Why ‘Mittelstand’ matters to Korea

2013-10-06 11:08

Why ‘Mittelstand’ matters to Korea

Merck discusses success of German small and medium enterprises
By Kim Da-ye
Merck, a leading liquid crystal supplier, is surely not a “Mittelstand” company, a German term for a small and medium enterprise (SME). Founded in 1668, the firm employs some 38,000 people in 66 countries, and posted 10.74 billion euros in sales in 2012. But when it comes to the spirit of the company, Merck wishes to stay with its Mittelstand roots.
“We still behave like a medium-sized company. We want to act like an entrepreneur and act like Mittelstand. That would be ideal,” says Roman Maisch, vice president of the performance materials division at Merck, in an interview with The Korea Times’ Business Focus. The German “Mittelstand” refers to more than 3.6 million small- and medium-sized firms, which together produce more than half of the country’s gross domestic product and employ roughly 15.5 million as of 2012, according to the German Federal Ministry of Economics and Technology.Mittelstand recently came under the spotlight here. Korea’s manufacturing-oriented economy is seeking a more appropriate model to benchmark for “creative economy” policies than the start-up cultures in Israel and Silicon Valley of the U.S. Choi Moon-ki, the minister of science, ICT and future planning who’s in charge of bringing the concept of creative economy into reality, acknowledged early September the difference between Israel and Korea. He said that the right model could be the combination of Britainstrengths in design and culture and the sophistication of the German manufacturing sector.
Germany has many examples of global leaders in their industries that started out as Mittelstand firms and still behave much like them. Business Focus picked Merck as an example — the firm was named among 500 “low-profile super-performers” in 1996 by German business consultant Hermann Simon in his book, “Hidden Champions,” and the firm has gone beyond that “low-profile” stage. The firm’s executive shared his thoughts on success factors of the German Mittelstand that differentiate them from Korean small and medium enterprises.
Success factors of Mittelstand
1. Independence 
One striking difference between German Mittelstand companies and Korean small and medium enterprises (SMEs) is their relationship with clients. While small- and medium-sized suppliers tend to be subordinate to one or two large corporation clients in Korea, German Mittelstand companies are much more independent with strong networks and multiple clients and partners.
Maisch discusses two possible reasons why Mittelstand companies have managed to cater to diverse clients. Firstly, the vice president says, Germany used to be a decentralized country with 16 provinces, each of which has its own industrial clusters. Secondly, many Mittelstand firms are suppliers of material or parts that can be customized for different clients.
2. Specialization
Mittelstand firms tend to be highly specialized. A blog entry at Harvard Business Review termed the characteristic “extreme focus.” The article published in February said, “They do one thing but they do it extremely well by achieving tremendous efficiencies…. To compensate for their razor-thin focus on just a single product, they diversify internationally and enjoy great economies of the scale.”
Although Merck is larger than a typical Mittelstand firm and has a more diverse product portfolio, the firm’s liquid crystals business shares a similar characteristic. Merck began selling the material for scientific studies in 1904, and intensive research on it resumed in the end of the 1960s for practical applications. The demand for the material then began soaring in the 1990s and continues until now.
3. Long-term vision
What the Merck executive discussed the most frequently throughout the interview was that most Mittelstand firms are owned by families who have long-term visions rather than short-term goals like the results of short-term stock prices.
4. Going global 
Discussing success factors of the German Mittelstand, the report from the Samsung Economic Research Institute says that they are exports-oriented and proactively pursue globalization by localizing production in overseas markets. Michael Grund, managing director of Merck Korea, agrees with the notion based on Merck’s experience.
“We have had a presence in Korea since 1985. Since then, we have continuously invested in our sites in your country. We manufacture here and we conduct research and development activities in close cooperation with our customers. Korea has now become a strategic country for Merck,” says Grund.
5. Being proud of what you do
Another key strength of the German Mittelstand that Korean SMEs are missing is the highly-skilled, not necessarily highly-educated workforce. “Even if you are a blue-collar worker and have high potential, you can move up. Small and medium enterprises focus on a niche market, and employees are required to have not only knowledge but also know-how,” says Maisch.
Planning for future
The key difference between the German Mittelstand and Korean small and medium enterprises (SMEs) pointed out by executives of Merck is the relationship with their clients. The German suppliers tend to be independent, serving various customers, while Korean counterparts often supply one or two large clients as their exclusive subcontractors. Unfortunately, Korean SMEs cannot do much about it until the culture of subordinate relationships between clients and suppliers changes. While
the future of a Korean SME with one or two clients depends heavily on their decision, a company like Merck can plan its own and even initiate a trend within the industry.

Then how does Merck prepare for the future? Apart from the obvious investment into research and development, Roman Maisch, vice president of the performance materials division at Merck, says that the firm tries to figure out what the future
would look like and what kind of display technology would fit into it. In that process, the firm closely collaborates with its partners and the third remotely relevant parties that could be influential on its business.

One example of such collaboration is the “Displaying Futures” symposium organized by Merck in Seoul last week. Under the theme of “ubiquitous interaction,” Merck invited an urban planning expert, architects and industrial designers to discuss what the city, home and other kinds of personal spaces would look like in the future, how people will interact with information when surrounded by displays in those spaces, what kinds of products would thus emerge and how display technology would support them.

One scenario that Maisch suggests is the demand for a new type of display in autonomous driving as the driver or de-facto passenger will be able to use the car as an extended office while commuting. “Our role is initiating such scenarios, moderating the process, and next, processing the collaboration,” said Maisch.

“We closely collaborate with our customers and try to involve other partners in other value chains. In case of citizen mobility, we need to talk to city planners and car manufacturers in order to solve these problems and forecast what the needs of the future display materials are.”

Walter Galinat, president of performance materials at Merck, adds, “As part of the display value chain, we want to expand our horizons beyond the purely technical side. Under the insights of cultural perspectives, we would like to see the opportunity of how the technical evolution, like the related standards in regards to display qualities, sustainability, types and shapes, can dovetail with patterns of behavior and perception.”