The Economic Power of the Deutsche Mittelstand

Prof. Dr.-Ing. Kai Lucks

The Economic Power of the German ‘Mittelstand‘

Invest in Bavaria

http://www.stmwivt.bayern.de/


Global Positioning


Outlook 2013: Top 3 Barriers Against Investments

Source: FT-Hogan Lovells survey of global firms November 2012



Outlook on Global Firms 2013: M&A Has Lost its Top Priority

Prof. Dr.-Ing. Kai Lucks Seite 5

Source: Chamber of Industry and Commerce

The 21 Leading Export Nations in 2011Exports in billion USD

1899

1481 1474

823

660597 555 523 522

476 473 456 452 410365 350 308

297 297 285 226

0

200

400

600

800

1000

1200

1400

1600

1800

2000

– Bavaria is in place 26 among the large export nations

– The export quota in the Munich region is 60 %


European Perspectives



Europe: 27 Member States


The 15 Members of the Eurozone


1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Germany

France

Spain

Portugal

Italy

UK

Argentina

Norway

New Zealand

Victoria

Chile California

Alberta

Sweden

The European Diversity is a Result of Different Ways to Deregulation of Markets

http://www.flagshop.com/Merchant2/merchant.mv?Screen=PROD&Store_Code=TFS&Product_Code=CA/ALB-006&Category_Code=ALB

http://www.flagshop.com/Merchant2/merchant.mv?Screen=PROD&Store_Code=TFS&Product_Code=US/CAL-060&Category_Code=USS



How is Economic and Political Uncertainty in the EurozoneImpacting on Your Plans for Growth?


Europe is the Most Important Trading Partner for the US

“There is now, for the first time in years, a serious drive towards an E.U.-U.S. free-trade agreement,” (Karel De Gucht, the European trade commissioner, said in Dublin in November)

The chamber estimates that an agreement that eliminated tariffs and other barriers between the United States and Europe could add 1.5 percentage points to growth on both sides of the Atlantic.

USA EUCHN

Inter continental trading volume 2012 up to September:

485 Bio US$390 Bio US$

200 Bio US$79 Bio US$

US Exports 2012 up to September:

Source: New York Times By Jack Ewing, November 25, 2012


Deal Drivers: 2013 Expectations vs. Last Year‘s Results

2013 M&A increasingly driven by depressed valuations and a glut of high-quality assets

Source: Freeman Consulting Services & Thomson Reuters, November 2012


European M&A in 2013 to be dampened by Eurozone crisis, but Americas and APAC largely escape fallout

Impact of Eurozone crisis and resulting banking turmoil



Renewed interest in foreign assets means active cross-border M&A Market should continue

Most attractive regions for acquisitions



North Track

South Track

Core

Core

North Track

South Track

Eastern Sphere

Eastern SphereWestern Sphere

Western Sphere

Center Block

From a User Economics View Europe is Diverse in (a) Structure, (b) Profitabilities, (c) Buyer Segments & (d) Labour Costs

MMI Analysis


Germany


The Federal Republic of Germany


The German Neighborhood

Prof. Dr.-Ing. Kai Lucks Page 20

Statistical Figures

Space01.01.2011

Inhabitants30.06.2011

GDP 2010

Jobless2011

Consump-tion Index

2012in km2 in % in

Mio.in % in Mrd.

€in %

Federation 357. 100 82. 100 2.500 100 7,1 % 100,0

Bavaria 71. 20 13. 15 442 18 3,8 % 108,7

Upper Bavaria

18. 5 4, 5 185* 7* 3,6 % 123,0

*Anteilig berechnet auf Basis von 2009.

Quellen: Statistisches Landesamt Bayern, Arbeitsagentur, GfK Geomarketing sowie eigene Berechnungen.

Stand: 24.01.2012


Germany‘s Main Import Sectors are Chemicals, Crude Oil & Gas, Machinery and Electrical Engineering


Germany‘s Main Export Sectors are Machinery, Road Motor Vehicles, Chemicals and Electrical Engineering


The United States are Germany‘s No.2 Investment Region


The USA have invested 24% of all FDI Projects in Germany since 2007. The majority of FDI projects consisted of ICT & Software.


In 2011, Germany Imported Primarily Chemicals, Machinery and Pharmaceuticals from the US.


In 2011, US Investments Amounted to 178 Projects. Bavaria and Hessen are the Top Destinations for US Investors.


The ICT & SW Sector is Highly Attractive to US Investors. Sales, Marketing & and Support Account for the Majority of all FDI Projects.


Source: German American Chamber of Commerce 2012


Structure of the German „Mittelstand“


SME‘s in Germany: Share of Overall Economy

SME-definition according to IfM: up to 499 Employees and 50 Mio € Sales


Company Size Type

Number of Employees

Overall Sales Volume in Mio €

Number of Companies

Smallest Companies

1 - 9 <= 1 1 Mio.

Small Companies

10 - 49 5 – 25 Mio 100.000

Medium Sized Companies

50 - 249 26 - 49 20.000

Large Scale Companies

250 - 500 50 - 249 7.000

Big Companies > 500 >= 250 500

Source: Statistisches Bundesamt, Umsatzsteuer Fachserie 14 Reihe 8.- ifm Bonn 2002.- Estimations of MMI

Potentials of German Companies


German small and medium-sized enterprises enjoy global recognition, strengthening the brand of the ‘German Mittelstand’

1.Germany’s small and medium-sized companies (Mittelstand) experience a strong reputation globally. 2.Small and medium-sized companies are the social and economic backbone of the German economy. 3.By European comparison, Germany’s SMEs are highly efficient at moderate labor costs. 4.German enterprises are the foundation of manufacturing among medium-sized companies in the EU. 5.Germany’s medium-sized companies hold the top position in many of the EU’s manufacturing industries. 6.Small and medium-sized companies represent 99.7% of all companies in Germany and employ almost 80% of all employees. 7.Medium-sized companies in Germany have a much larger influence on the national economy than small companies. 8.More than 340,000 German SMEs benefit from exports to global markets. 9.German SMEs are highly active in research and development, creating competitive “Made in Germany” innovation. 10.The German government strongly supports innovation created by small and medium-sized companies – welcoming foreign investors as well.


Germany’s small and medium-sized companies (Mittelstand) experience a strong reputation globally.


Small and medium-sized companies are the social and economic backbone of the German economy.

Note: data refer to 2009, *ifm estimation; Source: IfM Bonn 2012

With about 3.6 million registered small and medium sized companies (SME), the German Mittelstand comprises 99.7% of all enterprises. These companies each employ a staff of less than 500 employees

German SMEs contribute strongly to the national economy’s success. Their share of net value added amounts of 51.3%*.

Almost 21 million people in Germany work for SMEs. With a share of 79.6% of all employees, the German Mittelstand is a major employment driver.


By European comparison, Germany’s SMEs are highly efficient at moderate labor costs.


German enterprises are the foundation of manufacturing among medium-sized companies in the EU

Gross value added of medium sized enterprizes in EU Manunfacturing 2009 in %

Note: *companies with 50 to 250 employees according to EU-definition, **2008 data; Source: Eurostat 2012


Germany’s medium-sized companies hold the top position in many of the EU’s manufacturing industries.

Gross value added of Medium-Sized Enterprises* in selected EU manufacturing industries (2009, in %) *

Note: *companies with 50 to 250 employees according to EU-definition, 2008 data; Source: Eurostat 2012


Small and medium-sized companies represent 99.7% of all companies in Germany and employ almost 80% of all employees.

Economic Influence of German SMEs by Share of … (2009)

Source: Federal Statistical Office 2011, ifm Bonn 2011


Medium-sized companies in Germany have a much larger influence on the national economy than small companies.

Medium-Sized* Companies in Germany (2009)

Note: *Medium-sized companies employ between 10 and 499 employees and generate an annual turnover between EUR 1-50 m, according to ifm-definition.

Small companies employ up to 9 employees and generate a turnover of up to EUR 1 m. Source: Federal Statistical Office 2011.


More than 340,000 German SMEs benefit from exports to global markets.

German SMEs generated an export turnover of EUR 177 bn in 2009. More than 78% of that turnover was realized in manufacturing and wholesale & retail trade.

More than 41% of all medium-sized enterprises in Germany benefit from global markets through exports. Almost 12% of their turnover comes from business abroad.

Export activities of German companies are strongly promoted by governmental organizations, e.g. Germany Trade & Invest.

Exporting SMEs in Germany by Sector (2009)

Source: ifm Bonn 2011, Federal Statistical Office 2011


German SMEs are highly active in research and development, creating competitive “Made in Germany” innovation.

R&D Expenditures and Number of Personnel in SMEs (< 500 employees)

Note: *CAGR = compound annual growth rate, Source: Stifterverband 2012, IW Dienst 2011.


The German government strongly supports innovation created by SME companies – welcoming foreign investors as well.

Source: Federal Ministry of Economics and Technology


The Internal Conditions for M&A Have Improved But External Barriers Have Increased


The ‚German Mittelstand‘ is different

American SME Company German ‚Mittelstand‘

Huge homogenious home market

Smaller national home market

Shorter term performance orientation

Long term performance orientation

Open to M&A M&A largely seen as risk

Long term R&D seen as risky

Dedicated to long term orientated R&D

MBO, MBI more frequently Family succession preferred

Present in a few different national markets

Present in 10 out of 27 different national markets

One (few) country governance systrem

Multi-country governance system

Low cost source in Mexico at 1000 miles away

Low cost country at 100 km distance


M&A in the German

„Mittelstand“


German M&A Midmarket Deal Index MidMax

Market peaked in 2007 – afterwards coming down by 70 % (deals) / down by 47% (index)


GER

Maturity in M&A

Density in M&A

high

high

USAGBR

NDL

The German Mid M&A market shows little density and is less mature than other leading markets

Source: MMI Analysis


6.000 Chinese Companies operating

in Germany

5.000 German Companies having

manufacturing activities in China

The German Mittelstand is Active in China – and Vice Versa


Auch kleinere Projekte können komplexe Herausforderungen darstellen:

Path Screen

Explo-ration

Due Dili-gence

Busin. Case

Integr Prep.

100 Days.

Con-tracts

One Year

Information Process

Measures Planning Process

Communication & Change Process

Controlling Process

Valuation Process

Legal Process

Negotiation Permission

Readiness at Closing

1

2

3

4

5

6

Beispiel: Hybridmodell bestehend aus Projektstufen und durchgängigen Prozessen

Strategy Check


Bavaria


10 Reasons for Bavaria

1. An unmatched location in Central Europe

2. Gateway to Central and Eastern Europe

3. Most modern energy, transportation and telecommunications infrastructure

4. Highly-qualified, motivated employees

5. World-renowned universities and research institutions

6. High-tech clusters with a bright future

7. Strong business partners

8. Pro-active economic policies

9. Targeted support services for potential investors

10. Work where others vacation


• Strong expansion after Financial crisis in 2011 continued.

• Dynamic economic growth of 3,7% in 2010 and 3% in 2011.

• State institution‘s consumption stable, at year-end 2011 slightly reduced.

• National demand becoming an important growth motor in 2011.

• Employment situation with continuous positive development.

Stable German Economy


• Worldwide important investment location. No 5 worldwide (2010)

• Greenfield new investments on high level and stable

• Between 2000 and 2009 steady annual growth of foreign direct investments: +5% p.a.

• Most important industries for foreign investments: Information & communication technologies, software & services, automotive, machine building, chemistry.

Important Foreign Investments in Germany


• Demand from established exportation goods customers (EU, USA) slightly shrinking. Asian requests for German quality steadily growing

• Especially expectations for consumer goods continue to be positive for foreign trade

• Exports growing double digit in 2010, in 2011 +8,2%. Prognosis for 2012 growht stable but smaller

• Qualitatively high value and specialized products of German companies ensure strong position in global export markets

Growing Foreign Trade from Germany



Bavarian Cluster Initiative





• Bavarian GDP of € 444.8 Bio is larger than those of 20 of the EU 27 member states

• GDP per capita amounts to € 35.530 – well above Germany

• Main Hubs are Munich and Nuremberg – two of the world top-ranked metropolitan areas

• Bavaria‘s business community shows a great diversity of size and sector: Allianz, Siemens, BMW, Audi, EADS, Adidas, Puma and MAN & large number of Small & medium enterprises

• Service sector constitutes an especially strong part of Bavaria‘s business community: largest German insurance community, second largest banking one

• Tourism: one of the world‘s favorite places to visit

• State‘s infrastructure – high capacity, ultra-reliable grids for transportation, highways, telecommunication and energy

• Education, research and development: more than 3% of Bavaria‘s GDP goes to R&D

Bavaria in Facts & Figures


Source: Chamber of Industry and Commerce of Bavaria

Bavarian Exports and Imports with China

3824

5641

67467206

11643

4960

14214

0

2000

4000

6000

8000

10000

12000

14000

2005 2006 2007 2008 2009 2010 2011

Bavarian exports to China in million Euro

6916

8842

10558

1180011156

1281613692

0

2000

4000

6000

8000

10000

12000

14000

2005 2006 2007 2008 2009 2010 2011

Bavarian imports from China in million Euro


Source: Chamber of Industry and Commerce

Bavarian Exports and Imports with Hongkong

559

696749

594

865

617

929

0

100

200

300

400

500

600

700

800

900

1000

2005 2006 2007 2008 2009 2010 2011

Bavarian exports to Hongkong in million Euro

348

407

359

273

217

268

307

0

100

200

300

400

500

2005 2006 2007 2008 2009 2010 2011

Bavarian imports from Hongkongin million Euro


Technology Cluster Initiative Bavaria

Mobility Material Development

Mankind and Environment

Infotec & Electronics

Services & Media

Automotive New Materials

Biotech-nology

Infocom Technology

Financial Services

Rail Chemistry Medical Technology

Sensors Media

Logistics Nano-technology

Energy Power Electronics

Aerospace Environ-mental

Mechatronic Automation

Forest & Wood

Nutrition

Source: Bavarian Financial Institute



Inroads to the German

‚Mittelstand‘


Green field Brown field

M&A

OEM & Brands

1st tier /system supplier

2nd tier component

supplier

There are Different Promising Market Entry Paths to Germany

Prof. Dr.-Ing. Kai Lucks 67

Coverage of the Value Chain:Building up Strategic Positions

Sourcing R&D Manufact Sales Service

Global

National Suppliers

Own Patents

License Assembly

ComponentsManufacturing

Distributors

Own Salesforce

Third party

Own Fleet

from business start…

…to building up of national lead positions

Driv

er fo

r na

tiona

l mar

ket s

hare

Prof. Dr.-Ing. Kai Lucks 68

Market Positions versus Earning Positions

Attractive results only through market positions from No1 to No 3

Average earningsfrom business

Nr. 1 Nr. 2 Nr. 3 Nr. 4and worse

0

Market position

++

0

-

Organic market entry stimulated

by price wars and ending in

undercritical market shares

Siemens Database – MMI Analysis

M&A-entry resulting in profitable No3-position


Industry Community State‘s OrganizationsSocial Network

Universities‘ Network R&D NetworkValue Chain Network

Services Network

Competitive Cluster

The German ‚Mittelständler‘ is Tied Into a Dense Network

Industrie Verbände

BDI

Cities & Areas

Car Makers

Manufact Automat

Unions Germany Invest

Invest in Bavaria

10.000 Consultants

1000 M&A Boutiques

Suppliers

Clients

Fraunhofer

Max Planck

Hochschulen

Elite Universities

SME

Foreign enterprises can only be successful if they tie into this network


Why to Acquire Companies from the German ‚Mittelstand‘?

1. Huge amount of target companies (1 Mio companies with sales up to 5 Mio € .- 100.000 companies with sales of 5-25 Mio € .- 20.000 companies with sales of 26-49 Mio € .- 7.000 companies with sales of 50-250 Mio €)

2. SMEs represent 99.7% of all companies in Germany and employ almost 80% of all employees

3. More than 340,000 German SMEs benefit from exports to global markets. Many global market leaders (niches and specialties)

4. German SMEs are long term business orientated and highly active in R&D, creating competitive “Made in Germany” innovation

5. Typically present in a multitude of countries (27 EU member states), having structures and systems to cover different markets

6. Access to East European low cost suppliers and subsidiaries (wage differences 10:1) at distances of a few 100 km

7. Investing in German SMEs could enable them to enter into the US and Chinese markets: attractive complementarity of interests


[email protected]

e

Invest in Bavaria

German Federal M&A AssociationBismarckstraße 24Friedberg 61169Deutschland

President‘s Office: Mrs. Simone SchnellPhone +49 6031 7386-18Fax +49 6031 [email protected]

Pippinstraße 10D 82131 GautingGermany

Pippinstraße 10D 82131 GautingPhone: +49 89 89328592Fax: +49 89 [email protected]

http://www.invest-in-bavaria.de/

http://www.stmwivt.bayern.de/

Business

The Economic Power of the Deutsche Mittelstand