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June 27, 2013 11:33 pm

UK business seeks to learn from Germany

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German manufacturing

From business banking to apprenticeships, British policy makers are seeking to learn lessons from Germany in the quest for economic growth. But the biggest prize of all would be to acquire some of the lustre of Germany’s famed Mittelstand of middle-sized businesses.

Now, there are tentative signs that Britain may be starting to do just that. According to research by finance provider GE Capital and Warwick Business School, UK mid-market businesses – defined as having turnover of £15m-£800m – achieved average revenue growth of 2.3 per cent in the year to April, compared with 2.4 per cent for German companies, 1.7 per cent in France and 0.2 per cent in Italy.

Britain's expanding middle

Britain's expanding middle

For the coming year, British companies are more optimistic than others, predicting 2.1 per cent sales growth compared with 1.7 per cent in Germany, 1.4 per cent in France and 0.5 per cent in Italy.

Almost nine out of 10 UK mid-market companies plan to increase or maintain their investment, according to the survey of 2,200 companies in four countries. British companies are also more optimistic than the others about their ability to expand sales in emerging markets.

To a large degree, Britain’s perfomance has been flattered by Germany’s economic slowdown and the wider eurozone crisis. However, there are optimistic signs for a UK sector that has in the past lacked identity, self-confidence and ambition.

The research found that the UK now has the highest proportion of “growth champions”. These businesses – defined as having achieved revenue growth of more than 10 per cent over the past year – now make up 17 per cent of UK mid-market companies. That compares with 13 per cent in Germany and Italy, and 11 per cent in France.

Even so, the German Mittelstand is a hard target to aim at. By specialising in advanced niche markets, retaining skilled workers and keeping debt low, this cadre of largely family-owned businesses has thrived and accounts for more than half of Germany’s economic output.

It has deep historical roots that make it hard to imitate. Mittelstand companies learnt to export when Germany was a patchwork of sovereign states. They are based in strong regional clusters and supported by a banking system, and by public policies, attuned to their needs.

This model has proved hard to export, even to the former east Germany. In Britain, medium-sized companies have often been neglected – although policy makers say that others can learn from the Mittelstand’s investment in innovation, its closeness to customers and its management continuity.

“We’ve been banging the drum for medium-sized businesses and the important role this forgotten army will play in the UK’s economic recovery,” said John Cridland, director-general of the CBI, Britain’s largest business lobby group.

He added: “Though small in numbers, these firms are big on impact, punching well above their weight in terms of revenue contribution and job creation.”

By GE Capital’s revenue criteria, there are 27,850 mid-sized companies in the UK, or 1.67 per cent of all UK private sector businesses. But they contribute more than a third of private sector output, revenues and employment.

At the larger end of the sector, there are consumer businesses such as Poundland, the discount retailer, Linpac, the packaging maker, Odeon/UCI Cinemas and Harrods, the department store operator. Among the smaller fast-growth companies are Ella’s Kitchen, the baby food producer, and Wiggle, the online sports goods retailer. However, the mid-market also comprises a higher proportion of manufacturers than the rest of the economy.

Even if their forecast growth is achieved, though, catching up with the Mittelstand will be difficult.

“When you look at the productivity data, in terms of sales per employee, the UK mid-market still lags behind Germany by about 10 per cent. That’s been the historical pattern,” says Stephen Roper, professor of enterprise at Warwick Business School, and author of the research report.

Separate research for the CBI by McKinsey, the consultants, also pointed to management weaknesses in family-owned companies. Only 10 per cent of family firms in Germany are run by the eldest son, versus 50 per cent in the UK, it found. Where the default was to appoint the eldest son to run the company, it said, companies were drastically restricting their ability to find the right talent.

The GE Capital study highlights other issues. Although UK companies almost matched German revenue growth last year, that had yet to translate into equivalent jobs growth: UK companies created an estimated 67,000 jobs but could have created 80,000 more had they matched Germany’s level.

There was also a regional divide. Southern England matched the revenue performance of Germany’s top regions but northern England, Scotland and Northern Ireland lagged behind.

Prof Roper said: “We are going to need a few more years of strong growth in the UK mid-market if the gap is going to close.” But he added that UK companies were capable of starting to narrow the divide, given the right macroeconomic environment.

Policy makers in the UK are making efforts to provide it. The coalition government’s British business bank is aimed partly at midsized companies’ needs. GrowthAccelerator, a public-private business advice service, is aimed at fast-growth companies.

Prof Roper said: “I think we have a considerable way to go yet. The comparison has to be with Germany, where the business ecosystem, support institutions and government have for years recognised the importance of the Mittelstand as the key to growth.”

 

Planet Caravan

 

Swift Group, Britain’s largest caravan maker, is one of the “forgotten army” of midsized UK companies that is determined to grow. Faced with a sluggish home market, it has expanded into continental Europe, Australia and New Zealand, writes Brian Groom.

“The UK market has been pretty flat for the last two or three years,” said Nick Page, commercial director

Swift, which has a £200m turnover and 1,000 staff, is based near Hull in east Yorkshire, where nearly all of the UK’s caravan industry is located. It remains the only UK manufacturer that makes products for all three sub-sectors of the market: touring caravans, motor homes and static caravans.

Traditionally, UK manufacturers have exported little – partly because left-hand-drive vehicles are needed for continental Europe, but also because the weather dictates that British caravans are generally built with indoor ovens, while others are not.

However, by modifying products and negotiating a financing package, it has grown sales in the Netherlands, Belgium and Scandinavia. It has also done well in Australia and New Zealand, where there is demand from expats for UK-made products.

Three years ago, just 2 per cent of Swift’s turnover came from exports. Now, this figure is nearly 10 per cent, or £20m – and Mr Page believes this can grow to £35m in three years.

He is eyeing China. At present, just 1,500 caravans a year are sold to the country’s 1.3bn people, but the government plans to spend billions of dollars to expand coastal campsites to encourage citizens to spend money at home, rather than abroad. He is also looking to the US, the biggest caravan and motorhome market.

Mr Page said Swift has had “superb” help with its market research from UK Trade and Investment, the trade promotion agency. The UK’s midsized sector was “not well publicised” compared with the Mittelstand, he said, but it felt good to be part of it.

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