Bigger not always better in Germany Medium-sized companies offer edge

August 23, 1992|By Ian Johnson | Ian Johnson,Contributing Writer

BERLIN — Berlin--Volkswagen, Bayer and Siemens may be among the first names that come to mind when Germany's powerful economy is mentioned. But how about Krone, Tetra or Doering Glas?

Such little-known companies seem unlikely competition for the German auto, chemical and electronic giants.

But the Mittelstand, Germany's medium-sized companies, are unsung heroes in one of the world's most flexible and successful export economies. Nimble and specialized, such companies prove that corporate bulk isn't needed to survive in the rough international markets.

Krone supplies telephone switching equipment worldwide, Tetra dominates the fish market, and Doering makes glass for supermarket display cases from Berlin to Brooklyn. On a larger scale, family-owned SMS Schloemann-Siemag is a leading supplier of steelmaking equipment to plants like Bethlehem Steel Corp.'s at Sparrows Point in Baltimore County.

In Germany, these companies are revered by economists and politicians. Hermann Simon, a professor of business administration at Johannes Gutenberg University in Mainz, calls them the "hidden champions" of the economy. They are credited with rebuilding the former West Germany after World War II and with adopting creative export strategies that stolid, bureaucratic conglomerates often ignore.

Today, such companies, each of which generally has fewer than 500 employees, account for 30 percent of German exports, produce two-thirds of Germany's gross national product and employ four of every five workers.

And they could influence U.S. efforts to boost exports. Several states, including Pennsylvania and New Jersey, are creating export promotion programs modeled on Germany's.

Germany actively promotes Mittelstand companies. Such companies receive special tax breaks for research, and when they operate overseas they are allowed to use the local German embassy's offices for handling business deals.

Meanwhile, Mittelstand lobbying associations furnish standard contracts in several languages and push the government to maintain tough antitrust laws, which protect medium-sized companies from overbearing conglomerates.

One successful Mittelstand company is Berlin-based Krone AG, which exports telephone switching and fiber-optic technology to the United States and other countries.

Although its 4,000-person work force exceeds some definitions of medium-sized, it is tiny compared with such competitors as American Telephone & Telegraph Co. And it has many typical Mittelstand characteristics: It is family-owned, specializes in a narrow range of top-quality products, shuns short-term strategies and is unknown to the general public.

Krone has maintained a niche by reacting quickly to changes in the market, says Manfred Schneider, a board member and director of company sales. When Germany liberalized import laws for telecommunications, for example, Krone realized that it couldn't compete with cheaper imports. It started producing switching equipment for phone systems that use fiber optics -- thin glass strands that carry signals of light.

"We were reluctant to do it because we had been founded as a maker of telephones in the 1920s," Mr. Schneider said. "Now telephones are unimportant to us."

The result is that Krone, which lost $4 million in 1990 when it was suffering from the loss of phone contracts, posted a $7 million profit last year.

Krone can make decisions quickly, Mr. Schneider says, in sharp contrast to his former employer, the large communications company ITT. With only four people to consult, including Klaus Krone, who is the chairman and a family member, the company can make decisions within 24 hours.

And, though family members may be eager for profits, they understand the need for short-term sacrifices better than do stockholders of big companies, who often demand quarterly earnings increases, he says. The main goal at Krone is to hand a healthy company over to the next generation, meaning that long-term planning and strategies assume more importance.

Still, because all the company's stock is owned by the Krone family, there is plenty of pressure to deliver.

"There's no anonymous stockholder," Mr. Schneider said. "You have to look the family in the eye and tell them that you've done your best."

Krone and other Mittelstand companies also have trouble keeping pace with the research budgets of larger competitors. Krone, for example, spends 15 percent of its operating budget on research and development, a figure common among Germany's medium-sized companies. Also typical is that it does no basic research on its own, instead applying technology that it develops with other companies or universities.

This does not mean that Krone is old-fashioned. Germany's medium-sized companies are famous for using the latest production technology, partly to overcome the country's high wages. Krone's $100 million new factory, for example, features computer-driven production that can run on weekends, when Germany's highly unionized labor force refuses to work.

Battling for sales around the globe can be taxing on family members. Still, some leaders of Mittelstand companies wouldn't think of trading places with executives at corporate giants.

Just ask Gerald Kuehnel, co-owner and managing director of Doering Glas, whose specialty is bent glass. The company is a world leader in the glass used in supermarket deli counters and curved windows.

The company was founded by Mr. Kuehnel's father-in-law, Franz Doering, in 1951. When Mr. Doering died suddenly in 1976, the family pressured Mr. Kuehnel to take control of the company.

"It's one of the sacrifices of working in a family business," he said. "It may be a lot of work, but it's the only job where you can greet each employee in the morning with a handshake."

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