Globalisation meets specialisation: The Hidden Champions (PART ONE)

Ahead of Professor Hermann Simon's visit to Australia next month, we will be considering his Hidden Champions concept, which has been used to help explain Germany's export success.

Who are the Hidden Champions?

Have you drunk a Coke lately? How about gone to the theatre? Or maybe you’ve made a phone call or swiped a smartcard? Then you’ve used a product made by a Hidden Champion – a company who leads in its niche, serves a global market, but remains unnoticed by the general public.

In our above examples Jungbunzlauer produces the citric acid used in every bottle or can of Coca Cola, Hans Gerriets is the sole producer worldwide of large stage curtains, and Delo produces the electronic adhesives used in 80 per cent of the world’s smartcards and half of all mobile phones.

Germany’s unusually high share of the world’s Hidden Champions go a long way to explaining the country’s strength in exports, and contribute to an estimated quarter of all exports.

Professor Hermann Simon, founder and chairman of international strategy and marketing consultants Simon-Kucher & Partners and a former visiting professor at universities including Harvard Business School and Massachusetts Institute of Technology, has been studying the Hidden Champions phenomenon since 1986, popularising the term in his 1996 book of the same name.

To qualify for the title, a firm needs to be:

a) The leader in its market on its continent or in the top three worldwide;

b) Have a turnover of less than $US 4 billion; and

c) Have a low level of recognition to the general public.

They are not explicitly manufacturing businesses, for example Belfor, a global leader in disaster recovery services, but many produce niche products all over the world, generally unnoticed by consumers.

By Simon’s measurements in his most recent version of his Hidden Champions study, there are 2,746 such companies. For reasons that will be considered later, a large chunk are German (1,307) and the majority are from German-speaking countries. However, they also exist in the United States (366), Japan (220) and elsewhere.

Simon-Kucher & Partners’ Australian branch has identified a number of these companies here.

“Especially in the mining sector, there are some which grew with the mining boom and have specialised worldwide in certain solutions,” explained Christoph Petzoldt, the company’s Australian managing director and author of the paper Hidden Champions Down Under.

“For example Mine Arc. They do rescue capsules for underground mines, and I think there are only two companies doing that worldwide,” he told Manufacturers’ Monthly.

“So they are extremely specialised.”

Specialisation can exist anywhere, and Australia has its specialists in manufacturing and other industries, with some of the local examples noticed by Petzoldt’s company including Resmed, SAGE Automation, CHEP and ANCA.

Specialisation and globalisation

An excellent example of the concept in Australia, Bayswater-based CNC tool grinder specialist ANCA (incidentally, this magazine’s Manufacturer of The Year for 2013) ticks the boxes for many of categories identified by Simon.

“Our product managers, our chief engineers, technology people regularly make visits to customers to gain feedback,” CEO Grant Anderson told Manufacturers’ Monthly.

“And you have to travel all over the world and have arms and legs extending into the global marketplace, and you have the intelligence coming back to the company about what are the new developments, what are the new areas, what are the customers’ needs and wants around the world.”

Having a global customer base and a set of products that answered its demands neatly has also had other benefits.

“From a business risk point of view, it balances the markets which we sell into. That is, in recent times the China market has softened, whilst that’s been offset to some degree by the US, which has been absolutely booming.”

ANCA also invests heavily in R&D, recently putting this figure at approximately a tenth of its revenue.

Listed among Simon’s Hidden Champions is SICK AG, a German industrial sensor and automation specialist. SICK Australia is among more than 50 of its worldwide subsidiaries.

SICK, established in 1946, like ANCA, would not be recognised by many outside of the industries it serves, but within them has a global reputation for excellence.

Like other Hidden Champions, it also has a sharp focus on its niche married with a global reach.

“Globalisation is the necessary complement to specialisation,” Simon told Manufacturers’ Monthly.

“Specialisation and focus make a market small. Globalisation makes it big.”

SICK has partnered with companies including Qantas and Rio Tinto (for more on this, click here for a current story) to bring about unique solution to a highly specialised area.

“The main industry segments we provide sensor technology to are factory automation, logistics automation and process automation,” SICK’s managing director David Duncan told Manufacturers’ Monthly.

“One of the things that’s often quoted to me in the marketplace is if there’s a difficult sensing application, we go to SICK, and they will solve it for us. That seems to be the reputation that we’ve built.”

This happens globally, and comes with an investment in R&D that Duncan puts at ten per cent of revenue before relating a story about a project with an unnamed mining company to illustrate how the company matches working with a local customer to global excellence.

“What happens is when the application is fed back to Germany, we have to do some form of local adaptation and feedback to Germany to do some further R&D on the development of product and we then take that into the application of the product,” he explained.

Collaboration between the local arm of the company and German headquarters led to consideration how the technology was applied, a customised solution provided, and a customer’s needs met.

“There’s nothing available so we have to build something, we have to develop something,” said Duncan.

“And that is one of the exciting parts of the international corporation, because Sick AG, our headquarters, and also the local SICK company work together. What we’re striving for is a global partner with local competence. Sounds like a catchcry, doesn’t it?”

Closeness to customer

Germany’s Mittelstand (middle-sized) companies – which employ over 60 per cent of the country’s workers, make up over 99 per cent of its firms and are famous for their manufacturing strength – are known for their closeness to their customers.

As well as qualities such as generally having a longer-term vision and close ties to their region, the Hidden Champion tier of the Mittelstand has a proportionately high number of people in the company that will deal with and thus be better able to understand customers.

“More employees (37%) have regular customer contact than in large corporations (7.5%),” said Professor Simon of his research.

“The involvement of top management is much deeper in the case of the Hidden Champions, and there is less friction between the various functions involved.”

Importantly, Simon explained, R&D was more meaningful and, though there was a higher spend on this compared to a larger companies, the investment was also much more likely to yield results.

“Innovation is one of the pillars of the Hidden Champions’ success,” he noted.

“Large corporations have six patents per 1,000 employees, the Hidden Champions have 31. The costs of a Hidden Champion patent are only about one fifth of those in a large corporation. The challenge of innovation is to integrate technology and customer needs. 65% of the Hidden Champions claim that they are successful in doing this, whereas only 19% of large corporations say this.

“Closeness to customer plays a crucial role, but technology is equally important. You need both. This integration is much easier to achieve in a smaller company since their customer contacts are much more intensive.”

The focus of a Hidden Champion is a relation to its closeness to its customer. It leads to an advantage over larger competitors through aspects such as better service and better customising a product to the market’s needs.

Petzoldt joked that it might be hard to guess the exact nature of the relationship.

“You may argue whether they are close to the customer because they are specialised, or they are specialised because they are so close to the customer” he offered.

Anderson said that for ANCA, understanding customers’ needs was, “critical to adding value for our customers, which allows our customers to be much more productive.

“We actually customise for specific customer requirements. So having people and innovation that can take those things to market and satisfy the customer is absolutely critical.”

Part two of this article, which will cover topics including some of the reasons for Germany’s export success, as well as the importance of its manufacturing base to this, will be published on Wednesday. 

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 German-Australian Chamber of Industry and Commerce website.







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