June 23, 2014 12:02 am

UK closes gap on Germany’s growth machine

Germany’s Mittelstand of middle-sized companies is widely admired, not least in the UK, which aims to emulate its practices in business banking and apprenticeships in its quest for sustainable growth.

Britain’s mid-sized businesses were once described by John Cridland, director-general of the CBI employers’ group, as the “forgotten army” of the UK economy.

That is changing. After years of neglect, policy makers are focusing on the sector. The government’s British Business Bank is aimed partly at mid-sized companies’ needs and Lord Livingston, trade minister, is concentrating support on medium-sized exporters.

The UK mid-market is playing an important part in the recovery. Having edged towards the Mittelstand’s growth rate last year, British companies expect to outstrip their German counterparts during the coming year, according to research by GE Capital.

British and German companies are also more optimistic than their French and Italian counterparts, reflecting their countries’ stronger recoveries.

“In the UK and Germany there is quite a similar level of confidence in the national economy, and that means people are going to be more willing to invest at home,” said Stephen Roper, professor of enterprise at Warwick Business School, the report’s author.

But the strengths of the Mittelstand have been hard to export, even to the former East Germany. By specialising in advanced niche markets, retaining skilled workers and keeping debt low, these largely family-owned companies have thrived. They account for more than half of Germany’s economic output.

The Mittelstand learnt to export when Germany was a patchwork of sovereign states. They are based in strong regional clusters and supported by a banking system, and public policies, attuned to their needs.

UK companies would need several years of strong growth to close the gap, particularly in areas such as skills and productivity.

Skills shortages emerged as the biggest problem in the GE research. On average British businesses have half as many apprenticeships and internships as their German counterparts.

“While the mid-market is thinking bigger, it still has critical challenges to overcome, particularly as the competition for talent becomes much tougher,” said Ilaria del Beato, chief executive of GE Capital UK.

Companies are trying, however. Five times as many expect to increase apprenticeship and internship programmes as expect to cut them.

By GE’s calculations, the UK mid-market accounts for 1.7 per cent of companies but contributes more than a third of private sector output, revenues and employment.

Fast-growing examples include the Cambridge Satchel Company, which makes leather bags, brewer BrewDog and restaurateur Caffé Concerto.

At the larger end are companies such as Poundland, a discount retailer, Sir Robert McAlpine, the construction company, and department store operator House of Fraser.

The research also found evidence of a regional divide. London was the best-performing region, with 86 per cent of mid-market companies reporting revenue growth in the past year. Businesses in the south generally grew faster than those in the north.

“This may, in part, be explained by a stronger focus on export markets in the south,” Prof Roper said.

Previous research for the CBI by McKinsey, the consultants, pointed to management weaknesses in family-owned businesses. Only 10 per cent of family companies in Germany were run by the eldest son, versus 50 per cent in the UK, it found. Those that appointed the eldest son to run the company, it said, were drastically restricting their chances of finding the right talent.

A third of UK mid-sized companies believed their growth had been limited by access to finance, though they were reducing their reliance on bank loans and embracing a wider mix of funding methods.

A separate report by the CBI and accountants Grant Thornton said medium-sized businesses were being held back by the UK tax system.

“Medium-sized firms are not able to benefit from the incentives that small firms do, and at the same time most cannot afford to have an army of tax consultants on speed dial to help them wade through the complexities of the system,” Mr Cridland said.

It called for the threshold at which companies must pay taxes quarterly rather than annually to be raised; for access to research and development tax relief to be widened; and for the threshold for exemption from transfer pricing rules to be raised from companies with up to 250 employees to 500.

 

Family values help Seidensticker collar success

 

A century ago there were 100 companies making shirts in the German town of Bielefeld. Now there is just one, Seidensticker – but it is one of the three largest shirt manufacturers worldwide with annual sales of €200m.

Owned by two families of the same name since it was founded in 1919, Seidensticker is not quite the stereotypical Mittelstand company: it operates at all price levels in a mass market and it manufactures in Asia rather than Germany.

But it exemplifies a number of the Mittelstand’s strengths. The family owners, represented by two directors, are “visible in the company and they have a vision of where it is going over five to 10 years”, says Jens Waechter, head of finance. The owners can take a long-term view but also take decisions quickly, he adds.

As well as making its own branded shirts and own-label ones for supermarkets and fashion chains, it has opened 50 retail stores in Germany and a few other European countries. It expects to open 10 or 20 more over the next four years.

“The Mittelstand is very healthy”, Mr Waechter says, “not just at the moment but it was always so and probably will be for the coming years as well.”

 

Ticket website looks to stars to help it rock

 

Seatwave, the ticket resale website founded in 2006, saw its growth slow down over the past 18 months as fewer stars gave concerts. It expects a pick-up in the fourth quarter, however, on the back of shows by U2, Coldplay, Take That and potentially The Kinks.

It recently acquired US start-up Timbre, which developed a mobile app for users to search for live music and purchase tickets. Now it has launched an app that will alert users to upcoming gigs. Another service will allow users to post pictures after a show, listen to songs from the set list and share their experience.

Ajay Chowdhury, former chairman of music-recognition app Shazam who became Seatwave’s chief executive last autumn, said the move into mobile would change the dynamics of the business, which has ticket sales close to $100m a year and recently moved into profit.

Mr Chowdhury said mid-market companies were benefiting from the improvement in the economy, but he urged the Bank of England to exercise care in deciding when to raise interest rates. Some midsized businesses were potentially vulnerable, he said, whereas big companies had more resources and smaller ones often had lower debt.

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