Savants and Fabricants - Is the German Mittelstand in trouble?

March 2021

Recently, I watched a speech about innovation by a level C manager of a large German company. He said something that stayed with me for a while because it bothered me. I didn't know why at first, but then I realized what he said might be the very embodiment of why most German Mittelstand companies are not even close to the innovative enlightenment they wished they had.

He pointed out that his 100 years old firm had recently organized a hackathon. The goal of the hackathon was to develop innovative products for Mittelstand companies. The hackathon was carried out with business students from an elite college and high-level managers. During the questions and answer part, he was asked how many of the HACKATHON students could code. He responded that coding isn't always necessary. It's often a hindrance to creativity because coders would be too critical and fail to see what is possible. It got worse. He said that business students have great ideas, they'll just pass them on to the IT departments and let them execute. Obviously, this is wrong.

It got worse. He said that business students have great ideas, they'll just pass them on to the IT departments and let them execute. Obviously, this is wrong.

If you want to understand why this is wrong, I highly recommend reading Paul Graham's essay "Billionaires Build". It shows you that ideally founders need to live in the future. Here is an excerpt: "In the sense of being at the leading edge of some kind of change, and who are building something they themselves want. Most super-successful startups are of this type. Steve Wozniak wanted a computer. Mark Zuckerberg wanted to engage online with his college friends. Larry and Sergey wanted to find things on the web. All these founders were building things they and their peers wanted, and the fact that they were at the leading edge of change meant that more people would want these things in the future."

Apparently, the manager didn't take into account what was needed to make the launch of his company 100 years ago even possible. An important parameter was the readiness of the general public to come up with innovative products. This meant a population with knowledge about cutting-edge manufacturing technologies.

What does this have to do with the innovation power of the Mittelstand you might ask? There is no secret sauce that comes out of nowhere to give to the Mittelstand all over sudden Silicon Valley-like products. If most of the Mittelstand keeps ignoring the key parameters necessary, it will not come up with innovative products that people in the future want to use.

One of the most important parameters that not only the German Mittelstand should take a close look at is that "Research & Development" needs high profitability. In other words, invention has to payout. It needs a high Return on Investment (ROI).

To get a high ROI most of the following parameters should be given. Play a game and answer for yourself if Germany is providing the following:

  • Sophisticated development and engineering knowledge enters all levels of society
  • Experts of all fields can program
  • Investors are willing to take high risks and support upcoming developers/engineers with resources and network
  • Investors understand that most great products get started by people who want to build and not by people who want to look like they are building
  • Costs of incorporation must be low, process to launch a company fast
  • Society must in general be driven by determined optimism that is carried by conviction to improve one's life circumstances
  • Regulation for new innovative products is low
  • Quality of life is attractive to young people
  • Education is skill based, focused on the problems not the tools and it is not degree based
  • Education has a high ROI in the first 1-3 years after completion
  • No ideology predominates
  • All of society must partake via equity holdings in the value created by the new products (like the Nordic pension fund or the idea of Sam Altman)

The following data shows how well R&D pays out in certain countries:

It looks like the German Mittelstand is in trouble.