|Germany: The EU's Number One Economic Powerhouse|
These firms, which I call “Hidden Champions,” are part of what makes German economic growth more inclusive: by my calculations, they 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. And they are But the reasons they are a predominantly German phenomenon are many.
This includes the German history of many small independent states (until 1918 Germany consisted of 23 monarchies and three republics), which forced entrepreneurs to internationalize early on in a company’s development if they wanted to keep growing. In addition, there are traditional regional crafts, such as the clock-making industry in the Black Forest with its highly developed fine mechanical competencies, which developed into 450 medical technology companies, most of them makers of surgical instruments.: my estimate is that 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.
Moreover, Hidden Champions have also contributed to the sustainment of the German manufacturing base, and it is in large part thanks to them that nearly a quarter of the German gross domestic product continues to come from manufacturing. The percentage in most other highly industrialized countries such as the U.S., the UK, or France is only about half of this. The effect on employment is enormous. Manufacturing creates jobs at home and at the time same allows companies, through exports, to participate in the growth of emerging countries.
Given this success, it’s not surprising that many non-German policymakers and economists have looked to the Hidden Champions, or more broadly, the Mittelstand, to try and chart a path to more inclusive growth in their own countries. But how replicable is their success? While other countries could try to emulate aspects of what makes the Hidden Champions so successful, the reasons for their success are the result of a complex network of factors, many of them historical.
A Hidden Champion is defined by three criteria: 1) a company has to be among the top three in the world in its industry, and first on its continent; 2) its revenue must be below €5 billion; and 3) it should be little known to the general public. Germany seems exceptionally good at creating these companies; I have identified 2,734 Hidden Champions worldwide and no less than 1,307 of them are based in Germany. You might argue that my research is deeper in Germany than in other countries, and most likely I wouldn’t be able to prove you wrong. But researchers in other countries have also examined this phenomenon and found far fewer Hidden Champions in their countries. A colleague who looked for Hidden Champions in Japan for years identified only 220 companies, a researcher in France has come up with only 100. With the exception of Switzerland and Austria, the per capita number of Hidden Champions is nowhere near as high as it is in Germany.
Of course, success of individual Hidden Champions is based on their leadership and strategy. The most important difference is the continuity of the leadership. The leaders of the Hidden Champions stay at the helm for an average of 20 years; according to Strategy&, which collects data on the world’s largest 2,500 companies, in large firms the average CEO tenure from 2012 – 2016 was only seven years, and the median was even shorter, at five and a half years. The leaders of Hidden Champions are also more likely to come into power at a young age and are more often women than in larger companies.
But the reasons they are a predominantly German phenomenon are many. This includes the German history of many small independent states (until 1918 Germany consisted of 23 monarchies and three republics), which forced entrepreneurs to internationalize early on in a company’s development if they wanted to keep growing. In addition, there are traditional regional crafts, such as the clock-making industry in the Black Forest with its highly developed fine mechanical competencies, which developed into 450 medical technology companies, most of them makers of surgical instruments.
Scientific competencies also play an important role. The cluster of 39 measurement technology companies in the area of the old university of town of Göttingen are the result of the leading role Göttingen university’s mathematics faculty had for centuries. The Fraunhofer Institute continues to function as a transmission belt between science and practical applications. The Munich-based Hidden Champion Arri, world market leader in professional film cameras, used the expertise of Fraunhofer to navigate the transition from analog to digital technology, and was thus able to defend its leading market position.
A further pillar of the Hidden Champions’ competitive strength is the unique German dual system of apprenticeship, which combines practical and theoretical training in non-academic trades. The Hidden Champions invest 50% more in vocational training than the average German company.
Tax advantages are another reason. The high taxes on assets in France and the inheritance tax in the U.S. prevent the accumulation of capital necessary for the formation of a strong mid-sized sector.
Finally, the international openness of a society is an essential factor in the globalized world of the future.
Germany is far ahead of other large countries with regard to mental internationalization. This includes language competencies, international experience from student exchanges, and university studies. Countries such as France, Italy, Japan, and Korea lag far behind in these respects.
Why is this mental internationalization so important? Because while Hidden Champions may be small, they compete on a global scale.
They achieve world-class quality by keeping their focus narrow; focus is the most important element of a Hidden Champion’s strategy. Flexi, for example, makes only one product — retractable dog leashes — but has the claim to make them better than anyone else. This has allowed them to reach 70% of market share in this category. But focus makes a market small. How can you make it bigger? 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. About one quarter of German exports comes from the Hidden Champions.
Read more: Why Germany Still Has So Many Middle-Class Manufacturing Jobs