Germany balances on its middle

Melbourne Herlald Sun, Friday August 18, 2012-08-17

Berlin, Germany

The Germans don=t have big resource mines and record prices for their products. In fact they are still the traditional manufacturing economy we have always known.  The kind that fell apart in the industrialised US and west Europe during the GFC.

So how come they are not in financial trouble and in fact are being looked on as the saviour of Italy and maybe even France?

Passing through Berlin during my European trip I was impressed at the calm flow of life and business, not much different from how I remember it in the past. Germans are well fed and contented, their taxis are brand-new Mercedes, and there seem to be a flood of new babies in expensive designer strollers.

Obviously, if we Australians have one answer to the world=s economic malaise of the past four years, they have another. What is it?

They call it the Mittelstand, the solid core of mid-sized companies that employ the majority of German labour. They give the economy, and the nation, the stability to weather any storms.

A Mittelstand company turns over less than $60 million, employs less than 500 people. Most importantly is what it does not have, in general.

It has little debt. Small bank loans. Less than 20% use stock market financing. Most of a company=s machinery and assets it owns outright. It pays its costs as its cash flows, and if they can=t afford something they don=t buy it. Which rather sounds like sacrilege in the high-flying, high-debt world of modern MBA business management.

It is this stubborn, black-hatted protestant ethic that has led Chancellor Angela Merkel into so much strife with the world=s bankers who want to see that stash of cash used to bail the rest of Europe out. Try asking any German whether they are willing to.

But what are the Germans doing to generate all this business, when any item we try to make is available fully imported from China for half of our manufacturing cost?

They do what they have always been good at. Quality. Machinery, engineering, leather goods, software, foods. Made to such a standard of excellence that price does not matter any more. Reliability of delivery, constancy of supply, consistency of quality. Once you=re out of the bargain basement, this is what matters, this will keep the customers coming back.

In recent years they have taken their products out into the booming markets of Asia, where quality, once appreciated, totally overcomes price. And into new territories like South America and Africa.

As a group they are as cautious as ever. They are advised to not allow any single customer more than 10 per cent of their business. Because if this customer departs, for whatever reason, the loss can be withstood. Not when the account takes 20 or 30 per cent, as with many of our companies.

What do you do if a customer wants more? You say, ASorry we have no more we can supply@. Now that=s a business decision worthy of an Iron Cross.

Of course everything I=ve said here is a generalisation. A very broad picture. But there are enough figures and research results to justify this view of the German economic battle ship. It=s going to take a great deal to sink this Bismark.

I=m not so sure of our own economy. Our Mittelstand has shrunk away, companies sold as soon as they start making profits, or destroyed by debt. Our own ship of the economy is faring well now - but is it sailing on shifting dunes of sand and ore? 

ray@ebeatty.com