Hidden Champions

They combine innovative technology with tailor-made solutions for their customers: 'Hidden Champions' are among the most successful small and medium-sized enterprises in Germany.

05/20/2019 · ZEW – Leibniz-Zentrum für Europäische Wirtschaftsforschung · Forschungsergebnis · News · Wirtschafts- und Sozialwissenschaften, Raumwissenschaften

Hidden champions are relatively unknown small and medium-sized global market leaders that operate in niche markets. They are among the most successful small and medium-sized enterprises (SMEs) in Germany. One determinant of their success is that they combine innovative technology with tailor-made solutions for their customers. Although hidden champions do not invest more in innovation than firms of a similar size in the same sectors, they achieve greater market success with their innovations. One reason for this is that hidden champions design their innovation processes to be open without compromising their control over product development. At the same time they invest much more in the skill development of their staff.

These are among the findings of a study conducted by the Mannheim-based ZEW – Leibniz Centre for European Economic Research, which for the first time has used representative base data to empirically document, compare and evaluate the key characteristics of hidden champions. This study is based on the annual ZEW Innovation Survey of firms’ innovation activities in Germany.

Hidden champions generally specialise in narrowly defined market niches, are strongly export driven and have a large share in the global markets. As this study shows, by pursuing this strategy they are much more productive and substantially more profitable than a peer group. A matching approach was used to compile the peer group. This involved comparing each hidden champion with a firm of (virtually) the same size and same age from the same sector.

The study’s authors have identified two main reasons for hidden champions’ success. First, they forge very close customer relationships and adapt innovative technologies to meet their clients’ specific needs. To this end, hidden champions invest strategically in research and development (R&D). Secondly, they target investment specifically at the recruitment and training of their staff to provide them with the necessary skills. The proportion of employees with a university degree, for example, is five percentage points higher than the peer-group average, while the cost of training and development per employee per year is 610 euros, which is 140 euros more than in the peer group.

Hidden champions achieve wider profit margins and higher productivity

“The combination of premium technology and customised solutions makes these firms hidden champions – i.e. global market leaders – that operate in niche markets and are therefore relatively unknown to the general public,” explains Dr. Christian Rammer, deputy head of ZEW’s Research Department “Economics of Innovation and Industrial Dynamics” and co-author of this study. Hidden champions on average achieve a two percentage-points wider profit margin and a 29 per cent higher productivity than other SMEs of same size, age and industry. “Being in niche markets, hidden champions obviously operate in a comfortable environment in which they are exposed to less price competition and fewer new entrants. However, they also derive a competitive advantage from the optimum way in which they pool and use their resources. This is particularly true of staff training and development,” adds Christian Rammer.

According to the study, there were approximately 1,800 firms classified as hidden champions in Germany in 2016. They employed roughly 490,000 people and generated total revenues of around 285 billion euros. Over the ten-year period surveyed (from 2006 to 2016) the researchers found that, on average, 0.6 per cent of firms – or 1,637 firms – met the criteria to be classified as hidden champions.

These criteria include a substantial market share, a global market strategy with an export share of more than 50 per cent, a focus on niche markets, a small company size with fewer than 10,000 employees, and strong growth of at least ten per cent above the industry average for five successive years. The largest number of hidden champions in Germany can be found in the mechanical engineering sector (more than 400 firms), followed by the electrical engineering industry (roughly 200 firms).

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