Stephan Guinchard / Partner, Ixens / 2015-03-26
Hidden champions are market leaders that are often not well known by the general public. These small and medium size businesses focus on niche markets that they dominate at a national, regional or even global scale, with a market share often exceeding 70%. Exceptionally numerous in Germany, where they form the backbone of the Mittelstand, they explain both this country’s exporting power and its resilience to crises.
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ParisTech Review – You developed and applied to France the concept of “hidden champion” created by German economist Hermann Simon, because you feel that this type of business, the backbone of the German Mittelstand, largely explains the industrial and exportation performances of Germany. After the more traditional categories of small and medium enterprises (SMEs) and middle-market companies (MMCs), how did the notion of “hidden champion” emerge?
Stephan Guinchard – In the mid 1980s, Herman Simon, then a visiting professor at Harvard, met Theodor Lewitt, the inventor of the concept of globalization in line with the increasing internationalization of trade. They wondered why some countries performed much better in exportations than others. Hidden champions was their answer to the question: an SME or MMC is a market leader on its own segment, that is to say, in the top 3 at a global or European scale –it can also be a company that has a unique technological position. A champion is not only strong, it is also dominant in its market.
Its turnover must be less than 3 billion euros. The message sent by this category of players is crucial to SMEs: one can be relatively small and yet global at the same time. In short, a hidden champion seems more of an operational concept, less descriptive than that of middle-market company (MMC), which is a simple statistical category. Finally, hidden champion is generally not so well known by the public, with a big gap between their performance and their reputation. The hidden champion is usually a B2B player.But there are also some examples of B2Cs, such as Babolat (racquet sports), Beneteau (sailboats) or Darégal (frozen aromatic herbs).
Where are the hidden champions in Europe?
In Germany of course, and in the German-speaking area of Switzerland and Austria. Wherever the German model is dominant. Many are also installed in the north of Italy and in Scandinavia, especially the Swedish family businesses of metal and paper. In France, JC Decaux, the world leader in outdoor advertising, is a good-sized champion, and a quite visible one. Examples of smaller size are MMCs such as ARaymond (fastening clips), Clextral (leader in extrusion technology), Radiall (coaxial connectors), Laporte Ball-trap, world leader of clay pigeons or FAVI, world leader in pressure die-casting of copper alloys. Rossignol Technology, located in Haute-Savoie, offers another outstanding example. Here’s the European leader of brake control rods, a small piece located below the brake pedal of every car. In Europe, one new car in two has its control rod manufactured by Rossignol Technology in the Czech or Savoyard facilities. They have produced over 500 million units since the creation of the company in 1977. This SME has a turnover of about fifteen million euros. While obviously a fairly small market, the new president, head of the company since 2010, has opted to remain focused on its historical expertise, and therefore, has refused to diversify. He believes in nice growth opportunities outside Europe, including Japan and the United States.
And what about outside Europe?
Hermann Simon has identified 2,800 companies that meet this definition in the world. The concept has met a huge success in South Korea, a country sensitive to the excessive weight of its chaebols (conglomerates) and to the need to promote the development of small family businesses. In New Zealand, one can think of Gallagher, a specialist in livestock fences; in Japan, Hamamutsu Photonics, a specialist of light sources is also a good example.
The only exceptions to this definition based on exports is in the United States, where hidden champions can emerge from, and work within, the domestic market alone. This is the case of McIlhenny Company, which manufactures Tabasco in Louisiana since 1868. More examples are now flourishing in countries with a huge domestic market such as China or India: Essel Propack, for example, is an Indian manufacturer of laminated tubes for toothpaste with one third of the world market.
Compared with Germany, there are few hidden champions in France. What is the extent and nature of the French gap?
In general, French MMCs aren’t as dynamic as their German. Their waterline is lower. French “champions” need to achieve outstanding results to match their German counterparts. We’ve identified 450 hidden champions in France, that is to say half the workforce that would level Franc, relative to its GDP, with Germany (1300). France would need at least 900 hidden champions, taking into account the difference in size between the two economies. This difference of 450, is even more significant because the two countries are neck in neck in the number of large multinational groups. These 450 companies would represent an additional volume of exports of 100 billion euros. Such a volume would transform the French trade deficit into a surplus. It would also represent more than one million additional jobs. In France, several exogenous factors are unfavorable to the development of SMEs, of champions in particular: greater recruitment difficulties, more difficult access to suitable financing, less solidarity and cooperation between actors of the same industry (especially between large groups and networks of subcontracting SMEs), poor understanding of economics and entrepreneurship, not to mention the attitude regarding productive capital…
Does the attitude towards financing solutions explain the performance difference from one country to the other?
There are biases regarding funding. Venture capital exists in France, but it is perceived with mixed feelings by SMEs in the context of the current crisis. As for IPO, it is very expensive: it brings a whole series of constraints and consumes resources that are otherwise limited. Issuing a bond, despite models favoring “small” programs, remains very expensive in relation to the raised amounts. Is it really tempting? The German model relies on self-financing, which is very suitable when one achieves good margins. Of course, as a result, champions tend to curb their growth ambitions because they don’t want to open their capital or overload their debt. This isn’t necessarily a mistake. Their growth never really speeds up but their approach also allows them much more freedom in the event of a crisis.
Caddie, a former champion, disappeared while its German rival, Wanzl, is doing quite well. Why? Because Caddie was one of the “unfortunate” 2007 LBOs: financial arrangements made on the basis of disproportionate ambitions, in light of the crisis that followed. In the years that followed, Caddie had no financial flexibility left. Hidden champion mistrust instinctively this logic of excessive growth backed by significant financing. They know how to contain their growth. In the name of sustainability. To maintain flexibility. To avoid being surprised by the unexpected. To avoid having to make massive layoffs in the event of a crisis. To preserve their expertise, human capital and loyalty, while taking advantage of market opportunities.
This caution also explains their resilience. If you take the automotive industry, it is very interesting to hear many European champions declare that the 2008 crisis has affected only 10% to 15% of their turnover, while most large companies in the sector declined by 30% or even 50%.
Above a certain size, is it possible to remain a hidden champion?
Herman Simon, who fathered the concept, set the bar at three billion euros in turnover, which exceeds even the MMC threshold. But really, what matters most is quality rather than quantity. The spirit of the German Mittelstand is even at the heart of companies such as Miele, that generates over three billion euros in revenue. Or even Würth, a worldwide wholesaler of screws and fasteners for professionals, with a turnover of 10 billion, which remains a united, independent and decentralized family business. Philosophy and strategic choices are the main features of hidden champions, more than statistical measures. This idea also applies in the other direction. Clufix, French champion and European leader in assembly functions for the automotive sector, has a turnover of tens of millions of euros while it acts, thinks, innovates and communicates as a ten times larger MMC.
In managerial terms, is the champion original or conventional?
Managerial originality is often found. ARaymond, champion of fastening clips for the automotive sector, inventor of the push-button, is a MMC with a turnover of 800 million euros. Its organization is not a rigid pyramid but a network led by a very small holding. Their philosophy is to disseminate information and good practices. The head of each regional Business Unit is granted great freedom in terms of organization and a true “customization” flexibility in terms of marketing. What binds all the BUs, is a system of values. A soft and yet strong connection with internal trade forums. They trust instead requiring monthly reports. “Resource teams” are created and they manage on their own. This system gives excellent results in terms of production and productivity.
Are there social markers for hidden champions?
Generally speaking, social dialogue tends to be based on consensus in Germany and onconflict in France. But hidden champions are an exception. Among champions, in times of crisis, managers and employees often agree on flexible procedures. At Poclain Hydraulics (200 million euros turnover), for example, when the crisis has reduced by 30% their sales volume, the family recapitalized the firm and employees accepted wage cuts. Thanks to a long term relationship, stability and an identity employees can relate to. For a hidden champion, human resources are neither considered nor managed as a cost. Each year, at Rossignol technologies, every employee takes a working day to pay a site visit to a client, in order to fully understand what their product is becoming, and give meaning to their daily tasks. This is a crucial investment in both customer relations and human resources.
Do hidden champions recruit easily?
In France, learning is not valued as in Germany and SMEs don’t have a good “employer brand”. Which French grande école graduate would want to work in a SME or even in a MMC? And yet, a successful MMC with a 300 million turnover provides wonderful flexibility as well as great opportunities. Growing SMEs have a hard time recruiting, especially hidden champions in the manufacturing sector, who work on machining, make boilers. In short: industrial craftsmanship trades. In France, these sectors have suffered from the crisis and SMEs find themselves in the absurd situation of having to recruit in Switzerland, Belgium and Germany, often paying high wages for scarce skills, while France has 3.5 million unemployed. La Société Maritime de Soudure et de Montage, an industrial boiler company in the north of France, employs a hundred people, but is unable to recruit. They could afford hiring more boilermakers but don’t find them in France. Other highly industrialized regions, such as the Arve valley, face the same problems.
To face the scarcity of talents, Germany, northern Italy, Switzerland and France find themselves in direct competition. In the Swiss watch industry, hidden champions have so much trouble recruiting that they developed their own internal training. Same approach for Carboman, the European leader in the construction of racing boats and production of large industrial parts in composite material. They have the largest composite oven in Europe. Each year, the company itself forms several technicians, recruited from local schools.
Are hidden champions technologically innovative, despite being financially conservative?
Despite the sometimes antiquated image of these champions, even though half of them already existed before the Second World War, they still continue to hire and innovate in 2015. Our studies show that on average, a hidden champion dedicates 6.5% of its turnover to innovation, twice as more as “normal” companies of similar size. Laporte (Ball trap), world leader in clay pigeon shooting, supplier of the Olympics and of the Royal Family of England, invented phosphorescent powder or electronic systems to “modernize” the classic clay pigeon model. Backed by a powerful brand and solid experience, they realize a turnover of 20 million euros, have a staff of 125 employees, manufacture in France and the UK. Most importantly, they export to China, especially since the Beijing Olympics, where they were an official supplier.
Another striking example: La Buvette, European leader in cattle troughs. They export heated troughs for Siberia and offers drinkers with vitamins supply. The company conducts highly specialized zoological studies on cow herds to understand the behavior of dominant animals that block access to water while they drink. Consequently, they designed and optimized their drinkers to maximize the number of animals drinking the same time. Continuous innovation can apply to any product. There is also a strong correlation between investment in research and intimacy with the customer. Hidden champions are niche markets. They lead the race, find specific products that quickly become a reference and they install barriers to entry. Their experience curve and degree of intimacy with the customers are such that non specialist players will always fall behind.
Hidden champions are generally active on highly focused markets, and only operate at a global level, with a limited number of competitors, less than a dozen in most cases. But competition can be harsh within the oligopoly which is why innovation efforts and emphasis on R&D are so important.
How do these companies, often family businesses with an incredibly long history, manage the challenge of property transfer?
In the long history of these hidden champions, transfers are always delicate moments. They need to be anticipated. A transfer needs preparation: some leaders may allow the process to stretch over 10 years. It’s not because the company is family-owned that it is easier to transfer either. At the 4th or 5th generation, in a MMC, the system that selects the heirs who have access to senior management is extremely severe: candidates compete between themselves and face many requirements: professional experience abroad (even better if it’s in another group), in-house experience, charisma, qualities as an ambassador for the group’s values… When necessary, family businesses can resort to a CEO from outside the firm. The primary objective is always the future of the business and employees.
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