Envy of Germany s medium-sized family firms sparks a desire to emulate them
Oct 20th 2012 | PARIS | from the print edition
THE word Mittelstand has no exact equivalent in French but has a clear enough
meaning: as the euro crisis eats away at the confidence and success of France s
big national champions, emulating Germany s medium-sized, mostly family-owned
businesses is seen as the way to boost French growth, jobs and exports. The
Mittelstand has become an ambition. What is not clear is how far the French can
achieve it.
This week they unveiled their big effort to do so. Fran ois Hollande s
government announced a new bank, merging various bodies set up by the previous
administration to steer finance (public and private) into middling firms. The
new Banque Publique d Investissement (BPI) looks very like Germany s venerable
KFW (Kreditanstalt f r Wiederaufbau), the reconstruction bank set up after
1945.
Characteristically, the French in their centralising way are latching on to the
only bit of the German system that has anything to do with the federal
government. The heart of the Mittelstand miracle lies not in Berlin but under
the rolling fields of the German L nder (states).
By sticking to their knitting and improving efficiency, the French believe,
German firms have prospered in specialised markets, earning good margins which
finance more innovation and produce a virtuous circle. In contrast, despite
their strength in consumer industries such as fashion, food and drink and in
high-tech nuclear and aerospace, France s large companies have been left behind
since 2000.
Strictly, a Mittelstand firm has fewer than 500 employees and turnover of less
than 50m ($66m), though in practice the term also applies to larger firms. It
took France until 2008 to come up with its own term for Mittelstand: ETI
(entreprises de taille interm diaire), which means in-between-sized firms: ie,
bigger than small businesses but not giants. Most ETIs have between 250 and
5,000 employees and a turnover of up to 1.5 billion. According to a study by
Ernst & Young, a business-services group, there are twice as many such
creatures in Germany as in France.
But for Ludwig Erhard, the economics minister who crafted West Germany s
post-war revival, the Mittelstand was never just about numbers. It is more an
expression of a state of mind and a specific attitude, he wrote in 1956.
Nicolas Sarkozy spent five years as president trying to imbue the French with a
similar attitude. His idea was to create a state-backed fund, the Fonds Strat
gique d Investissement (strategic investment fund, or FSI), to support
companies large, medium and small. The fund is now being subsumed into the new
BPI. So far it has invested over 7 billion, taking minority stakes alongside
private investors in more than 1,800 businesses. Last week it published a study
looking at why medium-sized firms in France lag those in Germany.
L tat le veut
History provides part of the answer. The term Mittelstand originally referred
to artisans who flourished in the 19th century. But it was Germany s post-war
economic settlement that consolidated the position of middling firms. In 1945
Germans started reconstruction with a distaste for big business, which was
tarred by association with the Nazi regime. The division of the country further
helped regional smaller firms. Siemens and Daimler, big firms ousted from
Berlin, breathed life into Bavaria and Baden-W rttemberg, hotbeds of the
Mittelstand. In contrast, France went in the opposite direction. Private firms
left basic industries and capital goods to Germany and competed with Italy in
consumer goods, while the state built up national champions in then-emerging
sectors such as nuclear power and aerospace.
This history helps explain the different roles of the state. Guy Maugis,
chairman of the Franco-German chamber of commerce, points out that when France
wants to do something to improve competitiveness it starts with top-down
decisions in Paris; the new bank is a case in point. Mittelstand firms, by
contrast, look to their regional governments and regional banks for support.
Studies have identified attachment to the local area and close connections with
these banks as factors in their long-term development.
But history and traditions of government are not everything. Jean-Daniel Weisz,
one of the report s authors, compares the way German firms and their French
counterparts operate. French middling companies, he says, have twice as many
layers of management between the boss and the shop floor: usually 18, compared
with a German maximum of nine. German firms also pay more attention to their
supply chains, he argues, taking managers from their suppliers on trade trips
to China, for example. This is something French firms rarely do. Germans firms
tend to promote specialists, technicians who know the answers to precise
technical questions, whereas French firms promote from an elite cadre of
generalist engineers.
Some of these German management practices can doubtless be copied. Layers of
management can be stripped out, different people promoted. But the weight of
history and governing traditions cannot so easily be shifted. Consider France s
efforts to help middle-sized firms adopt the German approach of relentless
incremental innovation. Jean-Yves Gilet, the chief executive of FSI, is taking
his fund out into the provinces and forming public-private partnerships to
boost regional companies and help them become leaders in their sectors. But
injecting money into little companies is no magic wand. Mittelstand firms
themselves usually prefer steady growth from retained profits to borrowing. The
French (like other would-be Mittelstand-mimickers) have a way to go.
from the print edition | Business