July 4, 2013 / 6:13 AM / in 6 years

Worries mount for German 'Mittelstand' as election looms

BERLIN (Reuters) - Christof Rosenberg has been trying for a year to find a skilled toolmaker for the specialist pipe company he runs with his two brothers in western Germany.

A woman paints on a vase at the KPM porcelain manufacturer in Berlin June 28, 2013. REUTERS/Thomas Peter

Two recruits he brought in and trained failed to master the job. Now he’s having to delay projects by up to six weeks and that’s hurting business at Aquatherm, the 450-strong firm Rosenberg’s father set up in his garage four decades ago.

“The market is completely devoid of well-qualified workers,” Rosenberg told Reuters from the company’s headquarters in Attendorn, an industrial town 90 kilometers east of Cologne.

Aquatherm, which makes plastic pipes for heating and air conditioning, is not alone among German “Mittelstand” companies - the small and medium-sized, often family-run, manufacturing firms that form the backbone of Europe’s largest economy.

A recent study by consulting firm Ernst & Young showed three of every four German Mittelstand firms are struggling to find suitable employees due to an acute shortage of skilled labor.

And that’s not the only problem worrying the sector ahead of a federal election in September in which Chancellor Angela Merkel is seen likely to win a third term, in part due to the relative strength of the German economy.

Slowing growth, rising energy prices, tightening credit conditions and a pre-election debate about tax hikes are also unnerving firms across Germany, including those that have weathered years of crisis in Europe with hardly any damage.

Reuters spoke with a dozen Mittelstand firms about their business prospects ahead of the vote. Most said they had a higher headcount now than three years ago, considered their business situation to be satisfactory and planned to invest around the same amount as last year.


But many admit to being worried by a deteriorating economic backdrop. The Ernst and Young survey showed nearly one in two firms is suffering due to the euro zone crisis and nearly one third fear they may not survive if Europe does not pick up.

“The business situation is mixed. It’s not bad but it’s also not good - it’s just mediocre,” said Lutz Goebel, president of a German lobby group for family-run firms.

Political uncertainty ahead of the election on September 22 is adding to the Mittelstand’s concerns, although the center-left opposition seems unlikely to wrest power from Merkel.

Mittelstand firms worry the tax increases the opposition Social Democrats (SPD) and Greens are calling for such as hiking the top income tax rate to 49 percent from 42 percent, could find their way into legislation over the next four years if one of these parties ends up in a coalition with Merkel.

Both the SPD and Greens also want to introduce a wealth tax that would hit Germans on high incomes of, for example, one million euros or more. This is a frightening prospect for small firms, where personal and company assets are often the same.

Theegarten-Pactec, a manufacturer of packaging machines based in the eastern city of Dresden, currently reinvests around 10 percent of the 60 million euros it makes in annual sales in new machines, training, research and development.

But managing director Markus Rustler said he would be forced to reduce investment if a wealth tax were introduced.

“It would seriously hit the Mittelstand. It would indirectly erode liquidity and that would force firms to scale back investment and reduce spending on research and development because the money isn’t there anymore,” he said.

Joerg Woltmann, owner of KPM, a 250-year-old porcelain manufacturer in Berlin once owned by the German monarchy, said a rise in taxes would make firms like his, a 180-employee business with sales of 10 million euros last year, more vulnerable to crises by plundering company reserves.

Worries about tax hikes are one reason most of the managers of small and medium-sized businesses interviewed by Reuters said they would back center-right parties in the upcoming election.

They applaud Merkel’s steady crisis management. She has kept the economy in relatively good shape during the financial crisis with measures like subsidies for companies that reduce staff hours while avoiding layoffs, and has managed to keep the euro intact while setting tough conditions for bailouts.


Still, some are worried at the prospect of years of slow growth in the euro zone, which is trapped in its longest recession since records began, and fear the region’s troubles could deepen and hit their business harder.

They got a jolt of bad news in the first quarter when the German economy grew just 0.1 percent after contracting sharply at the end of 2012. Manufacturing has particularly suffered.

“Bad weather really took its toll on growth in the first quarter so the economy probably failed to expand much in the first six months of this year - it was a weak first half,” said Marco Bargel, chief economist at Postbank.

While Merkel has called on other euro zone states to reform, Mittelstand companies say Germany also needs to take measures such as cutting bureaucracy and simplifying taxes so that small and medium-sized firms can remain internationally competitive.

“You have to employ several people to ensure you stick to all the laws and regulations necessary for your firm,” complained Arvid von zur Muehlen, chief executive of SimonsVoss Technologies, which makes keyless locking systems. “They cost money but don’t produce anything.”

Like many Mittelstand executives, von zur Muehlen says his company with sales of 48 million euros has no problem getting credit. But some firms are worried the introduction of higher minimum capital requirements as part of international Basel III regulations from next year will make borrowing more expensive.

While 77 percent say there has been no change in their ability to secure bank financing in the last year, 16 percent say it has got harder, according to the Ernst and Young survey.

Some firms, like LIMO Lissotschenko Mikrooptik, which makes micro-optics and laser systems from its headquarters in the western city of Dortmund, are already feeling the pinch of tough credit conditions and resorting to private finance brokers.

Paul Harten, co-managing director of the firm which has 240 employees and pulled in 20 million euros of sales last year, said the financial crisis and the euro zone’s troubles had made banks much more cautious and more vigilant when looking at company numbers, making it harder to get a loan.

He said his firm was losing business as it could not afford to invest in demonstration systems needed to entice potential customers, such as from the Korean flat screen industry.

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“We need to invest in those but we can’t because the banks aren’t giving us the necessary funding,” he said. “We’re really cutting off business opportunities as we haven’t got our financing sorted yet.”

Back in Attendorn, Rosenberg points to very low unemployment of 3.5 percent in the region - about half the national average - and says he knows it will be tough to find a toolmaker.

“The machines and the capital are not the problem. We just don’t have the people to sit around them,” he said.

Reporting by Michelle Martin; Editing by Noah Barkin and Peter Graff

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