We need a stronger Mittelstand in New Brunswick

From a recent TJ column:

Twenty-five years ago in the first year of my MBA program at university, I wrote a paper on Germany’s mid-sized manufacturing firms known as the Mittelstand. At the time Germany was known for its large multinational brands such as Siemens, Volkswagen and BASF, but I learned the Mittelstand were considered the backbone of the German economy.

These mid-sized manufacturing firms are dispersed throughout the country and tend to be family owned. They specialize in the production of specific, niche products that feed the supply chains of other larger manufacturing firms around the world.

More than two decades after I wrote a glowing paper on this group of manufacturers, they continue to be the engine of the German economy. According to a recent article in The Economist, government officials and business leaders from around the world are flocking to Germany to learn the secrets of the Mittelstand and try to foster such a cohort of ambitious firms in their own countries.

New Brunswick has historically had its own version of the Mittelstand. According to Statistics Canada there were 191 manufacturing firms across the province with between 20 and 100 employees in 2012.

Thirty-six of these firms are in the food manufacturing business. There are 22 firms in the fabricated metal product manufacturing sector. Seventeen firms in the machinery manufacturing sector and 11 firms in the furniture manufacturing sector are part of New Brunswick’s Mittelstand.

But this group of manufacturers is in decline. According to Statistics Canada there were 271 of these manufacturers in New Brunswick a decade ago. Employment in New Brunswick’s Mittelstand is also dropping. In 2002 there were nearly 7,100 persons employed by manufacturing firms with between 20 and 99 employees. By 2013, the number was down to 4,800.

There are a number of reasons why we should be concerned about the shrinking number of Mittelstand manufacturing firms.

When a manufacturing firm is large enough to require 40, 50 or 100 employees they are far more likely to be exporting. Exporters are critically important. Our economy is heavily dependent on imports – from consumer goods to services – and we need a healthy mix of exports to bring some balance to our trade position.

Mittelstand firms also have the scale to be able to invest in research and innovation. Once a firm reaches a certain size they can afford to develop good human resources programs and offer their staff formal training programs. Critically, most Mittelstand firms should find it easier to attract capital.

Why are mid-sized manufacturing firms on the decline in New Brunswick?  There are many possible causes. Increasing global competition means these firms need more sophisticated operations and market development capacity.

The tightening labour market is making it harder for firms that built their business model on salaries at or around the minimum wage. Successful firms are using technology and better business practices to drive down unit labour cost while simultaneously increasing wage rates.

I think demographics plays a role. Many of New Brunswick’s mid-sized manufacturers were started by ambitious entrepreneurs back in the 1970s and 1980s. We are not seeing a new crop of ambitious entrepreneurs – particularly in the manufacturing sector – step up to the plate.

What can we do to beef up the Mittelstand in New Brunswick?   Our smaller firms need the capital and ambition to be able to scale up. Of the nearly 700 manufacturers with fewer than 20 employees scattered around the province, there must be a few dozen that have the potential to break out.

We should also look at immigration to fill the depleted ranks of the Mittelstand. I am sure there are ambitious entrepreneurs from Albania to Zimbabwe that are eager to break into the North American market. We should pitch them on the merits of setting up in New Brunswick.

If the New Brunswick’s economy is going to rebound in the coming years, we will need increased economic activity from many sources. The Mittelstand could be an important source of growth.