Unveiling SME Investment Capabilities: Insights from the German Mittelstand and Strategies for UK SME Support

Small and Medium Enterprises (SMEs) form the backbone of international economies, with Germany’s Mittelstand standing as a prime example of entrepreneurial success and resilience. In this article, we’ll investigate SME investment capabilities, drawing insights from the German market and the Mittelstand. We’ll point to winning strategies that could be adopted to foster the growth, innovation, and sustainability of UK SMEs.

German Mittelstand: A Model of Success

Translating as middle class, Mittelstand is a term used in reference to the small and medium-sized businesses of Germany. Known for their innovation, quality, and long-term vision, such businesses typically have characteristics such as family ownership, niche specialisation, and focus on craftsmanship. Having successfully endured economic change and turbulence, the Mittelstand reportedly accounts for 99% of all companies in Germany.

The majority of companies in this category make annual revenues of up to 50 million Euro and have no more than 500 employees. As such, they are far bigger than UK SMEs, which have been defined by the government as having fewer than 250 employees and a turnover of less than €50 million or a balance sheet total of less than €43 million. However, there are still a variety of lessons that the UK’s firms could learn.

Other qualities of Mittelstand business include:

• Independence
• Flexibility
• Innovativeness
• High levels of resilience
• Customer focus
• Established regional links
• Strong international presence

As mentioned, Mittelstand companies tend to have a narrow and well-defined focus. However, they target expansion across a range of international markets, opening up significant economies of scale. Aiming for as much international engagement as possible, they can recoup R&D investments over time.

Investment Strategies of the Mittelstand

In prioritising strategic investments specific to innovation, technology, and market expansion, Mittelstand companies are commonly able to sustain long-term growth. Profits are typically allocated for further innovation and the development of strategic partnerships for access to new markets. Such businesses also share a focus on continuous improvement and employee development.

Germany’s established apprenticeship system is of particular benefit, with a range of vocational programs allowing for the continued entry of highly skilled workers. Mittelstand company owners typically commit to the recognition and reward of employee contributions. In turn, this makes for increased levels of workplace satisfaction, loyalty, and productivity. While enjoying international success, these companies maintain strong regional ties, promoting engagement in education, arts, and sports across Germany.

Key Considerations for UK SMEs

UK SMEs can emulate the success of the Mittelstand in focusing on niche markets, investing in innovation, and fostering cultural agility and flexibility. In so doing they can remain adaptable and resilient to economic change, such as that seen in the wake of the pandemic. Focusing on long-term sustainability rather than short-term profits, such companies can stay relevant and competitive across international markets.

Representing Prima Electronic Services and the Denchi Group, Nick Russel says “One of the biggest problems in the UK is short-termism, especially when it comes to manufacturing. This is exacerbated by venture capital or private equity backing, where the focus is always on short-term returns. Manufacturing needs a ten-year vision to enable companies to grow at the right pace. It [should be] less about ripping out profits, and more about investing for the future.”

Learning Lessons from the Mittelstand

Access to finance will be vital for the vision of the Brittlestand (or UK Mittlestand) to be realised. This will mean the arrangement of diversified funding sources for the UK’s SMEs, with venture capital, government grants, and alternative financing platforms being developed.

Collaboration and ecosystem building should be actively encouraged, making for the formation of industry clusters, innovation hubs, and business networks. This will facilitate knowledge sharing, partnership building, and access to resources for UK SMEs.

The owners of such businesses should also look towards the Mittelstand’s experiences of internationalisation. There are lessons to be learned when it comes to engagement with export markets, formation of strategic alliances with overseas partners, and investment in cross-border expansion initiatives.

Government Support and Policy Interventions

The UK Government has a key role to play in the introduction of supportive policies and incentives for the nurturing of SME growth, innovation, and internationalisation. Initiatives such as the offer of tax incentives for R&D investment, grants for technology adoption, and export promotion schemes can encourage UK SMEs to embrace strategic investment strategies like those of the Mittelstand.

There must be an ongoing investment in the development and maintenance of national infrastructure across the areas of transport, energy, and telecommunication. Companies should also be given flexibility in the arrangement of finance with a focus on innovation. The success of national help-to-grow schemes should be built upon, allowing UK SMEs to outpace the international competition.

Emerging UK SMEs can separate themselves from the more established Mittelstand companies by adopting a progressive approach and showing a greater appetite for risk in entering international markets. This will mean being open to outside investment, embracing new technologies, and taking opportunities for diversification. Broad horizons must be maintained, with no limits being placed on the prospects of growth.

Building for the Future

By drawing insights and implementing tailored strategies based on lessons from the Mittelstand, UK SMEs can strengthen their competitiveness, resilience, and long-term sustainability. The collaboration of industry stakeholders, government agencies, and financial institutions will be key if the UK SME sector is to thrive, driving economic growth, innovation, and job creation in the post-Brexit era.

Automate UK will continue to play a leading role, pushing for industry progress and supporting well-informed technology decisions for the growth of UK businesses. Lobbying for progress on key industry issues, supporting the filling of skills gaps, and sharing the latest insights, we’ll fulfill the aim of ensuring that automation technology is at the heart of a thriving manufacturing industry in the UK and beyond.