EUROPEAN BUSINESS:ON A CHILLY evening early in the new year, German businessman Adolf Merckle told his wife, Ruth, he was going into the office for a few minutes. The 74-year-old didn't go to his nearby office, in the southern German town of Blaubeuren, beside Ulm. Instead he headed for the railway tracks 300 metres from his home.
Around 7.30pm his body was found. His wife found a farewell note saying simply, “I’m sorry.”
Adolf Merckle’s death shook to the core Germany’s Mittelstand, the small- and medium-sized companies that make up the backbone of the German economy and from where the Merckle family business originated.
Starting after the war in wholesale chemicals, the group later moved into branded generic drugs production and wholesale.
Merckle’s generic drug company, Ratiopharm, had a turnover of €1.7 billion in 2007; in the same year, the Merckle drug wholesale company Phoenix had sales of €21.6 billion.
Merckle was number 94 on the Forbes list of the world’s wealthiest people and in recent years moved into leveraged investments, taking control of materials giant Heidelberg Cement and, fatally, taking short positions on Volkswagen shares, betting their value would fall because of the Porsche takeover.
When Porsche revealed in October that it owned nearly 75 per cent of VW stock and options, the price of the remaining VW shares rocketed and short buyers took a beating.
Adolf Merckle lost around €400 million, worsening his debt-burdened group’s already tight liquidity position. After weeks of bank negotiations, he signed away Ratiopharm, his life’s work, and went out to the train tracks.
Portrayed in the media as a man who took a huge bet and lost, most Mittelstand managers express huge sympathy with the dead man. In their eyes, Merckle was a self-made man who may have over-extended himself but who took his life after being hung out to dry by the banks.
Even at the best of times, it doesn’t take much to set off Mittelstand business owners about banks. But they have been particularly aggravated of late, watching politicians pop in and out of meetings with bank managers, practically begging them to accept state guarantees. Meanwhile these same bank bosses, Mittelstand managers complain, barely give the business community the time of day, much less the credit they badly need to survive.
In January, as the federal government was putting together an economic stimulus programme, Mittelstand lobbyists had to raise a stink before they got a meeting with chancellor Angela Merkel.
The talks produced a new €100 billion “loan and debt guarantee programme” for SMEs, although the criteria for granting credit are not yet clear.
That went some way to dampen criticism that the €500 billion stimulus programme was mostly geared towards the needs of Germany’s 5,000 big companies, each employing more than 500 people.
As Mittelstand lobbyists never tire of pointing out, over 70 per cent of Germany’s 40 million German workers are employed in small and medium-sized enterprises. Traditionally more optimistic than their big-business colleagues, the mood among 5,600 German SME managers surveyed by the influential Ifo economic institute has fallen to a historic low.
For the first time in four years the pessimists in the survey results outweigh the optimists. Demand is weak, orders are down and the outlook is bleak. Latest forecasts see Europe’s largest economy shrinking by at least 2 per cent this year. The export-driven economy has been left exposed to a drastic drop in demand for the machines and vehicles that drive business around the world.
The most visible casualties so far have been in the auto industry: from BMW to Daimler, VW to Opel, all have put their workers on short-time, a move which quickly filtered down to SME suppliers.
“The situation in the Mittelstand varies widely from region and sector. People in the food sector are doing fine but anywhere or anyone that has to do with the car industry has been very badly hit,” said Eberhard Vogt, spokesman for BVMW, a leading SME association representing three million companies.
But the problems of declining orders are nothing compared to the existential crisis posed by vanishing liquidity.
Most German Mittelstand companies have traditionally low levels of equity of 10-12 per cent, a result of favourable government tax policy towards credit. That has left many feeling the pinch since bankers started offering short-term loans only on punitive terms.
Anecdotal evidence about tough loan conditions is backed up by a second Ifo survey of 4,000 companies, 35 per cent of whom said credit conditions were “restrictive”, up from 29 per cent in August.
“In all four economic sectors surveyed – manufacturing, construction, retailing and wholesaling – the access to credit deteriorated,” said the Ifo report.
Mittelstand lobbyists say their members feel hard-done-by and are calling on politicians to lean on banks to lend at better terms. “The supply of money is where the main problem lies for the Mittelstand,” said financial consultant Winfried Neun to the Süddeutsche Zeitung newspaper.
“Banks are rigourous, demanding security from Mittelstand companies for which, before, they could have borrowed four times as much money. The banks are braking everything.”
Emka is a locking-systems company with a 76-year history, annual sales of €200 million and 1,000 employees worldwide. It says the fact the company is privately owned and has relatively good equity means it is well-positioned to stay in business. “But so many companies in the Ruhr area who are dependent on supplying to the car industry are in very a bad way,” said Oliver Brandenberg, head of exports at Emka, which does a lot of business with Irish companies such as Thermoking in Galway.
“We’re trying to see it in a positive light, as having a cleansing effect on the market. We expect business to be bad until the end of 2009. Then it will pick up, it has to.”
Despite the bad business climate, privately held German Mittelstand companies have proven more flexible in reacting to the slow-down than their larger, publicly quoted counterparts. While bigger companies put workers on short-time or even out on the street, family-owned companies have cash reserves and no investors demanding dividends.
Mittelstand lobbyists say Merckle’s death was an extreme exception rather than the rule, but that it still reflects the deep sense of responsibility Mittelstand company owners feel to their firm’s home town and employees, a responsibility that goes far beyond the ups and downs of the daily business cycle.
That perhaps explains why, in a survey by the BVMW, most Mittelstand companies quizzed said they would try to hold staff numbers steady this year, with just 7 per cent considering redundancies. Around 30 per cent are even planning to hire new employees.
The general frustration among SMEs about the government’s attitude towards them is nothing new, and it has bred a culture of self-reliance. That doesn’t mean they were too shy to make demands when they finally met Angela Merkel in mid-January.
After demanding better credit conditions from banks, the state-owned KfW bank has announced measures to offer fresh credit directly to Mittelstand firms. And, rather than sinking billions into measures that may take time to filter down, Mittelstand lobbyists have called for drastic cuts in bloated German bureaucracy.
There are signs the government is listening: federal economics minister Michael Glos has promised to cut non-essential bureaucracy worth a reported €100 million in savings to SMEs. “That would have an immediate effect,” said Friedhelm Graack, of the biotech company Wita, near Berlin. “It would lift a huge burden from companies with 500 employees who face the same senseless bureaucracy hurdles and costs as a company with 5,000 employees.”
