The Germans have drawn the manufacturing blueprint ...

... but can Britain translate the message from Mittelstand? Mark Leftly visits Nuremberg and Berlin to discover why medium-sized German producers are thriving

Inside a factory which Willy Wonka would have been proud to call his own, with its yellow walls, blue and red-framed windows, and bright green doors, the stench of fetid glue fills the air.

Slats of wood hurtle along a waist-high miniature conveyor belt, pausing briefly as the 10 grooves in each piece are filled with thin rods of graphite. A second slat is stuck on top of the first, and bubbles of white glue are squeezed out through the miniscule gap between the graphite and wood. After an hour of drying, the slat is broken up, producing 10 pencils that are piled up in their thousands in small black boxes.

This is the type of speedy, hugely efficient production process that the British Government would like to see replicated across the UK as part of its "march of the makers" push for manufacturing to become once more a bedrock of the economy.

A shame, then, that last week's figures from the Chartered Institute of Purchasing & Supply/Markit showed yet another dip in the confidence of UK manufacturers and that the multi-coloured factory is in the Franconian town of Stein, a 20-minute drive from Nuremberg in southern Germany.

This Mittelstand, Germany's three million small-and-medium-sized businesses, has been the saviour of the country's economy during the crisis, while nations, like the UK, that were heavily reliant on financial services have suffered rising unemployment and little, if any, growth. If the UK coalition wants to rebalance the economy – only 18.2 per cent of GDP is industrial output, against Germany's 28.1 per cent – Deputy Prime Minister Nick Clegg and Chancellor George Osborne might want to take a tour of the small German towns that house these export-led manufacturers of high-quality products.

Investing for the future

Count Anton-Wolfgang von Faber-Castell described the prospect of one day making pencils as "boring" 40 years ago. Today, he is the eighth generation of his family to run Faber-Castell, a 251-year-old company, which in its Brazilian plant alone produces enough pencils each year that end-to-end would go around the world eight times.

Annual turnover will soon top €500m (£416m) and Faber-Castell's limited edition pen of the year collection, which for 2012 is made of 1,750-year-old wetland oak wrapped in three layers of 24-carat gold, sells for €10,000 euros a pop.

"Financial services: it's a fashion," von Faber-Castell scoffs from an ornate dining room in the Stein factory's accompanying castle. "I still remember at the end of the Nineties and the dot-com boom. People kept asking me: 'What? You're still making pencils?' They're gone and I'm still here."

And he emphasises the importance of being privately owned, not having to react to the short-term whims of shareholders who are just looking to make a quick buck: "Consistency [of product] is important in the German Mittelstand. There is no great secret – just sticking to what you know and not making changes according to quarterly earnings results, so you are able to implement long-term decisions."

British industrialists broadly agree with the Count, pointing out that UK firms worry more about immediate profit than future growth. An executive at a major UK manufacturer moans: "This is an engineering culture, there is that spirit of the British engineer. The trouble is that long-term investment in plant, machinery and automation is our Achilles heel."

Getting the money together for investment is particularly difficult for the smallest UK companies. Sir Roger Bone, the UK president of aircraft manufacturer Boeing, says that while many of the medium-sized companies of Boeing's 250 suppliers are able to get loans, others are struggling as banks keep hold of their capital in the wake of the crisis.

"If you look into the depths of the supply chain they are not getting the access to the finance that they should," says Bone. "These are the medium-sized companies of the future and they are currently the level of company that is also the most truly innovative. What worries me as a Brit is what things will look like in five, six, maybe 10 years."

Mittelstand company owners tend to keep a tight grip of their companies, usually ensuring that they have at least 35-40 per cent equity, so they are rarely over-leveraged and can cover their interest payments.

However, in recent years they have benefited from tax relief on revenue that is reinvested into businesses. Inheritance tax reform has been a blessing: as recently 2008, one in 10 of the 70,000 firms that face succession issues each year were thought to be put out of business as a result of this levy, which was 30 per cent for close relatives and 50 per cent for others.

Romanticising the 'Mittelstand'

In a small, undistinguished conference hall at the foreign ministry in Berlin, 65 manufacturers are congratulating themselves at a symposium entitled "Handmade in Germany".

Annette Roeckl, the managing director of premium glovemaker Roeckl Handschuhe & Accessoires, claims that her products have a "soul"; Ulrich Welter, the founder of wallpaper firm Welter Manufaktur Für Wandunikate, boasts of how he charges €350 for just one square metre roll.

While this kind of talk would likely jar with a British manufacturing audience, the point is that the Mittelstand is seeking out niches and making money by focusing on quality rather than trying to lower unit costs.

"After 20 years' of dominance of cheap products, I think people are saturated with low value, low quality products," argues Roeckl. "People want fewer, high-quality products."

Welter, who more resembles a trendy French smoothie with his two-day old stubble and laid-back posture than a German businessman, adds: "The most important thing to realise is that we shouldn't be afraid of prices. If the product gets more perfect and your commitment gets more perfect, then the market will accept your product."

As the Mittelstand gravitates towards the luxury market, it is shunning exports to countries, like the UK, where customers are generally price-driven and looking instead to where the big money is in the east. However, at the same time this has meant moving production out of Asia and back to Germany, where they can keep a closer eye on it.

On the fringes of the symposium, delegates are thankfully speaking in less romanticised tones about their products. A public relations woman from one of the more internationally focused Mittelstand companies argues: "Sometimes it's better to work with German suppliers than someone who is far, far away. There can be quality problems, problems of freight. Manufacturing is moving back to Germany – if we have a 'made in China' sticker on our products we get complaints."

However, she adds that they can be "unprofessional" in terms of distribution, focusing so much on the product that they ignore distribution and marketing. However, the German government has pledged to help the Mittelstand open doors overseas.

At a gala dinner, where successful German designer products from oddly-shaped kangaroo soft toys to ludicrously oversized cutlery are on display, German Foreign Minister Guido Westerwelle vows: "It is the success of SMEs that meant we survived the financial crisis in good shape. An SME, which is a majority of our business community, needs assistance, especially when they go to Latin America and Asia.

"We have made it clear our consulates and embassies must carry out this task. At the moment if a German businessman says he will market German products abroad he will be shocked to receive help."

The sadness of British manufacturing

On the conclusion of Westerwelle's speech, the delegates start tucking into a sumptuous dinner of beef and venison. They are all making small fortunes, though they will never enter the leagues of super-rich investment bankers and directors of vast conglomerates – "when you make potatoes, you eat caviar; when you make caviar, you eat potatoes", as one puts it – and all the love in the world can't save certain businesses.

Bernd-Otto Kruse made his money in ornate plastic packaging, but his family business, Grimm & Triepel Kruse makes chewing tobacco. In the 1920s, this firm had 1,600 employees, now it has just four staff and Kruse says that he will not pass it on to his children. Instead, he will donate the 100-year-old equipment that produces the gum to a museum.

There is, then, still a pragmatism to Mittelstand thinking, no matter how much the companies try to emphasise their heritage. Chewing tobacco is a shrinking market.

However, Kruse, who has a large car collection that includes a 17-year-old Jaguar, argues that the UK has done the opposite, selling off and failing to capitalise on its rich manufacturing heritage.

"It's very sad what's happened to British cars," he sighs. "Look at, for example, Aston Martin: it's owned by Arabians, the CEO is German, and the company is making money. There is potential in Great Britain."

It's all very well having the potential, it's realising it that counts. As yet, British manufacturing lags well behind the brightly coloured pencilmakers and silver-pearl encrusted wallpaper manufacturers of the German Mittelstand.