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02/11/2019

08:02 AM

Hidden Champions

Why are German companies so good at weirdly specific things?

By: Lin Freitag, Kristin Schmidt, Grace Dobush

Family-owned Mittelstand companies are the backbone of the German economy, often becoming the world leaders of very specific markets. Here’s how they find, perfect and defend their niches.

DPA

German bestseller left, Chinese imitation right.

Family companies are the backbone of the German economy and the envy of the world: economically successful, regionally anchored and socially oriented. “Made in Germany” is a global promise of quality; no other country can boast as many market leaders.

Business economics professor Christoph Müller, of St. Gallen University, follows such "Mittelstand" companies closely, tracking what makes the family-owned German firms into world leaders in their highly specific niches. The 2018 list of “hidden champions” runs to 455 companies.

He also has a running list of Future Champions. He defines these as German companies that are owner-operated, active on at least three continents and make at least 40 percent of their sales abroad – and are the No. 1 or 2 company in their field. Müller identified 62 such companies for WirtschaftsWoche; the top 10 by sales are below.

Grafik

Varied though they are, they share one thing. “Only with a clear focus do you become world-class,” says Hermann Simon, a business expert who coined the term “hidden champions” and has dedicated his career to studying Germany’s Mittelstand companies.

Specialization is key, Simon says, and hidden champions often control most of their supply chain, only relying on suppliers when absolutely necessary. These kinds of specialists work closely with clients to find solutions for their needs, which helps these firms create better products.

Find the niche

Back in the early 2000s, Christoph Ballin was looking for a boat at his vacation home on a lake where diesel motors were banned. He showed off his new boat with an electric motor to his colleague Friedrich Böbel, whose reaction was: "A ghastly engine!" Ballin replied, "The best on the market.” Both were right.

Ballin became obsessed with electric boat motors — was the technology underdeveloped or too expensive or was there just no demand? He became convinced he’d found a gap in the market. Ballin and Böbel determined that the leading diesel boat motor producers, Yamaha and Honda, weren’t making electric ones, and many companies that did make electric boat engines were operating at a hobbyist level.

Ballin and Böbel quit their jobs in 2005 to found Torqeedo, developing electric motors for boats, kayaks and dinghies. Today they sell more than 10,000 motors each year, driven by boating enthusiasts who also want to help the environment. Torqeedo has about 180 employees and annual sales of €25 million, but hasn’t yet achieved profitability.

Deepen the niche

Once you find the perfect gap in the market, you must never rest on your laurels. Take the example of Gerriets, the world market leader for theater curtains.

Change management: Mittelstand firms are struggling with generational change

Change management

Mittelstand firms are struggling with generational change

It was going to be a difficult year anyway for Germany's hidden champions, the famed Mittelstand. But due to demographics, their biggest challenge remains how to pass on the firm.

Hans Gerriets was a fabric wholesaler who started specializing in theater curtains after World War II. His son, Walter, expanded the company’s purview to include the hardware systems used to hang the drapes. When cheap fabric imports from Asia threatened the market, Gerriets doubled down on quality, outfitting La Scala and the Metropolitan Opera. And now grandson Hannes Gerriets runs the company, offering complete curtain solutions and not only for the stage.

About half of Gerriets’ €31.1 million in annual sales still comes from the theater market, though that's stagnating. But noise-canceling curtains are a godsend for the modern open office. Workplace curtain solutions accounted for €3 million of Gerriets’ sales in 2018.

Defend the niche

Of course once a company finds a successful niche, imitators abound. PWM is the market leader in electronic price signs at gas stations, making €44.9 million in sales annually and counting 150,000 clients worldwide.

CEO Max-Ferdinand Krawinkel says no other company matches PWM’s quality because its competitors underestimate how complicated the products are. “They simply mount cheap LEDs onto circuit boards and are surprised when they shut down in the first heat wave," he says.

Like other hidden champions, PWM has used its close connections to customers to develop innovative products. When a client wanted his sign’s numbers to be made of white LEDs, which are harder to see in daylight, PWM’s engineers worked on the solution for three years. But now white LEDs account for 60 percent of all gas station signs.

This business will continue changing, and other competitors may arise, but PWM’s core competency of electronics will continue to be the key: "We're simply too good at this."

Listen hard enough and that's the message you'll hear from many of the firm's German peers.

Lin Freitag and Kristin Schmidt are editors at WirtschaftsWoche, a sister publication of Handelsblatt. Grace Dobush is an editor with Handelsblatt Today in Berlin. To contact the authors: [email protected]

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