1,600 Hidden SME Champions in Germany - Strong in Their Niche But Weak in Growth

The German economy has spawned many innovative SMEs who have a leading position in the world market. The strength of these so-called "hidden champions" lies in their focus on relatively small markets and their high degree of specialization on particular products or applications. The growth opportunities for hidden champions heavily depend on the development of demand in these niche markets. According to the 2015 Innovations Indicator by acatech, the National Academy of Science and Engineering, and the Federation of German Industries (BDI), only few hidden champions manage to grow to be a large company.

As part of the 2015 Innovation Indicator, the Mannheim Centre for European Economic Research (ZEW) conducted an analysis, which revealed that 1,600 German small and medium-sized enterprises are currently leading the world market. However, most of these "global specialists" are very small: On average, they employ less than 300 people and achieve an annual turnover of under 100 million euros. The reason for the comparatively small corporate size of lots of those world-leading SMEs is the small scale of these companies' markets. Just slightly more than 10 per cent of the hidden champions operate in sales markets of a volume bigger than one billion euros.

The ZEW analysis shows three distinct types of hidden champions: The classical niche champion concentrates on very specific product applications. In niche markets, major groups cannot apply their volume advantage in terms of research and development or sales. Therefore, niches are not attractive to them. Most times, those markets are so small that companies can only succeed if they cater to the whole global market. And even then, the market is just big enough for small companies. Such niche providers have frequently merged into enterprise groups. This way, they can still apply certain size advantages. Examples are the Heitkamp & Thumann Group from the metal forming sector, or the Körber Group that produces special-purpose machines.

The second group of hidden champions operates in shrinking markets. In the past, those markets used to offer space for various companies. However, they are now shrinking due to technical progress or declining demand. The consequence: Companies leave that business sector and the market consolidates itself. Among the remaining companies, those who actively invest in the world market are able to turn a technical edge into a leadership of the world market. Usually, those are very old, traditional companies that have kept on improving their products over the years and benefit from their experience. If the market becomes a small niche, a technical edge might not even be needed.

The third kind of hidden champions is rare in Germany – young SMEs taking a leadership position in fast-growing global markets. But those do not stay hidden champions for long: They either develop rapidly into globally active and internationally known groups, parallel to their market's development, or they are bought by existing groups, who can thereby purchase growth. This type of SME is mainly found in the USA, where corporate growth is a special performance criterion. External investors, such as venture capital funds, put a special focus on these groups. Among German hidden champions, however, young companies of meteoric growth are the exception. Here, the term champion is rather defined by corporate stability, modest, rather long-term growth and a cautious internationalisation.

Hidden champions are defined as companies with less than 10,000 employees that primarily operate internationally and have a high share in their main market.

About the Innovation Indicator

The annually published Innovation Indicator is a study which compares countries in terms of their innovation performance. The study analyses the conditions for innovation in Germany and develops a ranking which compares Germany to other leading industrial nations and emerging countries in terms of economic policy, education, state and civil society, as well as in terms of an overall indicator. This provides a basis for innovation policy. The Innovation Indicator is a joint initiative of acatech, the National Academy of Science and Engineering, and the Federation of German Industries (BDI). The study is completed by the Fraunhofer Institute for Systems and Innovation Research (ISI) in collaboration with the Centre for European Economic Research (ZEW). The Innovation Indicator was a joint initiative of BDI and the Deutsche Telekom Stiftung, before acatech joined as a cooperation partner in 2015.

For more information please contact

Dr. Christian Rammer, Phone +49(0)621/1235-184, E-Mail rammer@zew.de