KfW Research: Germany’s SMEs see themselves well-positioned in international competition

• Their key strengths are skilled workers and the “Made in Germany” quality standard
• One third of businesses expect their competitive position to improve and one fifth expect it to deteriorate in the future
• Half of all SMEs see bureaucracy as a high risk to their future competitiveness, only one in five worry about energy costs

The latest KfW Internationalisation Report shows that internationally competing small and medium-sized enterprises in Germany currently see themselves well-positioned in relation to their rivals. Encouragingly, they are mostly optimistic about their future competitive position. Around half expect to be able to maintain their present position in international competition, and roughly one third even expect an improvement. One fifth of all small and medium-sized enterprises are concerned that their competitive position may deteriorate.

Around one in ten of the 3.5 million SMEs in Germany compete globally. These 380,000 businesses are the subject of the KfW Internationalisation Report. Larger manufacturing firms, which are among the main drivers of turnover, employment and investment in the SME sector, are disproportionately represented among them.

For SMEs, international competition primarily means European competition. Major foreign competitors of around 60% of small and medium-sized enterprises are located in Europe. Outside Europe, China is the main source of competition (31%). For 20% of companies, competitors are also located in other regions of Asia, and for another one fifth, competition comes from the United Kingdom or the US.

German enterprises currently see themselves as performing well in many aspects of international competitiveness. They regard the availability of professionally trained employees as their main strength. One third of enterprises believe they are better positioned in this respect than their foreign competitors, half of them believe they are at least comparable and only 5% in a worse position. Small and medium-sized enterprises are also able to score points internationally with the positive “Made in Germany” image. Fifty-one per cent believe their products or services are more recognisable than those of their international competitors, 48% note a higher degree of innovation and 33% better quality.

Besides these clear strengths, SMEs also see some weaknesses. A good one fourth of enterprises see price as a disadvantage for their own products or services, 16% believe they are not as well positioned in terms of labour costs, 17% are critical of their own service provision and advisory skills, and 10% are unhappy with their own degree of digitalisation.

The public debate often portrays high energy costs in Germany as a significant locational disadvantage in international competition. For the broad SME sector, however, they do not present a serious competitive disadvantage. Only around 11% of German SMEs believe they are worse off than their foreign competitors in terms of energy costs, with 39% even seeing themselves better positioned than their most important competitors. For around 26% of all enterprises, energy costs are not a relevant factor at all for international competition. The views of manufacturers are somewhat less positive than those held across the broad SME sector, with 19% seeing themselves worse off and only 29% better off than their competitors. The relative burden of energy costs has grown noticeably since 2021, particularly in manufacturing. Still, most SMEs (81%) believe the energy costs on the level of March 2023 are manageable – despite the added burden they place on some.

Germany’s SMEs also believe high energy costs are neither the only risk nor the greatest risk to their future competitiveness. Looking to the next three years, SMEs are worried about bureaucracy more than anything else. Half of them (48%) see it as a high-risk to their future competitiveness at their German location. It is followed by taxes and levies (34%) and environmental and climate regulations (26%). Energy costs only rank third, with 21% perceiving them as a high risk. SMEs experience the issue of skilled labour shortages (21%), digital infrastructure (20%) and availability of raw materials/inputs (18%) as a similar problem.

“Generally speaking, Germany’s SMEs have a positive view of their current international competitiveness. And SMEs are also definitely more positive about the future than the current public debate suggests, although they do see a clear need for action. Removing bureaucracy, addressing skilled labour shortages, creating acceptance of the green transformation by preventing competitive disadvantages, securing the supply of raw materials and energy and pushing ahead with digitalisation – there are many ways in which the international competitiveness of German SMEs can be maintained and reinforced”,

said Dr Fritzi Köhler-Geib, Chief Economist of KfW.

“Developing and putting in place specific measures is a task which policymakers and businesses need to tackle together. The main levers which policymakers can pull are the framework conditions which they can set to maintain the attractiveness of Germany as a business location, for example by simplifying planning and approval processes or creating incentives for increasing the labour participation of women. Businesses also have a major role to play, as they need to adapt to a changing competitive environment and take measures to mitigate risks, for example by diversifying their supply of raw materials.”

The KfW Internationalisation Report also provides up-to-date representative data on the foreign turnovers of German SMEs. In 2021, their total turnover amounted to EUR 617 billion, which was not just above the previous year’s figure but well above the pre-COVID-19 crisis level. SMEs thus continue to make an important contribution to Germany’s total exports. But the war in Ukraine presents new challenges for businesses. Rising energy costs, high inflation and persistent supply bottlenecks clouded export expectations in 2022. Given the weak economy in Europe and the slowdown of global economic growth, expert demand is likely to remain subdued this year as well.

The dataset:

The KfW Internationalisation Report is based on the data of the most recent survey wave of the KfW SME Panel (10 February – 17 June 2022) and two supplementary surveys on the security of raw material supplies (1–9 September 2022) and international competitiveness (1–8 March 2023). The KfW SME Panel (KfW-Mittelstandspanel) has been conducted since 2003 as a tracking survey of small and medium-sized enterprises in Germany. The basic population of the KfW SME Panel includes all private-sector companies from all industries with annual turnovers of up to EUR 500 million. With a database of up to 15,000 companies a year, the KfW SME Panel is the only representative survey of the German SME sector, making it the most important source of data on issues relevant to SMEs.
Details: www.kfw.de/mittelstandspanel.