German SMEs yet to fully exploit potential of digitalisation

• 80% of small and medium-sized companies have implemented digitalisation projects, but mostly only on a small scale
• Only one in five companies among digital pioneers
• One third still in the early stages

A new study by KfW Research shows German SMEs are still in an early phase of digitalisation. While it is true that four out of five small and medium-sized companies have implemented digitalisation projects over the past three years, and invested in new technologies or in improving their IT capabilities, the individual projects are generally only modest in their scope. Most strikingly, small firms (fewer than ten employees) commit less than EUR 10,000 a year to this kind of investment, often without planning to increase that expenditure over subsequent years. Almost half of larger SMEs (150 or more employees) spend more than EUR 100,000 on such projects annually. Extrapolated to cover German SMEs in their totality, annual expenditure on projects to expand digitalisation comes to around EUR 10 billion.

“SMEs are still a long way from fully exhausting the potential of digitalisation,” says Dr Jörg Zeuner, Chief Economist of KfW Group, with regard to the study’s findings, which are based on a representative survey of small and medium-sized companies employing more than five people. “Most SMEs are indeed expanding their digitalisation, but are predominantly adopting a gradual approach.” Consequently, digitalisation continues to hold vast, largely untapped strategic potential for German SMEs. At worst, firms are at risk of “missing the boat”.

In total, around a third of SMEs are currently still in the early stages of digitalisation, meaning a below-average number of them do not even have such basic applications as their own website. Smaller SMEs with fewer than 50 employees are particularly over-represented among these latecomers to digitalisation. Around half of mid-sized companies in Germany are part of the way there, using e.g. individual applications for digitally networked information and communication. Representing just under a fifth of SMEs, the leaders of the digital pack, i.e. companies already focusing on digital products, services, apps or Industry 4.0, make up the minority.

Between 2013 and 2015, 78% of companies invested in technology projects (hardware, software, IT security, websites, IT procurement, the linking of processes). Projects to expand competence in the sphere of digitalisation (IT training, IT consulting, workflow reorganisation, concepts for Internet marketing and sales) were implemented by 64% of SMEs. Pioneering companies implement competence projects almost twice as often as the stragglers. “There is no way past digitalisation if SMEs are to remain competitive in the future,” emphasises Zeuner. “That means companies have to invest not only in software and hardware, but inevitably in knowledge too, so that they can develop the solutions best suited to them.”

Companies state that the main barriers to continued digitalisation are a lack of IT skills among their staff (67%), data protection and data security requirements (62%) and an Internet connection that is too slow (58%). But even if these obstacles are overcome soon, it will likely not be enough to trigger large-scale digitalisation among German SMEs. Apparently, many firms are unable to recognise the benefits to their business model offered by continued digitalisation. Concerns about high capital expenditure and operating costs (59%) are leading them to invest nothing at all or too little in digital projects. It appears to make sense here to provide examples of best practice and to highlight the real savings potential of more intelligent use of IT (e.g. reducing the number of defective goods in production, cutting warehouse costs and energy consumption).

When SMEs do invest in digitalisation, they finance 77% of that investment from current revenues. At 4%, bank loans play a subordinate role. 32% of SMEs mention financing problems as a barrier to digitalisation. “Demand for financing will increase among mid-sized companies once they perceive that there is a greater need for digitalisation in the future. A significant step forward in digitally networked information and communication within companies, alongside the networking of products and services, is only possible with considerably higher expenditure,” says Zeuner.

Note:

The study on digitalisation among SMEs was carried out by the Centre for European Economic Research (ZEW) in Mannheim in collaboration with infas Institut für angewandte Sozialwissenschaft GmbH in Bonn, on behalf of KfW Group. The key aspects of the representative study are the status of digitalisation, the projects currently being implemented and their financing, as well as the challenges and barriers facing small- and medium-sized companies. The study, a summary and other press material (photos, films, case studies) can be found at www.kfw.de.