Germany’s ‘Mittelstand’ has been driving the country’s export growth for generations. Clarissa Dann looks at how this is financed and talks to BRITA’s Stefan Jonitz about how it turned water optimisation into a global brand
Unlike certain other countries – such as the US, UK, Sweden and Spain – German banks have sought primarily to invest in national industrial or business enterprise rather than becoming heavily reliant on lending for residential housing or commercial property. With renting more common than home ownership, the German economy has been largely free from the distraction of inconvenient housing and property bubbles. German entrepreneurs have, therefore, enjoyed more support from their banks than they might in other developed countries and receive continued support to ensure long-term competitive sustainable growth.
This article takes a closer look at Deutsche Bank’s activity in the Mittelstand sector and includes a special focus on one Mittelstand success story: water optimisation global brand BRITA Group.
Germany’s banks have been busy acting as low-cost lenders to local projects and small and medium-sized businesses, known as the ‘Mittelstand’. This has not only been a remarkable corporate phenomenon, but is the somewhat unsung engine behind Germany’s exports-led economy, providing 55% of the country’s net produce and employing 60% of its total workforce.1 The group also represents some 99% of all German firms – although there are obvious examples, such as Siemens, Daimler, Bosch and Porsche, that have become highly successful multinational companies.2
The Economist notes that, individually, the Mittelstand enterprises are “world leaders in hiding their light under a bushel. They tend to be family-owned, tucked away in small towns, and familiar only to the businesses that buy their specialised machinery and components.”3 Despite heightened global uncertainty in the international environment following Donald Trump’s accession to the US presidency, the German economy expanded at its fastest pace in five years during 2016, with a weaker euro helping to lift exports and domestic demand boosting growth the strongest level of any advanced nation in the world.4 German GDP grew 1.9%, with exports rising by 1.8% to €1.21trn in the 12 months ending December 2016.5 This makes Germany the fourth largest exporter in the world – behind the US, China and its dominant trading partner, the Eurozone.
However, the road has, at times, been hazardous. In July 2015, export growth was sputtering, and so the future viability of the Mittelstand and its ongoing capacity to invest and innovate was the subject of a review by the Federal Ministry for Economic Affairs and Energy. It observed that new opportunities (such as technology) and threats (increasing financial services regulation) were emerging and this sector, on which the German economy remains highly dependent, was at risk of being left behind. Furthermore, it sees sustained and continued access to finance as, “a key precondition for the future viability of the Mittelstand – and thus for its capacity to invest and innovate”. Specifically, it declares, “Loans will continue to be by far the most important external financing instruments for SMEs.”
The review explains how the German economy benefits from the three-pillar banking system: private banks (such as Deutsche Bank and Commerzbank), public law banks (the Sparkassen Finanzgruppe and eight Landesbanken, such as Helaba in the Frankfurt region) and cooperative banks.
Case study: BRITA
Optimise and simplify
My visit to the BRITA headquarters with Deutsche Bank’s German group relationship manager Sabine Hermsdorf helped me understand exactly what Jonitz meant. The whole ethos of enjoyable, clear water in a form that reduces the number of discarded plastic bottles streamed from the calming blue and white interior of what felt something like a combination of a new university campus and a spa retreat. He confirmed Meenen’s point that a family business like this one builds a business for grandchildren, and thinks ahead rather than chasing quarterly results. Fiftieth birthday celebrations are running from 1 July 2016 to 30 June 2017, and it is clear the strategy is proving successful. Working closely with the owner, and treating company finances as “our money”, rather than some anonymous performance measure for analysts, is hugely motivating. And his passion for the product shone through.
Chinese appetite for “healthy” water has helped BRITA build a burgeoning export market there, aided by the internet. “The Chinese people prefer to buy this way and German brands have a huge appeal in Asia,” says Jonitz. Hermsdorf, who last made a site visit to BRITA in China two years ago and is about to return, confirmed that its brand attribute of quality remains very important to Chinese consumers.
Sourcing of supplies is highly complex because the product “touches food” and is thus subject to a complex array of legal requirements. “We work mainly with German and European third-party suppliers. But the activated carbon – the main agent to remove the chlorine and metals in tap water – in the water filter is sourced from Sri Lanka and the Philippines,” Jonitz says. He adds that many supplier partnerships have been in place from the beginning and they are close relationships. “We are not talking about commodities and we work with our suppliers to continuously test and improve our product.” This is all part of the assumption of product responsibility from raw material purchase to making sure that the product promise is adhered to.
This level of trust in suppliers and customers has meant that BRITA has no need for trade finance or receivables finance. “We look to Deutsche Bank for cash management and foreign exchange. Eighty per cent of our turnover comes from abroad and we have to deal with lots of different currencies,” he says.
In line with findings from The Economist Intelligence Unit’s research conducted for Deutsche Bank, this company holds large sums of cash in case it wants to acquire.7 While BRITA has its own M&A team on the lookout for potential additions to the portfolio, it welcomes support from external providers such as corporate and investment banks specialising in this mid-cap sector as they see what comes up for disposal. “We are in the process of building our strategy and looking at further opportunities for international expansion,” confirms Jonitz.
The professional filtration range found in schools and hospitals came from a series of acquisitions that were subsequently integrated into the group. Jonitz adds that investment is also made in non-filtration technology that might yield a new diversified revenue stream.
While this foresight is indeed impressive, I found myself agreeing with the BRITA mantra that water is indeed “the basis of all life, and a valuable resource that is in short supply”. By optimising and individualising this basic commodity, this particular Mittelstand company has been ahead of its time.
1 See http://bit.ly/1svU5Rw at www.ifm-bonn.org
2 See also the author’s article ‘Vorsprung durch Mittelstand’ at www.tfreview.com/node/13650
3 See http://econ.st/2v079sd at www.economist.com
4 Destatis See https://www.destatis.de
7 See http://bit.ly/2msNAov at http://cib.db.com
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