Tag Archives: Mittelstand

Buffalo’s Mittelstand

9 Feb

The general post-Super Bowl consensus is that the commercials sucked, except, perhaps for this one:

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Imported from Detroit. Catchy, right? Chris Byrd, Broadway-Fillmore advocate and general Buffalo booster, summed up the feelings of plenty when he said he wished Buffalo had such an ad.

The commercial reminded me, though, of how Buffalo, probably through accident, or at least necessity, took a different path from Detroit some time ago, and how we will be better off for it. Fifty years ago, Detroit and Buffalo were muscular brothers towering astride Lake Erie between them, cranking out cars and steel and prosperous lives for millions of workers. Bethlehem Steel failed faster and harder than the American car industry, but Buffalo’s current manufacturing prowess, a legacy of the worker boom, positions us in fine global company. 

It is a myth that American manufacturing output has fallen along with manufacturing employment. In fact, we still produce as much as China, India and Brazil combined, a sum that accounts for 20% of the world’s capacity and hasn’t changed in 40 years. But the sector’s impact has shrunk as a percentage of the US economy: it is down to 11% of our GDP, and is only 9% of our employment and dropping, as outsourcing and productive technologies continue their advancement.

Contrast the United States with the world’s current economic darling: Germany. Manufacturing still accounts for a full 25% to 30% of their GDP (depending on the fact sheet one checks), and 12% of employment. And while globalization has affected Germany as well, it has largely been for the better, through planning, culture and geographic luck. The great savior of German manufacturing is the mittelstand, small and medium sized family owned firms that specialize in and dominate their niche markets. 70% of German manufacturing employment is at mittel firms, and they have taken advantage of globalization by making machines that make other things. As The Ecomomist notes: “If a particular job can best be done by a machine, then the chances are that the machine in question was built in a small town in Germany.”

Chinese factories are humming with equipment made by small German firms. The machines themselves were probably constructed in part in Czech or Poland, where labor is cheaper but supply lines are far denser and parent company influence is stronger and more proximate than General Motors’s Michigan-Mexico chain. Yet, the Mittel-Management trend – focusing on slow growth, family firms, industry specialization, business to business sales and international exports – is not confined to Germany. It is spreading to Harvard Business School, Silicon Valley and the industrial Midwest.

Image courtesy apiheattransfer.com

And in this way, Buffalo resembles Germany more than the greater United States. Despite the rise of the health care industry and business back off services, manufacturing still accounts for 11% of Buffalo’s jobs. That’s twice as many as our growing financial sector, and three times as many as work for state government (including UB). International exports account for 11.8% of our region’s GDP, compared to 9% nationally. And like Germany, Buffalo is not dominated by huge companies that boom and bust. Detroit still suffers from going as the Big 3 go. We made the painful transition from such corporate dependence, and now Tonawanda, Buffalo, Lackawanna, Niagara Falls, and Cheektowaga are full of companies you’ve never heard of, employing 50- 200 workers each, making heat transfer coils, laminates, valves, shelving and storage units, conveyor belts and air separation equipment. Yes, we are still home to GM, Ford, Delphi, and Moog. But there are far more K-TECHs, Audubon Machineries, Kraftwerks, and AirSeps, and they increasingly represent the future of American value-added manufacturing.

Why? Because the challenge for all manufacturers is to reduce the cost per unit of production, and mittel firms leverage their expertise to move than statistic beyond simple labor costs.  In Italy, where the mittelstand exist as textile firms, much cloth production was outsourced to Romania, where labor costs were lower. New factories were established, and after much diligence, the quality of cloth at the Romanian factories was equal to the Italian. The cost per unit was higher, however, and many jobs are now moving back to Italy. Why? The machines at the Romanian factories would often break, requiring costly repairs and many hours of lost production. The Italian workers, using the same machines, had such expertise that they could anticipate breakages – a change in pitch, a slowing of a system – shut the machines down to prevent damage, and then fix them themselves. High quality cloth, higher labor costs, lower cost per unit, ultimately higher productivity. This is how the United States, and Buffalo, compete with China in the 21st Century.

It goes without saying that Buffalo can do better to encourage, reinforce and reinvest in this trend. Our school’s BOCES programs are larger and more comprehensive than most, but still not the equal of the German Gymnasium system. Whether by planning or accident, Buffalo is well positioned to emulate a global leader.