In part two of our Hidden Champions series, we look at how these companies are managed for the long-term, and Professor Hermann Simon gives some explanations for Germany’s strength in manufacturing, as well as the importance of the sector in profiting from globalisation.
Growth, leadership and employment
Since Simon’s original Hidden Champions book was published, his research has shown that not only has the number of companies matching this model increased, but his 1996 cohort had fared excellently.
A study running between 1994 and 2004 of Simon’s original 450 companies published in a London Business School journal found that 82 per cent of the subjects had “defended or even extended” their dominance, while only 18 per cent had lost their lead (6 per cent dissolved), supporting the idea that the Hidden Champions concept is unusually sustainable.
Simon has found that the growth among these companies, driven by globalisation, has been strong.
“On average they are today five times larger than 15 years ago,” he said.
“The main growth driver for them is globalisation, but innovation is also very important.”
Many of the companies have been family-owned (about two-thirds), with leaders not only committed to success but feeling an extra emotional attachment to their organisation.
Hidden Champions are also in the main (but not entirely) privately-owned. Simon and supporters of his concept have said that this helps firms remain focussed on the long-term, with leaders better able to weather difficulties without panicking.
“There are examples here in Australia, there are two companies which have about 50 per cent in, I think it was, fish food for aquarium fish,” related Petzoldt.
“And one is family-owned and the other is part of a larger corporation.
“The family-owned one went through years of very, very low margins but they are still around and the others are now owned by private equity because they couldn’t make it any more.
“It’s an advantage if you are not having shareholders sitting somewhere and pointing at you. You can have a longer-term perspective. It’s not a guarantee you’ll survive, but also if it’s a family business, it‘s always a perception that it’s your money, and you’ll be a little more careful with your money than other people’s money.”
In his 2009 book Hidden Champions of The 21st Century, Simon singles out those at the top as most important for the continued success of this style of company.
He describes the leadership of these companies as being authoritarian on principles and values, but flexible when it comes to details, and dedicated to the longer term. Characteristics of single-mindedness, fearlessness, perseverance and being an inspiration to workers were also noticed.
On the whole, the workers at Hidden Champions were much more likely to be retained, and more likely to be highly qualified. Turnover rates were 2.7 per cent annually, compared to an average of 7.3 per cent in Germany.
What's Germany's secret?
Simon believes there is no single explanation for Germany’s comparatively high share of Hidden Champions, but a number of things contribute to the globally-oriented nature of so many German companies.
Germany’s proximity to other markets certainly encourages exports, but similarly-located countries such as France, the UK and Italy are nowhere near as successful per capita.
“More important are the orientation, the value systems, and also the history of a country,” explained the Professor.
“The vocational training system for example is deeply rooted in German history. It’s a general attitude of Germans to go international very quickly. Until the late 19th Century Germany had not been a been a nation state, unlike France, Japan or the US. German entrepreneurs who wanted to grow had to internationalise at a very early stage, and this has become part of the DNA of German entrepreneurs.”
Other factors such as clusters of related companies in the one region were a factor in success. For example, Tuttlingen in The Black Forest has a long history as a clock and watch-making region. Nowadays it is host to many world market leaders in surgical implements.
“[Clock making] has practically disappeared, but the fine-mechanical competencies were applied to new industries, especially to surgical instruments,” Simon explained, adding that such clusters were very hard to create artificially.
“Forming a cluster always requires deep competencies. It usually starts with one or several entrepreneurs around which other companies, suppliers [and] educational institutions cluster.”
Acknowledging the above are advantages enjoyed by Germany in terms of its ability to be globally competitive, he stressed that a lack of these shouldn’t lead to excuses. In terms of isolation, he points to the world leader in electric fences.
“Gallagher is based in New Zealand, even further away from ‘the world’ than Australia, yet they are world market leader for electric fences,” he explained.
“So far they haven’t complained that their location in New Zealand is too remote… Locations are what they are.”
The role of manufacturing
Manufacturing is incredibly important for profiting from an increasingly globalised world, according to Simon, who will be the keynote speaker at the Productivity, Process & Innovation Conference on October 31.
Benefiting from globalisation, in terms of employment and export revenue, depends on having strength in manufacturing.
“The Americans and the French have many strong service companies,” he noted.
“But where do companies such as McDonald’s, Starbucks, Hilton or Accor create new jobs? They do that in Beijing, Mumbai and Sao Paulo, the locations where they open their new stores or hotels.
“With a strong manufacturing base you can profit from growth in emerging countries and still create jobs in your home country through exporting. This is the opposite of what experts preached only a few years ago when Germany was blamed for its inability to manage the transition to the service economy.
“Luckily we did not follow this fashion, and today the US, the UK and France are desperately trying to rebuild their manufacturing base. This is very difficult and time-consuming. It’s not just a matter of building a new plant. You need qualified workers, a deep infrastructure of suppliers etc. That can’t be rebuilt in a few years; it takes a decade or more.”
Regarding advice to Australia, Simon believes we have the potential to be successful in manufacturing, and should be encouraging this.
Germany is the envy of many in the world, with its Mittelstand tradition, the reputation of “Made In Germany” as a mark of quality, and its much-admired vocational training system with a history going back to the middle ages.
What’s stopping Australia from taking a few lessons from Germany? Simon says with a few changes in attitude, Australia could pull itself up, and should be trying to.
“Australia has a good base to build manufacturing companies,” he said.
“What it also needs is a society that values engineering and science rather than white collar jobs in finance or other service sectors.
“Given its raw material base Australia should aim at not just selling raw materials and try to go further down the value chain to create higher value.”
For more information on the Productivity Process & Innovation Event – at which Professor Simon will be speaking on “Hidden Champions – The Vanguard of Globalia: Why are German companies so successful, and what can we learn from them?” – visit the events section or the German-Australian Chamber of Industry and Commerce website.