Germany’s small and midsized enterprises, collectively known as the Mittelstand, face mounting pressure from increasing competition from Chinese manufacturers, raising concerns about the future resilience of Europe’s largest economy. The Mittelstand, widely regarded as the backbone of Germany’s postwar economic success, consists of often family-owned firms that dominate niche markets globally, particularly in industrial machinery and specialized manufacturing.
Bertram Kawlath, CEO of Schubert & Salzer, a family-run industrial valve maker with about 150 employees and annual revenues above €50 million, represents the challenges and opportunities facing the sector. His company’s products are used in high-profile applications such as Formula 1 racing and the Fountains of Bellagio in Las Vegas, underscoring the Mittelstand’s reputation for quality and innovation. Nevertheless, Kawlath, who also serves as president of the Verband Deutscher Maschinen- und Anlagenbau (VDMA), stresses urgency in addressing competitive pressures: “There are reasons for optimism. But there is not much time to lose.”
The automotive industry in Germany has attracted much attention due to its struggles in the electric vehicle sector, where Chinese competitors often offer cheaper and more technologically advanced products. Meanwhile, the machinery segment, historically a strength of the Mittelstand, is now confronting its own set of challenges. Key among these is the need to integrate artificial intelligence into equipment rapidly while seeking greater support from national and European policymakers.
The VDMA reports a decline in German machinery exports to China—down 8 percent both last year and so far this year—contrasted with a 14 percent rise in Chinese machinery imports to Germany over the same periods. This shift reflects an intensifying trade imbalance and increased competitive pressure from Chinese firms.
Further highlighting the precarious outlook, a recent survey by DZ Bank and co-operative bank industry bodies found investment intentions among German small and midsized enterprises at their lowest since the survey’s inception in 1995, even below levels recorded during the 2008 financial crisis, the COVID-19 pandemic, or the energy crisis triggered by the war in Ukraine. Only 52 percent of companies plan to invest in their operations within the next six months, and a mere 26 percent expect an improved business environment.
Kawlath identifies domestic issues as critical to the Mittelstand’s future, pointing to corporate tax rates that exceed the OECD average by about five percentage points and high overall labor costs. Regulatory challenges persist as well, with German firms often subject to national standards exceeding those mandated by the European Union. On a broader level, Mittelstand executives express frustration with shortcomings in the EU single market, particularly regarding capital markets and the free movement of goods, which they say places them at a competitive disadvantage relative to Chinese and U.S. counterparts.
Concerns about China extend beyond market competition. German SMEs call on the European Union to adopt more agile and targeted measures against dumping and subsidies from Chinese companies—a process often hindered by lengthy and costly procedures that typically take effect only after damage has been sustained. Kawlath also advocates for greater access to Chinese public procurement, where smaller foreign firms without a local presence face significant barriers.
The geopolitical environment compounds these economic challenges. Kawlath refers to the “weaponisation of dependencies” evident in U.S. trade tariffs, Russia’s energy supply restrictions, and China’s dominance in rare earth minerals, factors that amplify the urgency for Germany and Europe to bolster their industrial competitiveness and strategic autonomy.
Despite these obstacles, the Mittelstand’s record of innovation remains strong, having overcome past competitive challenges, such as those posed by Japanese firms several decades ago. However, the intensity of current Chinese competition and the broader geopolitical context require accelerated reform and adaptation.
“In terms of European security, we need an industrial base that is competitive and fast,” Kawlath said. “We are far from perfect but we are walking in that direction. We have to run.”