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Supply Chain News: Key to Germany's Continued Manufacturing Success is Low Profile, Mid-Sized "Hidden Champions"

 

Amazingly, 48% of Global Mid-Sized Manufacturing Call Germany Home; What are the Key Factors?

May 6, 2017
SCDigest Editorial Staff

In an era in which the US, the UK and other countries are trying to find ways to revitalize their manufacturing industries, German manufacturers keep rolling along.

Germany came in third place in terms of top exporting countries in 2015, the last year for which accurate data is available, with over $1.3 trillion in exports, behind number 1 China ($2.3 trillion) and just below number 2 to the US ($1.5 trillion), despite the fact that the US economy is more than five times the size of Germany's.

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Why are these German manufacturers so successful, decade after decade? Simon cites a number of factors.


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It shouldn't be surprising then that manufacturing still represents about a quarter of German GDP, roughly double the share in the US or the UK.

When most think of German manufacturing, thoughts likely first turn to global auto giants such as Volkswagen, Daimler, and BMW. Or giant industrial companies such as Siemens and BASF.


Germany's Industry 4.0 initiative, an initiative from the government and industry there to digitize the factory floor, might also leap to mind.

All these aspects of German manufacturing prowess are well and good. But just as if not as important are more than 1300 mid-size companies that quietly excel at global competition, a group that well-known German businessman and author Hermann Simon calls "Hidden Champions" - a category he has been researching and writing about for more than two decades.

What is a Hidden Champion? Writing recently on the Harvard Business Review web site, Simon says they have three core characteristics:


• Company has to be among the top three in the world in its industry, and first on its continent


Its revenue must be below €5 billion

It should be little known to the general public

And by Simon's calculation, German has more than 1300 of these companies, or an astounding 48% of the global total of such firms, even though Germany has only about 1.1% of the world population.

Some in the US and elsewhere in Europe discount the importance of manufacturing strength in the health of the economy these days, but consider these facts: Simon says German Hidden Champions have created 1.5 million new jobs, have grown by 10% per year on average, and register five times as many patents per employee as large corporations.

They are also resilient. Simon says that in his estimate "in the last 25 years no more than 10% of them disappeared or were taken over, a distinctly lower percentage than for large corporations. Nearly all of them survived the great recession of 2008-2009."

What's more, manufacturing allows companies, through exports, to participate in the growth of emerging countries. About 25% of Germany's exports come from these Hidden Champions, according to Simon.

Why are these German manufacturers so successful, decade after decade? Simon cites a number of factors.

Leadership continuity plays a key role, Simon believes. The leaders of the Hidden Champions stay at the helm for an average of 20 years. That compares to an average CEO tenure of only seven years at the world's largest 2,500 companies from 2012-2016, and the median tenure was even shorter, at five and a half years.


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Simon also says that the leaders of Hidden Champions are more likely to come into power at a young age and are more often women than in larger companies.

But that data is from all Hidden Champions worldwide. Why are nearly 50% of them German? Simon says German history plays a key role. Specifically, Germany has history of many small independent states - until 1918 Germany consisted of 23 monarchies and three republics.
This forced German companies to internationalize early on in their development if they wanted to succeed - a tradition that still carries on here in 2017.

And German companies have evolved local skills to new product opportunities. For example, the clock-making industry in the Black Forest, with its highly developed fine mechanical competencies, has evolved into some 450 medical technology companies, most of them makers of surgical instruments, and many being one of the country's 1300+ Hidden Champions.

The unique German system of apprenticeship, which combines practical and theoretical training in non-academic trades, is also a key factor, Simon believes. He found that the Hidden Champions invest 50% more in vocational training than the average German company.

Simon says tax policy also plays a key role. The high taxes on assets in France and the inheritance tax in the US prevent the accumulation of capital necessary for the formation of a strong mid-sized sector, Simon argues.

Simon says many of the Hidden Champions have maintained success by keeping their focus narrow. He cited the example of a company called Flexi, which makes only one product - retractable dog leashes - but apparently makes them better than anyone else. This has allowed Flexi to reach 70% market share in this category.

"But focus makes a market small. How can you make it bigger?" Simon asks. "By globalizing. Today, the Hidden Champions are present in their target markets with 30 subsidiaries on average. Despite their medium or small size, they are true global players."

Simon concludes by arguing that "The Hidden Champions provide a model of inclusive growth that are worth emulating." However, "Any foreign policymaker or economist seeking to foster a community of such companies in their own country should tailor their approach to that country's own unique conditions.


What do you think of these German Hidden Champions? Could this be replicated in the US? Let us know your thoughts at the Feedback section below.

 

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