Hidden Champions (2): why do these hidden, global, innovative, extremely profitable companies thrive?

In 1986 Theodore Levitt, the famous Harvard professor who popularized the term ‘globalization’ asked me why Germany always ranks among the world’s top exporting nations – which is owed in no small part to the hidden champions, as I wrote earlier. Little has changed since then.

Germany has been the world’s leading exporter in 10 of the last 25 years, 2011 marked another record year. Exports, not domestic demand, sustain Germany’s affluence and low unemployment rates. Never before have I witnessed so much interest in the German model. Politicians, economists and executives from Korea, Japan, China, France and the US constantly want to know the secret behind Germany’s success and what they can learn from it.

So why is Germany so successful in exports? There is no simple answer because there is no single cause. What’s clear, however, is that large corporations are not responsible for Germany’s unrivaled export success.

The US has four times as many Fortune Global 500 companies as Germany; Japan twice as many, and even France has more. Yet the export strength of these countries is far below Germany’s. In 2011 German per capita exports were US-$18,863, France’s $8,784, Japan’s $6,258 and the US achieved $4,859. Even if you adjust for differences in population this doesn’t affect the picture.

At the root of Germany’s continuing export success are midsized companies, or more precisely, an elite tier known as ‘hidden champions’. I’ve been collecting the names of these little known midsized world market leaders for 25 years. My global list now includes 2,734 hidden champions, incredibly, 1,307 or 48% of those are from Germany. This elite tier of companies in Germany is a true anomaly in the world.

These companies alone contribute over a quarter of all German exports. Germany has 16 such hidden champions per one million inhabitants. France has 1.1, the US 1.2 and Japan 1.7. Only Switzerland and Austria are on par with Germany, at about 14 companies per one million inhabitants.

So why are there so many hidden champions in Germany? Again, there is no simple answer because there is no single cause. The hidden champions have risen – and continue to rise – from a complex set of influences, some geopolitical, others rooted in family values, and others in technological traditions stretching back centuries.

1. Germany’s history of small states

Until the end of the 19th century Germany was – unlike France or Japan – not a nation-state. It was a hodgepodge of small states, city-states, kingdoms, and principalities. Companies in this “Germany” had no choice but to internationalize quickly if they wanted to grow. You can still observe this same urgency to internationalize among German entrepreneurs today. Hidden champions start exporting much earlier than their foreign competitors, thereby creating fertile ground for continued growth and export success.

2. Traditional skills

Many regions in Germany have long traditions of specific skills that businesses still build on today. For hundreds of years clocks have been produced in Germany’s Black Forest. Clock making requires sophisticated fine mechanical skills. Today, Tuttlingen, at the edge of the Black Forest, is home to more than 400 companies that specialize in medical technology, especially the production of surgical instruments – an area that strongly relies on fine mechanical skills. Or look at Goettingen in Northern Germany. Why does this small university town have 39 companies in measurement technologies – many of them world market leaders? The explanation lies in the University of Goettingen, whose school of mathematics led the world for centuries. Several of these companies build on principles first discovered by groundbreaking mathematician Carl Friedrich Gauss, who served over 40 years on the faculty at Goettingen. Former Siemens director Edward Krubasik says that, “Germany uses its technology base, which stretches back to the Middle Ages, to be successful in the 21st century.” And Peter Renner, chairman of Dolphin Technology, itself a measurement company, says “Germany is still a huge engineering office.” Some things really don’t change.

3. The power of innovation

To measure Germany’s strength in innovation, you need look no further than the number of patents per capita granted by the European Patent Office (EPO). Germany has more than twice as many patents per capita as France, four times as many as Italy, five times as many as the UK and 18 times more than Spain. Only Switzerland and Sweden are ahead of Germany in the number of patents per capita. Germany’s innovative strength is outstanding in Europe and sets benchmarks internationally. The hidden champions have five times more patents per employee than large patent-intensive corporations. And their costs per patent are only one fifth of the costs in large firms.

4. Strong manufacturing base

In contrast to countries such as the UK and the US, Germany has retained its manufacturing base over the past decades. Criticized as outdated in past years, this strategy now draws admiration. The correlation coefficient between the percentages of GDP accounted for by manufacturing and the trade balance (exports minus imports) is 0.79. Germany may be old-fashioned in this regard, but its commitment to this strategy helps explain its success as an exporter.

5. Trends in unit labor costs

German exports have benefited tremendously in the last decade from keeping domestic unit labor costs down. These costs grew only modestly or even fell between 2002 and 2010 (except for the crisis years of 2008/2009). Over that entire period, Germany’s labor costs rose by only 6 percent, compared to 22 percent across the Eurozone and 26 percent in France.  

6. Fierce competition

In his book “Competitive Advantage of Nations”, Michael Porter asserts that strong domestic rivalry is a key driver behind a country’s international competitiveness. One third of the hidden champions say that their strongest competitors are in Germany. These tough domestic rivalries help build the competitive strength of German companies.

7. “Made in Germany”

Believe it or not, the “Made in Germany” label first appeared in the UK in 1887 to designate inferior products. Nowadays it means just the opposite. This first-class seal of approval – backed up by the quality of the products themselves – has certainly contributed to the lasting success of Germany’s exporters.

8. Industry clusters

German has dozens of industry clusters, which encourage excellence by concentrating the best skills worldwide into one region. Some of the clusters in Germany have roots that stretch far back in time, such as Solingen (the “city of blades”), roller bearings in Schweinfurt, lock technology in Velbert, and pencils in Nuremberg. Others have emerged more recently, such as fans in Hohenlohe, thermos flasks in Wertheim, interfaces in Eastern Westphalia, sensors in Southwest Germany, or wind energy in northern Germany.

9. Entrepreneurial clusters

In addition to industry clusters, I found countless geographical concentrations of several hidden champions that belong to different industries. Windhagen, a village in the Rhineland with a population of 4,260, has three world market leaders: Wirtgen in road-milling machines, the JK Group for professional tanning beds, and Geutebrück in customized surveillance systems (e.g. the Kremlin uses their systems). You will find innumerable of these strange clusters of unknown world market leaders across Germany. What’s happening here? Let’s just say that entrepreneurship is infectious and contagious. The social network that binds people together in these regions provides the inspiration for them to emulate their neighbors’ successes and build a market leader in their own field. Germany is more entrepreneurial than many think, but these entrepreneurs remain hidden.

10. Regional spread

In most countries, intelligence is concentrated in hubs – usually in the capital. Paris, London, Tokyo, or Seoul are examples. In contrast, few countries are as decentralized as Germany. Thousands of world-class companies dot the German countryside. I see this regional spread as a huge advantage. Even in the former communist states of East Germany, 45 hidden champions have emerged over the past two decades.

11. Vocational training system

Germany’s unique vocational training system is frequently named as one of the reasons for its competitive strength – and rightfully so. “Germany is well positioned in this area,” reported the OECD in a 2010 study about vocational training.  I have nothing to add to this. We increasingly see that other countries are trying to replicate this special feature of the German model.

12. Central geostrategic location

Even in the globalized world of the future, the need to overcome distances and time zones will remain. In this respect, Germany has unique geographical advantages. From here, you can phone Japan and California during normal business hours. This doesn’t work between America and Asia, as the time differences are 10 to 12 hours. The travel times from Germany to the world’s leading business centers are also shorter than the travel times Asian and American businesspeople face. Both Tokyo and San Francisco are less than 11 hours away from Frankfurt. Within Europe, Germany is centrally located. All these advantages will become even more important as globalization develops further.

13. “Mental” internationalization

International business has always required people to broaden their cultural horizons. Anton Fugger, the highly successful 16th-century global trader, said: “The best language is the customer’s language.” Among the large countries of the world, Germany is far ahead in terms of ‘mental’ internationalization. Only smaller countries such as Switzerland, the Netherlands, and Sweden are further along.

Of course, there are other factors which help explain Germany’s international success. Often typical German virtues such as thoroughness or punctuality are named. I don’t know whether they play a big role. This analysis has shown that the success of German companies doesn’t spring from one single source, but from a rather complicated bundle of interrelated factors, most of which are hard for other countries to imitate. The combination of timeless success factors implies that German companies are well equipped for the future competitive arena of Globalia.

Photo: Wolfgang Staudt, Flickr

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About the author

Hermann Simon

Hermann Simon is chairman of Simon-Kucher & Partners Strategy & Marketing Consultants and an expert in strategy, marketing and pricing. In the German language area he was voted the most influential management thinker after the late Peter Drucker. Before committing himself entirely to management consulting, Simon was a professor of business administration and marketing at the Universities of Mainz (1989-1995) and Bielefeld (1979-1989). He was also a visiting professor at Harvard Business School, Stanford, London Business School, INSEAD, Keio University in Tokyo and the Massachusetts Institute of Technology. From 1995 to 2009 he was CEO of Simon-Kucher & Partners. Professor Simon has published over 30 books in 25 languages, including the worldwide bestsellers "Hidden Champions", and "Power Pricing", as well as "Manage for Profit, Not for Market Share". His book "Hidden Champions of the 21st Century, Success Strategies of Unknown World Market Leaders" (2009, also in French) investigates the strategies of little known market leaders. "Beat the Crisis" (2010) provides companies with practical advice against the crisis and for a quick recovery. He just published a new book: "Hidden Champions: Aufbruch nach Globalia".

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