Summary: Hidden Champions in the Chinese Century: Ascent and Transformation by Hermann Simon

• The book explains the concept of “Hidden Champions”, which are medium-sized, unknown companies that have become world market leaders in their respective industries, and how they have achieved success in the global business environment.
• The book analyzes the impact of China’s rise on the Hidden Champions and other companies, and how they can cope with the increasing competition and opportunities from the Chinese market and rivals.
• The book offers practical and actionable recommendations for the Hidden Champions and other aspiring companies to adapt and thrive in the new era of globalization, digitalization, business ecosystems and sustainability.

Recommendation

Germany is an export powerhouse, thanks largely to its many small and midsize (SME) companies and their prominence in global markets. Consultant Hermann Simon examines these “Hidden Champions” and explains how they grew dominant and how they compete. He discusses globalization, Austrian and Swiss Hidden Champions, Chinese firms working in Germany, population shifts, digitalization, sustainability, and more. Simon offers a fresh perspective and new information, which will particularly interest SME executives in Germany, China and the United States. The book’s title may make you think it is just about Chinese firms, but its scope is the larger role of SMEs.

Take-Aways

• The phrase “Hidden Champions” originated in 1987, when academics probed the reasons for Germany’s global export dominance.
• More than 3,000 Hidden Champions are at work in almost 60 countries. German-speaking countries make up the lion’s share.
• Globalization enables smaller firms to succeed in new, cooperative business ecosystems.
• Hidden Champions, like all businesses, must plan for population shifts.
• Globalization has brought prosperity, but much more to some markets than others.
• The US market has been a sticking point for German companies.
• More than half of Germany’s Hidden Champions have a presence in China.
• Digitalization rivals globalization as a force for transforming business models.
• Hidden Champions are active in prioritizing sustainability.
• Innovation and solid business practices will continue to differentiate Hidden Champions.

Summary

The phrase “Hidden Champions” originated in 1987, when academics considered the reasons for Germany’s global dominance of exports.

Large German enterprises have been active internationally since the 1800s. That’s one reason researchers in the late 1980s attributed Germany’s export strength to its major corporations, then including Bayer and Volkswagen. However, a closer study led to the discovery that small and midsize companies – the Mittelstand – contribute significantly to Germany’s exports. The public was largely unaware of these “hidden” companies, but many of them lead their international markets, thus earning the title “champions.”

In the decades since the late 80s, China and the United States eclipsed Germany in absolute export volume, though Germany still leads in exports per capita.

Generally, a country’s export success correlates with its number of large companies. Yet China, the leader in absolute exports, and Germany, the leader in per capita exports, are both exceptions. Midsize companies generate more than 60% of China’s exports, comparable to the contributions Germany’s Mittelstand companies make to its economy.

“The world is full of business opportunities, even with little things. Hidden Champions have often seized these opportunities as pioneers.”

To qualify as a Hidden Champion, a company must have the greatest market share on its continent or rank in the top three among its global rivals. It must have an annual income below a certain amount and be largely unknown to the general public. Hidden Champions emerged thanks to divisions of labor, bigger, more homogeneous markets, and advances in communications and logistics. Such companies may produce seemingly trivial products – sausage casings, toothbrushes, bottle closures – but they manufacture them in such quantities that their revenues accumulate steadily.

More than 3,000 Hidden Champions are at work in almost 60 countries. German-speaking countries make up the lion’s share.

Germany has more than 1,500 Hidden Champions, half of which earn more than €150 million annually. Becoming a Hidden Champion takes time. About half of these companies have been in business some 70 years. They are concentrated in Germany, with a considerable presence in Austria and Switzerland.

“The ‘big champions’ simply emerge from midsize companies that grow continuously over long periods of time.”

These firms thrive in Germany. Its relatively late unification meant companies had to work across borders to prosper. Germany’s decentralized government allows widespread development. The educational system, which emphasizes “dual vocational training,” with an emphasis on hands-on learning, provides a supply of skilled workers. Unlike other highly developed countries, Germany retains its manufacturing base. Service firms do not dominate its economy. Mittelstand companies emphasize productivity and benefit from tough domestic rivals which strengthen them for international competition.

Globalization enables smaller firms to succeed in new, cooperative business ecosystems.

Some regions of Germany, Austria and Switzerland trace their traditions back centuries and support long-lived, thriving business ecosystems. Academic institutions that dedicate themselves to studying Hidden Champions have arisen in Germany, Korea and China, and research has burgeoned. Host areas now cite Hidden Champions in their publicity efforts. Interest and investment run high – particularly in Asia, most notably China.

The United States has diverse Hidden Champions, but relatively few due to America’s reliance on its domestic market. Japan parallels this situation. Its Hidden Champion suppliers primarily serve domestic electronics companies.

“Malaysia…the third-largest producer of natural rubber…has become the most important supplier of disposable gloves.”

Globalization has slowed. Since 2010, the rate of increase in international trade has only equaled or lagged GDP growth and global exports have grown less than 2% per year, down from more than 9% previously.

This affects German-speaking areas that host the most Hidden Champions. Global sales of services have been growing faster than the trade in goods and faster than the growth rate in national GDPs. German business ecosystems, such as the cluster of medical technology firms in Tuttlingen or cutlery manufacturers in Solingen, rely on and enrich each member. Such benefits don’t transfer easily to other locations, thus creating a defense against competition. Such cooperation will be critical to the future of Hidden Champions.

Hidden Champions, like all businesses, must plan for population shifts.

Some Hidden Champions scaled more than 40 times from the mid-1990s up to the COVID pandemic. The pandemic’s long-term market effects are unpredictable, though it is likely to weaken globalization trends, but unlikely to erase them. To determine if large-scale SME growth can continue, experts – including at the United Nations – have worked to forecast population trends over the coming decades. According to UN data, the world population will continue to grow through 2050. However, some other experts anticipate a population decline.

Hidden Champions must adapt as Africa and Asia experience higher growth than other regions. Despite China’s faster rate of GDP growth, the United States will still have the world’s largest GDP in 2030.

“Large companies are in the public and political spotlight, while Hidden Champions can operate below the radar of public attention due to their low profile.”

Whether Hidden Champions should focus most on market size or purchasing power depends on their product. For example, a growing population is crucial to the makers of cheap cell phones, while medical tech manufacturers should look to GDP. The United States, China and the European Union will be the most economically powerful markets in 2030. These are the target markets for would-be Hidden Champions, with the caveat that just because a market is large doesn’t mean its people have sufficient purchasing power to sustain a Hidden Champion.

Globalization has brought prosperity, but much more to some markets than others.

The future of globalization is indeterminate, depending on Sino-US tensions, sanctions on regimes in Russia and Iran, and various trade barriers. For example, one Hidden Champion previously supplied the American and Chinese markets from its Chinese facility, but after President Donald Trump’s administration imposed tariffs, it supplied the United States from Europe and Europe from China.

“China’s per capita exports are only 10% of Germany’s, and India’s are a mere 1.3%.”

Trade barriers have brought home the advantage of regional production capabilities, but Hidden Champions must expand internationally to grow. Many ring up more than nine out of 10 of their sales from exports. Business travel, which the pandemic curtailed, had become a source of knowledge transfer from home offices to suppliers and subsidiaries.

The US market has been a sticking point for German companies.

Hidden Champions do not report regional activity, so US sales figures remain murky. Service exports to the United States are low. The American market has frustrated such major European companies as Deutsche Post DHL, Thyssen Krupp, RWE, Tengelmann and Adidas. The DaimlerChrysler merger failed, and the Adidas and Bayer acquisitions of Reebok and Monsanto, respectively, have not been great successes. Yet Deutsche Telekom and Fresenius Medical Care AG have done quite well in the American market.

“In the USA…it is difficult to find skilled workers who meet German standards. Miele had great problems attracting technicians who could maintain and repair Miele machines.”

Many companies focused greater effort on the Chinese market than on the US one because competition in America proved particularly daunting. Some companies learned the hard way that US consumers’ preferences differ from Europeans’ preferences. For example, an interior design supplier discovered that US consumers didn’t respond to colors that Europeans liked, and an air conditioning component supplier was surprised to learn that Americans felt its products didn’t make enough noise. Legal liability can be a pitfall in the United States, as well. Still, Hidden Champions must invest seriously in the US market. The challenges are great, but so are the potential rewards.

More than half of Germany’s Hidden Champions have a presence in China.

China has been the major customer of many German Hidden Champions. For the past two decades, these firms focused on China instead of the United States because they can succeed in China with fewer hurdles. China has one-fifth of the Earth’s people and about one-fifth of its economic activity. Like the United States, China has one official language, uniform standards and a countrywide logistical framework. Since the mid-1980s, the German auto industry and its supply chain have established a strong presence in China where host cities offer “an ecosystem tailored” to the German expat communities.

“If a company wants to grow and remain competitive globally, it has to do business in China.”

Siemens and Bayer have been in China since the 19th century. Liebherr opened a branch in 1975, even before Deng Xiao Ping’s reforms, and forged a cooperative arrangement that led to Haier, now the global leader in household appliances. The one-million-a-year volume of Chinese patent filings illustrates the strength of innovation there. Chinese consumers adopt new products quickly. Companies should consider China as a test market for innovative goods while remaining aware of the threat of copycats.

China has fewer than 100 Hidden Champions, but Chinese entrepreneurs are eager to increase that number. Although Chinese SMEs are not yet a serious threat to Germany’s Hidden Champions, they are growing more quickly and investing heavily in R&D. They have the added ability to tap into public financial markets.

Digitalization rivals globalization as a force for transforming business models.

As various markets offer distinct problems and opportunities, SMEs must consider whether to digitalize at once or in cautious increments.

American and Chinese companies dominate the digital retail customer, and opportunities for new entrants are scarce. However, Hidden Champions may find ideal targets in niche industrial digital markets.

“German Hidden Champions do not play a significant role in the global digital consumer market…Germany is missing out on gigantic opportunities for growth and profit.”

German Hidden Champions appear to be digital laggards, but other complex niche markets offer great potential. Europeans are in the vanguard of developing AI, deep learning, robotics and mechanical engineering products.

Hidden Champions are active in prioritizing sustainability.

The trend toward increasing sustainability demands new competencies, qualifications and consumer education. Sustainability is now a competitive differentiator, and customers punish companies that don’t take it seriously.That is just one reason concern for sustainability may have an impact equal to digitalization. Hager SE’s 2012 Ethics Charter, in particular, addresses sustainability in detail. The 30 or so members of Germany’s Climate Protection Association include Hidden Champions.

“A huge waste of resources comes from the disposal of usable clothing…the secondhand clothing market…has doubled globally to $28 billion in the last 5 years.”

Government regulations and investor demands drive sustainability. A sound environmental, social and governance (ESG) profile also pleases potential banking partners because it signals resilience.

Innovation and solid business practices will continue to differentiate Hidden Champions.

Hidden Champions continue to file an outsize proportion of both “incremental” and “breakthrough” patents.

“Europe’s and Germany’s weakness is not research, but commercialization. The USA and China are often faster in turning new ideas into successful products.”

Hidden Champions must focus on core competencies, as the Fuchs Group does with spices or Flexi with retractable dog leashes. They can emulate firms such as Faber-Castell, which emphasizes vertical integration to the point of managing forests in order to provide a consistent quality of wood for its pencils. Digitalization and innovation force Hidden Champions who would rather control all aspects of their production to reach out to new partners.

About the Author

Hermann Simon is a management consultant and business professor, and the founder and honorary chairman of Simon-Kucher and Partners.

Genres

Business, International, Management, Leadership, Economics, Strategy, China, Globalization

Review

The book is about the phenomenon of “Hidden Champions”, which are medium-sized, unknown companies that have become world market leaders in their respective industries. The author, Hermann Simon, is a leading expert on this topic and has studied these companies for decades. He explains the concept and its reception, the ascent of the Hidden Champions worldwide, especially in Germany, Austria and Switzerland, and the new challenges they face in the era of globalization, digitalization, business ecosystems and sustainability.

He also focuses on China’s impact on the business world and how the Hidden Champions can cope with the rising competition from Chinese rivals. He offers concrete and actionable recommendations for the Hidden Champions and other aspiring companies to succeed in the new global game.

The book is a valuable source of management knowledge and inspiration for anyone interested in learning from the best practices of successful companies. The author provides a wealth of data, examples and insights from his extensive research and consulting experience. He also writes in an engaging and accessible style that makes the book easy to read and understand. The book covers a wide range of topics, from the historical origins and definition of the Hidden Champions, to their strategies, culture, innovation, internationalization, transformation and future prospects. The book also addresses the current trends and challenges in the global business environment, such as China’s rise, digitalization, business ecosystems and sustainability.

The author shows how the Hidden Champions can adapt and thrive in these changing conditions by leveraging their strengths and developing new capabilities. The book also offers practical advice and guidance for other companies that want to emulate or collaborate with the Hidden Champions. The book is not only informative but also inspiring, as it showcases the achievements and potential of these remarkable companies that have remained hidden from the public eye but have made a significant contribution to the world economy and society.