A Faber-Castell production line in Stein, near Nuremberg
Experimental feature

Listen to this article

00:00
00:00
Experimental feature
or

As Germany has reeled from the Volkswagen emissions scandal, the contradictions between the various elements of the country’s dominant corporate model have become starker. The confluence of pressures can have both good and bad results.

On one hand, Germany is respected for its many stable and long-established businesses, often privately owned and rooted in a strong tradition of engineering excellence. Such companies often share a homogenous culture, an independent management style and relative freedom from outside pressures. But the same elements can sometimes create a cocktail of influences that, at worst, triggers disaster. The VW imbroglio can be linked to just such a set of developments.

The car giant is not a particularly long-lived company — it dates from 1937 — and is publicly quoted. But it shares many characteristics of the fabled Mittelstand: the predominantly small to mid-sized private manufacturing groups that are a long-standing feature of Germany’s economy.

Volkswagen’s Wolfsburg headquarters

In the case of VW, the company systematically fooled US regulators over the amount of pollution emitted by its diesel cars. Before admitting its ruse — achieved by secretly modifying the software controlling some engines — it was for years held up as a paragon of German industrial superiority.

The group is controlled by three big shareholders that like to keep their deliberations private. Its executives are known for their controlling nature. The culture is one in which engineering ingenuity is admired above everything.

Such features have led to many fine companies that do much to maintain the “Made in Germany” brand. The closely held ownership of these businesses — and the fierceness with which many have clung on to their strong positions in the technical fields in which they specialise — have frequently given them a long history.

Take Achenbach Buschhütten, the world’s biggest maker of rolling mills for aluminium production, which traces its roots to 1452.

Prym Group, established by Wilhelm Prym in 1530, started out as a goldsmith and has moved into products including industrial fasteners and sewing needles. Still family-owned, it manufactures in 12 countries, including the US, Turkey and China.

Another example is Faber-Castell, a world leader in pencils and other writing instruments. It was set up in 1761 and has plants around the world. Count Anton Wolfgang von Faber-Castell, chief executive of the family-controlled group, says of Mittelstand businesses: “They have a profound know-how in engineering and are highly specialised and often global market leaders in a niche industry.”

Hermann Simon, chairman of consultancy Simon-Kucher & Partners, and author of Hidden Champions, a 1996 book about Germany’s privately owned corporate high-performers, says a key factor is a global mindset. Many German businesses, he says, “went global” well before the term became fashionable.

“That Germany was not a true nation-state until 1918 but a collection of small states and fiefdoms forced each entrepreneur [behind the most ambitious businesses] to go international very early.”

Once world markets opened up in the 1980s, German businesses were in a perfect position to expand. “If you are very good in your field and go global you can hardly avoid getting bigger,” says Simon.

But given the many common characteristics between the Mittelstand and VW, it is not too hard to make a link between the wider German industrial community and the background to the car giant’s disgrace.

Bernd Venohr, a Munich-based consultant who is an expert on the Mittelstand, says sometimes the very success of independently minded German businesses can lead to arrogance that brings a company to its knees. Being family-controlled or owned by a private group can, he says, be “a double-edged sword”. It “ensures tremendous commitment in difficult times, but if the [owner] does not have the necessary skills and resources it is a sure road to disaster”.

Big private companies that have lost their way in recent years and sometimes bought by a bigger quoted group — is worse.

Norbert Stein, chief executive and owner of Vitronic, a specialist in machine vision systems for industry that he started in 1984, says being private “helps more than it hinders” on the grounds of maintaining stability and control.

Others agree there is more to admire than disparage about the Mittelstand.

Over the past 30 years, one of the most successful of businesses of this genre has been Trumpf, the world’s biggest maker of laser cutting machines, controlled since the 1970s by the Leibinger-Kammüller family. Nicola Leibinger-Kammüller, chief executive, says the country’s continued faith in engineering-based industry has given its economy a valuable resilience. “At the beginning of the 1990s, when others relied on the service sector and the financial sector, and regarded industry as the ‘old economy’, Germany carried on as usual — and in so doing, it learnt to combine the strengths of tradition with those of the future,” she says.

For all the travails of VW — and the imperfect nature of the structure defining many top German companies — few see the Mittelstand model lurching off the road for some time to come.

Copyright The Financial Times Limited 2018. All rights reserved.