An Outside View at German Small and Medium-sized Enterprises

Small and medium-sized enterprises (SMEs) are the backbone of the German economy, which is the fourth largest economy in the world. In 2021, Germany's GDP amounted to more than $4.2 trillion.

According to the Federal Ministry for Economic Affairs and Climate Action of Germany (BMWK), more than 99 percent of all businesses in Germany are small and medium-sized enterprises. These SMEs account for over 50 percent of the entire economic output of Germany, and they also account for nearly 60 percent of jobs in the country.

Additionally, the BMWK states that around 82 percent of apprentices in Germany do their vocational training in SMEs. In other words, SMEs are a very important part of Germany's economy.

Not only do they drive the economy, but they can also help shape the country's culture through the huge impact their training and investments can have on the development of the economy. For example, with climate neutrality being such an important topic, German SMEs invested more than $22 billion in climate action in 2020.

SMEs in Germany are now facing multiple problems simultaneously, and many are worried about their future. This is confirmed by German SME expert and founder of Mission Mittelstand, Matthias Aumann.

"As an entrepreneur in the SME sector, you currently have the feeling that you are slipping from one crisis into the next. The worst thing about it is that the source of the crises is beyond your control. Corona, supply bottlenecks, the war in Ukraine - a feeling of powerlessness quickly arises. But that is precisely the great danger," said Aumann.

SMEs in Germany are facing serious issues

According to the results of a survey conducted by the Association of German Chambers of Industry and Commerce (DIHK), 52 percent of the 24,000 companies participating in the survey expect their own business to deteriorate in the next twelve months. Additionally, the DIHK survey found that around 82 percent of all businesses in Germany currently classify energy and raw material prices as a business risk.

Before the Russia-Ukraine war, about 55 percent of the gas used in Germany was imported from Russia. This means that, with the current situation, energy prices are continuously climbing, and SMEs are faced with tighter profit margins.

Further, a survey conducted by ifo Institute in July 2022 found that 49.7 percent of companies in Germany were affected by labor shortages. While this is not limited to SMEs, they are also affected by the serious lack of skilled workers.

Another issue that German SMEs are facing is the lack of digitalization. According to the European Union's Digital Economy and Society Index, which monitors the progress of digital transformation in EU countries, Germany only ranks 13th out of the 27 member countries.

Germany has an alarming amount of catching up to do. "'The Internet is new territory for all of us' - that's what the German chancellor said ten years ago. In the US, something like this is unimaginable. You don't have to look to Silicon Valley for that. Even smaller businesses here are often largely digitized," said Aumann.

"There is a statistic that illustrates the difference between the two continents very well: In the EU, around one of three employees works in a company that is neither digitized nor investing in digitization. That is almost twice as many as in the US. Their lack of digitization is usually one of the first points we tackle together," he added.

During the height of the coronavirus pandemic, over 2 million German SMEs lost tens of billions in turnover, with 44 percent of them reporting a drop in liquidity reserves as a direct consequence of the coronavirus crisis. This drop in liquidity reserves poses a huge risk for SMEs in Germany, and it hinders their ability to invest in digital transformation.

Doubling down on digital transformation

While the coronavirus pandemic has increased the rate of digital transformation in Germany, there is still a long way to go for the country to be competitive. According to a KfW Research report from 2021, German SMEs are currently only investing around $18 billion in digital transformation.

This means that Germany's investments in digitalization are far lower than those of other major countries, such as the U.S. Globally, spending on digital transformation is expected to reach around $1.6 trillion in 2022. The current situation also comes with many new opportunities.

"I see that growth and success are possible even in times of crisis. We are working together on some clear strategies: clear positioning, effective marketing, systems and processes that work, and successful employee recruitment. There are more than enough challenges, but there are also great opportunities for German SMEs," Aumann explained.

Mission Mittelstand is a fully digitized consulting firm that aims to boost the prosperity of German SMEs through digital transformation. While Germany is already one of the world's biggest economies, it's still lacking behind in the digital arena.

The German digital consulting agency enables SMEs in Germany to foster sustainable success in an increasingly digital world. Digitalization can substantially increase the efficiency and efficacy of SMEs, and Mission Mittelstand is enabling German SMEs to make the most of it.