KfW SME Digitalisation Report: Pandemic has boosted activities, but not everywhere

• 35 % of SMEs expanded digitalisation activities since start of pandemic
• Consumer behaviour changes are a strong driver
• Businesses still not leveraging full potential of digitalisation – not enough ambitious projects

Transitioning to a both climate-neutral and digital economy and society is more urgent for Germany than ever before. As a country with few natural resources it must be able to harness its creativity and technological capacity to remain competitive and prosperous going into the future. Digital technologies often form the basis for this. For the new KfW Digitalisation Report, KfW Research has examined on the basis of the representative KfW SME Panel where Germany’s SMEs as the backbone of the country’s economy stand in the area of digitalisation after two years of coronavirus crisis. The findings give cause for cautious optimism. Overall, the pandemic has generated a surge in digitalisation, as 35 % of the 3.8 million small and medium-sized enterprises in Germany expanded their digitalisation activities by autumn of 2021, nearly the same share maintained their activities but only 6 % reduced or discontinued them altogether. The surge was concentrated not just on the initial stage of the pandemic but actually intensified during the course of the crisis – despite all the difficulties businesses were facing. A major motivation for digitalising operations lies in the expectation of SMEs that demand will shift permanently to digital offerings and sales channels. Thirty per cent of them believe this is likely to occur, while a further 33 % believe this at least in part.

“Germany’s progress in digitalisation is only average. Russia’s war against Ukraine has made painfully clear how quickly abstract risks can turn into concrete threats. In the field of digitalisation, the war has exacerbated the threat situation from cyber attacks. We must be aware of how heavily dependent we are of commodities and how intensely global competition for them is evolving. Germany cannot afford any weaknesses in digitalisation. It is, rather, a building block for securing our prosperity and freedom into the future”, said Dr Fritzi Köhler-Geib, Chief Economist of KfW. “So the fact that the coronavirus pandemic has boosted digitalisation is a good thing. More businesses have switched from emergency digitalisation measures to strategic realignment. The task of economic policy is to support businesses so that this boost turns into a sustained trend.”

Germany’s SMEs have always focused digitalisation heavily on sales, and that has remained the case during the past pandemic years. At 58 %, digitalising the interaction with customers and suppliers continues to be the most frequent digitalisation project for businesses. This is reflected in the fact that online sales have grown significantly in the past two years (EUR 302 billion in 2021, which was +24 % or EUR 59 billion on 2019). Nevertheless, digitalisation is unlikely to become a matter of course in the SME sector, as the German business community is not yet harnessing the full potential which digitalisation offers. Complex digitalisation projects are still not sufficiently widespread. Measures such as digitally integrating functional areas, reorganising workflows and digitalising offerings have so far been completed by only 31 % to 22 % of businesses that carry out digitalisation projects. Large SMEs and businesses that have firmly integrated research and development into their business model have been and continue to be at the forefront also during the pandemic.

Upside potential also remains with respect to the proportion of enterprises engaged in any digitalisation at all. One fourth of businesses still have not undertaken any digitalisation activities even during the coronavirus pandemic. They have not even taken basic steps such as digitalising their interaction with customers. There are stark differences between large and small SMEs in this regard too. For example, 62 % of large SMEs with 50 and more employees expanded their digitalisation activities by September 2021, while this is true of only 32 % of businesses with fewer than five employees. Only 5 % of large SMEs are still not undertaking any digitalisation activities, while that figure is 28 % for small businesses.

SMEs’ expenditure on digitalisation projects has recently increased, amounting to EUR 20.3 billion in 2020 (vs. EUR 17.5 billion in 2019). But despite the pandemic-induced slump in overall SME investment expenditure (on machinery, fixed assets and similar) to EUR 204 billion (vs. EUR 223 billion in 2019), that means digitalisation spending still makes up only a fraction of this sum.

The current analysis by KfW Research can be retrieved from www.kfw.de/Digitalisierung

The dataset:

The KfW SME Digitalisation Report is based on the SME Panel (KfW-Mittelstandspanel), which has been conducted since 2003 as a recurring postal survey of small and medium-sized enterprises in Germany with annual turnover of up to EUR 500 million. The KfW SME Panel provides representative data for all SMEs of all sizes and across all industries in Germany. A total of 11,403 SMEs took part in the most recent survey wave, which was conducted in the spring of 2021. KfW Research also undertook five supplementary surveys on the impact of the coronavirus crisis on SMEs as part of the KfW SME Panel, most recent of which was from 1 to 10 September 2021.