- - Thursday, August 24, 2017

BERLIN — After graduating from college in his mid-twenties, Armin Pfannenschwarz was expected to return home immediately to run his aging parents’ family business, a midsize firm specializing in the production of wire harnesses for large auto manufacturers.

Ten years later he sold the business to pursue a doctorate.

“I had the experience that the company grew, was better and had a lot of success,” said Mr. Pfannenschwarz, now a professor of economics and business administration at the Karlshochschule International University in Karlsruhe. “But I couldn’t say the same for my own life. I came to the conclusion that this isn’t my life at all.”

Mr. Pfannenschwarz is among a cohort of young Germans who are increasingly opting to walk away from their family firms rather than run them, a trend that could spell economic uncertainty for the so-called “Mittelstand,” Germany’s small and midsize family-owned businesses that are the backbone of the nation’s world-class economy.

“The issue of succession is a problem that needs to be solved if we want to see more investment growth in Germany,” said Carsten Brzeski, chief economist at ING-DiBa in Frankfurt. “If you’re at the verge of some sort of change, you will not be able to start new, big-time investments, which will probably only pay off a few years from now.”

It’s a trend that goes to the heart of Germany’s ability to thrive in the global economy.

Small and medium-size businesses constitute 99 percent of all German enterprises and contribute 56 percent of the country’s economic output, according to figures from Germany’s Ministry for Economic Affairs and Energy. With their local roots and dedication to apprentice training, they are widely seen as one key reason that youth unemployment in Germany is far lower than it is in almost every other European country.

Mittelstand businesses are known for their hyperspecialized products, such as the wire that holds champagne corks in place. They’re also famously committed to training their workers, often in remote regions that don’t typically see much new economic development. Businesses with fewer than 500 employees generated around $2.65 billion in total annual turnover in 2015, according to statistics from Germany’s Institute for Small and Medium Sized Business Research, or IfM, in Bonn.

But the current generation of Mittelstand owners is rapidly aging. One in six of these firms — more than 600,000 businesses with 4 million employees — will need a successor by 2018 or else be forced to close or sell the firm, according to a recent study by Germany’s KfW banking group.

Attracting the young

Economists predict that finding willing owners may be difficult.

After studying in cosmopolitan German cities or abroad, many young, would-be next-generation business owners are unwilling to move back to the rural German towns where their families’ firms are located. Many would prefer to work for a multinational company in Bavaria or a hip start-up in Berlin, said Alexander Schiersch, a senior researcher and project manager with the German Institute for Economic Research in Berlin.

“This newest generation of workers has different wants and needs than their predecessors. So companies are trying to present themselves more attractively,” Mr. Schiersch said.

But small and medium-size German businesses have been slow to digitize operations and embrace flexible work environments, features younger workers increasingly favor. Implementing this cultural shift could be vital for the Mittelstand, he added.

“The world is spinning faster and faster,” said Mr. Schiersch. “The question will arise among companies and entrepreneurs about whether they’re taking the appropriate steps to jump on this speeding train of change that’s being fueled by digitization.”

That jump proved a big challenge for Katja Sator when she took over her father’s business in 2009. Her company, Frankenstein Prazision, located in a rural village in southern Germany, specializes in precision manufacturing of automotive parts.

Ms. Sator said that most family-run operations adhere to an old-school mentality toward business: strict working hours and a top-down approach where workers don’t think for themselves.

It took her years to redesign her father’s firm and build up a workplace sensitive to the needs of the new generation of workers. She thinks she was born to take on this challenge but believes many successors don’t feel the same call to put in the work and shake things up.

“I think that when the next economic crisis hits, those that haven’t paid attention to the culture in their firms will break away because they’ll lose workers and contracts,” she said.

The owners of one-quarter of German small and medium-size businesses currently undergoing management change are choosing to sell, oftentimes to foreign investors from China and elsewhere, according to a recent report from IfM. Many firms see this as an opportunity for the business to enter into emerging markets that would otherwise be out of reach without the help of foreign investors.

But selling runs the risk of diminishing the Mittelstand’s staying power, said Mr. Brzeski of ING-DiBa.

“There isn’t a Chinese buyer behind every corner,” said Mr. Brzeski. “When we see this trend toward more foreign takeovers of small and medium-size enterprises, there clearly is that risk that expertise, skills and knowledge will eventually leave the country and the economy.”

For Mr. Pfannenschwarz, the challenges facing Germany’s Mittelstand and its successors offer opportunities for growth. Years after selling his own family’s business, he now runs a bachelor’s program for entrepreneurship. Many of his students stand to someday run Mittelstand businesses themselves.

“There will be winners and losers of this process,” he said. “But in general, I think these types of businesses will prosper.”

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