Klaus Fischer has an approach to business that would make a shareholder activist shudder.

“The task I took over from my father is to successfully prepare the company for the future, to secure existing jobs and create new ones,” said Mr Fischer, 68, who is “not in it for the money but for the fun”.

Tucked into a remote valley in south-west Germany, an hour’s drive from Stuttgart, Fischer is a maker of wall plugs and car parts with annual sales of more than €800m.

Its newly built modernist headquarters boast one of “Germany’s 50 best canteens”, a top-notch gym and an intranet that allows employees to download stories to read to their children.

Mr Fischer said he counts in decades rather than quarters. Over the past 40 years, the number of staff has tripled to 5,000, while sales are up tenfold. In 2017, sales increased by 9 per cent, with the group expanding into 3D printing and touchscreen technology.

“I’ve always been driven by the urge to be jointly successful with my employees, not just alone,” said Mr Fischer; whose wealth Manager Magazin estimated at €600m.

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The floor of the Fischer factory, emblematic of the thriving German Mittelstand

The global image of Germany’s economy may be shaped by BMW cars, Daimler trucks and Siemens turbines but it is the Mittelstand of small and medium-sided companies such as Fischer that are “the backbone of the German economy”, as Chancellor Angela Merkel puts it. Jörg Zeuner, chief economist of publicly owned lender KfW, stressed that “it is not at all a cliché”: the Mittelstand accounts for 70 per cent of all jobs and 90 per cent of all apprenticeships.

Among Germany’s 3.3m SMEs, the leaders have commanding positions in specific markets — sausage packaging (Poly-Clip in Hattersheim), cabin pressure control systems for passenger jets (Nord Micro in Frankfurt) or realistic three-dimensional anatomical models (3B Scientific in Hamburg).

“We are deliberately targeting product niches that are too complex for small companies but too tiny for our big rivals,” said Sabine Herold, owner and chief executive of Delo Industrie Klebstoffe, a specialist glue maker in the greater Munich area that last year reported a 67 per cent jump in sales to €159m after a successful expansion into the electronics sector.

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Business consultant Hermann Simon has coined the term “hidden champions” for such companies. He has counted 2,700 of them globally, with close to 50 per cent of them based in Germany. Even the average SME is 1.5 to four times larger in Germany than in other EU countries.

They are not immune to economic crises but observers such as Mr Simon see the Mittelstand well positioned to face challenges such as Brexit or a trade war. “Many of their products are just indispensable. If a company has a market share of 50 or 70 per cent, you cannot replace it.”

Europe’s corporate comeback

The FT examines why corporate Europe is leaner, meaner and fitter following the global financial crisis. The series includes:

Part one
Introduction

Part two
Italy: luxury

Part three
Germany: Mittelstand

Part four
Spain: infrastructure

Part five
France: recruiters

Strong balance sheets help. “Family-owners are personally exposed to the company’s risk and hence tend to act in a more sustainable way and think for the long-term,” said Edith Weymayr, a divisional board member at Commerzbank, one of Germany’s leading SME lenders. As a consequence, Mittelstand balance sheets tend to be rock-solid. On average, equity stands at 39 per cent of assets.

Trumpf Group, a family-owned machine tool and laser technology company based in Ditzingen, north of Stuttgart, weathered the 2008 financial crisis without any lay-offs. “This is the owning family’s aspiration for dealing with any future crisis,” said Lars Grünert, finance director.

With factories on three continents and four-fifths of its €3.6bn annual revenue generated outside Germany, Trumpf is susceptible to shockwaves in the global economy.

epa06269479 A worker operates a 3D-Printing machine at a demonstration center of Trumpf GmbH + Co. KG in Ditzingen, Germany, 16 October 2017. Trumpf is the world market leader in the manufacture of laser cutting machines and producer of machine tools, laser technology, and electronics. EPA-EFE/RONALD WITTEK
A Trumpf worker operates a 3D printing machine. The company made it through the 2008 crisis without having to resort to layoffs

A year ago the company started to plan for stormier times, launching a project code-named “Koyer” — an ancient German term for dyke builders.

“In some business areas, demand is still so strong that we are struggling to meet it,” said Mr Grünert. But he added that Chinese orders for machine tools are currently softening and the business unit is lagging behind its targets.

Internal weaknesses often come from succession planning and family feuds. At Munich-based technology group Knorr-Bremse, a global leader in braking technology for trucks and trains, the 77-year-old patriarch Heinz Hermann Thiele in 2015 fell out with his son Henrik. Instead of taking a senior management role, the latter abruptly left the company.

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Some also worry that the Mittelstand’s strength in engineering obscures weaknesses in digital technology.

There are counter-examples, though. Brainlab, which makes visualisation software for neurosurgeons, has engraved the source code of its first software into the vast glass front of its imposing new headquarters in Munich.

Today its 1,350 employees generate €280m in annual sales. The company counts 5,100 hospitals in 100 countries as its customers. “When we started, the term digitalisation did not yet exist,” recalled Rainer Birkenbach, Brainlab’s chief technology officer, who joined as one of the first employees.

The large majority of Brainlab’s researchers are based in Munich, which Mr Birkenbach said does not create a competitive disadvantage to Silicon Valley companies. “We looked at offshoring parts of our R&D and programming activities several times,” he said. “We always came to the same conclusion: it just makes more sense to keep it here in Germany.”

Foreign acquirers show appetite for SMEs

The Mittelstand has attracted a surge of interest from foreign acquirers. In 2017, foreign buyers were responsible for almost 50 per cent of all M&A deals involving a German SME target with less than €500m in sales, up from 42 per cent a decade ago, according to a new study by German state-owned lender KfW.

The appetite of buyers from China, in particular, has jumped in recent years, with Chinese firms accounting for 4.2 per cent of all Mittelstand M&A in 2017, compared with just 0.3 per cent 10 years earlier, according to a separate KfW study.

Top of the shopping list for Chinese buyers are manufacturing and engineering companies but biotech companies are attracting increased interest.

The total number of M&A transactions involving German SMEs has largely been stable in recent years, with about 1,100 companies a year changing ownership. Most buyers are strategic, operating in the same sector as the target, with financial investors accounting for just one in five suitors. “With 500,000 entrepreneurs going to retire by 2022, Mittelstand M&A may be further on the rise”, said Jörg Zeuner, chief economist at KfW.

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About this series

Despite the negative noise around Brexit, trade wars and political uncertainty, companies across Europe are thriving. From luxury companies in Italy to the hidden champions of the German Mittelstand, FT reporters examine the reasons behind the run of continental prosperity and point out possible obstacles on the road ahead

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