exports, while Germany's larger corporations generate only 32 percent.

The reason Germany punches so far above its weight as an exporter is largely these companies. The German economic model derives its strength not from a small number of dominant players, industries or industrial regions, but from a wide range of companies, small, medium-sized and large, based in locations all across Germany, specializing in all sorts of different sectors, and often forming close networks with one another.

The "hidden champions" inside the Mittelstand

Within the Mittelstand sits a remarkable subset that economists call hidden champions: world market leaders in niche markets, hidden champions are an important part of the German Mittelstand and are heavily associated with the success of the German economy. You have probably never heard of most of them. To qualify, a company must be positioned in the top three of the global market or take the top spot on its continent in terms of market share, its revenue must not exceed $4 billion, and it must have a low level of public awareness. These firms pick one narrow thing, whether it is adhesives, fish food, fire trucks or titanium aerospace castings, become the world's best at it, and sell it everywhere.

The primary focus of these companies is usually on highly customized and specialized products and services, and they can rely on a highly skilled and flexible workforce, supplied by Germany's exceptional vocational training system. That training pipeline is the secret ingredient most other countries have tried and failed to copy: the German economy is unique with its deep, sometimes centuries-old connections between industrialist families, local banks, universities, technical schools and workers.

What makes it hard to export

While some countries, like Britain, have attempted to emulate the Mittelstand model, some have argued that exporting the Mittelstand would require exporting the German views on labor and capital. The resilience is also remarkable: the stability and resilience of Germany in the wake of the subprime mortgage crisis of 2008 and the European sovereign debt crisis was at least partially attributed to the Mittelstand. Companies rooted in a single craft, owned by a family with a 100-year surname on the door, do not pivot to quarterly earnings games the way a publicly traded conglomerate does. That long time horizon is the model, and it is hard to legislate into existence.