KfW SME Digitalisation Report: Digitalisation in the German SME sector sees mixed trend as a result of the coronavirus pandemic

• 33% of SMEs have ramped up digitalisation, while 33% have still not gone digital
• Most have carried out only quick-fix crisis management measures
• Large SMEs in particular are ramping up activities; a divide may be forming in the SME sector

Last year the coronavirus pandemic triggered a surge in digitalisation activity among German SMEs. According to the KfW SME Digitalisation Report, one in three small and medium-sized enterprises (33 %) had ramped up their digitalisation efforts by January 2021. The measures were important for overcoming the negative impact of the coronavirus crisis. This can be seen from the fact that companies that have been hit hard by the crisis but not in an existential way (41%) and expect it to last for an extended period (39%) were particularly active in stepping up their digitalisation efforts. However, this news is good at first glance only, because it also means that the projects they carried out were measures that have a short-term effect and can be implemented quickly. On the other hand, companies have likely postponed long-term and strategically important projects more often because of the difficult financial situation. Furthermore, another one third (33%) of German SMEs have still not carried out any digitalisation measures. This, too, shows that digitalisation does not happen on its own during the coronavirus pandemic.

The findings of the analysis recently carried out by KfW Research therefore give little cause for hope that the German economy will catch up with its international competitors in the field of digitalisation any time soon. In international comparison, Germany at best occupies a mid-range position when it comes to the diffusion of digital technology and business. The representative analysis conducted by KfW Research on the basis of the KfW SME Panel confirms that digitalisation efforts in the German SME sector slowed in the years prior to the coronavirus crisis. In the 2017-2019 period, only three in ten SMEs carried out a digitalisation project (-10 percentage points on the previous 2016-2018 period). The number of small and medium-sized enterprises with completed digitalisation projects dropped by 380,000 to a good 1.1 million.

In the coronavirus year 2020, digitalisation efforts were stepped up primarily by large SMEs with 50 and more employees, 58% of which increased their activities. Among small businesses with fewer than five employees, however, that rate was a mere 32%. SMEs that conduct research and development (R&D) were also particularly active, as they have been in the past, with 54% expanding their activities. If these trends continue, the SME sector threatens to split into two parts.

“Digitalisation is a beacon of hope for enhancing the competitiveness of broad sections of the economy and for a return to higher productivity rates. With the crisis now expected to improve in the further course of this year, SMEs will have to keep up the momentum of their digitalisation efforts and move beyond remote working and video conferences as new achievements”, said Dr Fritzi Köhler-Geib, Chief Economist of KfW. “Companies now have to address strategic digitalisation projects and secure and continue developing the qualities that have proven to be beneficial during the crisis in the long term, such as flexibility, initiative and entrepreneurial spirit. Many businesses will probably find this to be challenging. The tense liquidity situation and debt levels, which have risen in the course of the crisis, are likely to hamper the implementation of such projects when the crisis is over. Besides, many businesses are sure to have developed a greater desire to become more crisis resilient as a result of the pandemic. In order to address these conflicting goals of enhancing crisis resilience and increasing competitiveness, businesses require investment incentives for digital transformation and improved frameworks. That can enable them to complete the necessary digital transformation, stay in the race against international competitors and harness growth opportunities.” Economic policy measures include improvements to promotional loans, tax incentives and grants for explicit research projects, improved conditions through the training of skilled workers, as well as the expansion of fast and uninterrupted internet connectivity or initiatives of the public sector such, as GAIA-X.

The current KfW SME Digitalisation Report is available at https://www.kfw.de/KfW-Konzern/KfW-Research/Digitalisierung.html.

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 9,889 SMEs took part in the current survey wave, which was conducted from 10 February to 19 June 2020. KfW Research also conducted two supplementary surveys on the impact of the coronavirus crisis on SMEs from 1 to 14 September 2020 and from 12 to 22 January 2021 as part of the KfW SME Panel.