Friday, September 28, 2007
How to find a cutting edge
By Richard Milne and Peter Marsh
Published: September 19 2007, FT
Job cuts, boardroom disputes and corruption scandals at Siemens, Volkswagen and DaimlerChrysler have stolen the headlines of German industry in the past decade.
But a closer look at the country’s industrial ranks reveals a group of companies that is both more reticent and more successful than its bigger brethren. These are what Hermann Simon, one of Europe’s best-known management consultants, calls “hidden champions”.
They may be smaller in size – less than €3bn or so in revenues – but they are all world leaders in their fields, with annual growth rates of 10 per cent. In a decade in which low-cost countries in Asia and elsewhere have transformed the economics of manufacturing, these hidden champions have – paradoxically – become even more successful.
It is a trend that prompts Prof Simon to make the bold assertion: “The two winners of globalisation are Germany and China.” He backs his claim with the fact that German hidden champions are two-and-a-half times bigger than they were 10 years ago; have a market share two-and-a-half times larger than their biggest competitor; and have generated 1m jobs.
“These small companies are the core of the German economy. They have lessons for all companies, big and small, [about] how to grow, how to create jobs, how to innovate,” says Prof Simon, who this week publishes Hidden Champions in the 21st Century, a decade after he coined the phrase in the best-selling Hidden Champions.
Several characteristics distinguish these hidden champions: a sharp focus on a niche market that enables them to dominate it and to continue producing in high-cost Germany; a global strategy to open fresh markets; a “do-it-yourself” approach to innovation and production; and most often family or private ownership to ensure continuity.
Klingelnberg, a maker of gear cutting and grinding machines, based near Cologne, is an archetypal example. At the age of 193, it is in the seventh generation of family management. Diether Klingelnberg, now chairman having passed control to his son Jan after 35 years in charge, says the company dominates most of its specialised equipment markets.
He attributes the company's success to thorough research and moving swiftly into its identified market. “You have to specify the market very, very precisely through talking to customers or maybe universities about what might work and then we invest a lot, hire people and build up the market share quickly through growth.” Mr Klingelnberg says opportunities have multiplied in the past 10 years. “The market has become much bigger: it is much easier for us to sell in China, Russia or India now.”
Trumpf, the world leader in laser-powered cutting machines for the metal goods industries, has grown considerably during the past decade. Annual sales have risen more than three times to €1.6bn during the last 10 years, pushing up pre-tax profits nearly six-fold to €204m.
The company has always been a firm believer in a do-it-yourself approach. In the 1970s, when Trumpf first began to explore the market for laser-cutting machines, Berthold Leibinger, supervisory board chairman and the company's owner for the past 40 years, decided it should set up its own laser production operations because most of the existing devices were unsatisfactory. The decision paid off by making Trumpf not only a supplier of the machines but also of the lasers to other companies in fields such as welding.
Self-reliance has also been important for Kern Microtechnic, a world leader in machining systems for microscopic parts for industries such as defence, medicine and watches.
The 120-person company had sales last year of €15m. About a third of this was from sales of machines, the rest from its own production operations, which it uses to make parts for outside customers using Kern machine tools.
Mr Leibinger of Trumpf says innovation has been vital to the company's success, pointing to its decision to branch out from its core field of machine tools to medical lasers and electronics while retaining its position as market leader. He says Trumpf manages this by maintaining close ties with scientists worldwide and continually questioning its strategic direction. Prof Simon points to the rise of German companies in new fields such as biogas, wind energy and nanotechnology as a sign of how responsive they can be.
Hans-Jochen Beilke, head of EBM-Papst, a maker of motors and fans, emphasises the importance of its management style for its success. EBM-Papst has few rules, is heavily decentralised and has an extremely lean organisation – it hired its first public relations specialist only eight weeks ago.
Decentralisation is important, according to Prof Simon. “Hidden champions don't just decentralise their organisation. They also create new companies when they go into new areas. So the head of that new segment is not a middle manager, like he is in a big company, but the head of a separate company; that is very important for responsibility.”
Mr Beilke says the big advantage companies such as EBM-Papst and Trumpf have over larger corporations is the speed at which they can take decisions.
“We could go into a lunch to discuss whether to set up a Russian subsidiary and by the end of it have decided to do it. But if you are at VW or Siemens that could take half a year and then another half a year of committees and lawyers.”
Another characteristic of the hidden champion may seem obvious but is difficult to implement: putting the customer at the centre of the company's decisions. Volker Bartels, head of the management board at Sennheiser, the world's leading headphones producer, says contact with customers highlighted new trends such as the need to shrink headphones in order to keep up with changes in mobile telephony and listening to music on the move.
A lot of companies – particularly larger, listed ones – focus blindly on chasing market share rather than pleasing the customer, observes Hermut Kormann, chief executive of Voith, a maker of paper machines and turbines.
“If a customer has a problem, we don't say it is their fault and not ours. We go to the customer and ask: ‘What do you need to fix it?'”
Call of the east: transatlantic companies book a passage to China
Hidden champions do many things right but they still face challenges in the 21st century. Hermann Simon, a management consultant who specialises in small companies, says: “The biggest challenge for hidden champions is to transform themselves from transatlantic companies into Eurasian ones.”
Prof Simon thinks the typical proportion of their business – 70 per cent in Europe and the US – needs to change to 70 per cent in Europe and China.
“This will have a huge impact on the culture of companies: for some, China has become a second home.” An example is SMS Demag, a maker of machinery for the steel industry, which earns more than 40 per cent of its revenues from China.
Diether Klingelnberg, chairman of machine maker Klingelnberg, sees a bigger problem in Germany's shortage of engineers. “China is producing 300,000 a year and we are barely making 30,000. That is going to hurt us soon.”
He admits this may be more of a problem for Germany's economy than German companies that are building expertise in other countries. Klingelnberg is trying out another solution: this month it advertised for engineers aged 60 and over to answer its need for experienced problem-solvers.
Published: September 19 2007, FT
Job cuts, boardroom disputes and corruption scandals at Siemens, Volkswagen and DaimlerChrysler have stolen the headlines of German industry in the past decade.
But a closer look at the country’s industrial ranks reveals a group of companies that is both more reticent and more successful than its bigger brethren. These are what Hermann Simon, one of Europe’s best-known management consultants, calls “hidden champions”.
They may be smaller in size – less than €3bn or so in revenues – but they are all world leaders in their fields, with annual growth rates of 10 per cent. In a decade in which low-cost countries in Asia and elsewhere have transformed the economics of manufacturing, these hidden champions have – paradoxically – become even more successful.
It is a trend that prompts Prof Simon to make the bold assertion: “The two winners of globalisation are Germany and China.” He backs his claim with the fact that German hidden champions are two-and-a-half times bigger than they were 10 years ago; have a market share two-and-a-half times larger than their biggest competitor; and have generated 1m jobs.
“These small companies are the core of the German economy. They have lessons for all companies, big and small, [about] how to grow, how to create jobs, how to innovate,” says Prof Simon, who this week publishes Hidden Champions in the 21st Century, a decade after he coined the phrase in the best-selling Hidden Champions.
Several characteristics distinguish these hidden champions: a sharp focus on a niche market that enables them to dominate it and to continue producing in high-cost Germany; a global strategy to open fresh markets; a “do-it-yourself” approach to innovation and production; and most often family or private ownership to ensure continuity.
Klingelnberg, a maker of gear cutting and grinding machines, based near Cologne, is an archetypal example. At the age of 193, it is in the seventh generation of family management. Diether Klingelnberg, now chairman having passed control to his son Jan after 35 years in charge, says the company dominates most of its specialised equipment markets.
He attributes the company's success to thorough research and moving swiftly into its identified market. “You have to specify the market very, very precisely through talking to customers or maybe universities about what might work and then we invest a lot, hire people and build up the market share quickly through growth.” Mr Klingelnberg says opportunities have multiplied in the past 10 years. “The market has become much bigger: it is much easier for us to sell in China, Russia or India now.”
Trumpf, the world leader in laser-powered cutting machines for the metal goods industries, has grown considerably during the past decade. Annual sales have risen more than three times to €1.6bn during the last 10 years, pushing up pre-tax profits nearly six-fold to €204m.
The company has always been a firm believer in a do-it-yourself approach. In the 1970s, when Trumpf first began to explore the market for laser-cutting machines, Berthold Leibinger, supervisory board chairman and the company's owner for the past 40 years, decided it should set up its own laser production operations because most of the existing devices were unsatisfactory. The decision paid off by making Trumpf not only a supplier of the machines but also of the lasers to other companies in fields such as welding.
Self-reliance has also been important for Kern Microtechnic, a world leader in machining systems for microscopic parts for industries such as defence, medicine and watches.
The 120-person company had sales last year of €15m. About a third of this was from sales of machines, the rest from its own production operations, which it uses to make parts for outside customers using Kern machine tools.
Mr Leibinger of Trumpf says innovation has been vital to the company's success, pointing to its decision to branch out from its core field of machine tools to medical lasers and electronics while retaining its position as market leader. He says Trumpf manages this by maintaining close ties with scientists worldwide and continually questioning its strategic direction. Prof Simon points to the rise of German companies in new fields such as biogas, wind energy and nanotechnology as a sign of how responsive they can be.
Hans-Jochen Beilke, head of EBM-Papst, a maker of motors and fans, emphasises the importance of its management style for its success. EBM-Papst has few rules, is heavily decentralised and has an extremely lean organisation – it hired its first public relations specialist only eight weeks ago.
Decentralisation is important, according to Prof Simon. “Hidden champions don't just decentralise their organisation. They also create new companies when they go into new areas. So the head of that new segment is not a middle manager, like he is in a big company, but the head of a separate company; that is very important for responsibility.”
Mr Beilke says the big advantage companies such as EBM-Papst and Trumpf have over larger corporations is the speed at which they can take decisions.
“We could go into a lunch to discuss whether to set up a Russian subsidiary and by the end of it have decided to do it. But if you are at VW or Siemens that could take half a year and then another half a year of committees and lawyers.”
Another characteristic of the hidden champion may seem obvious but is difficult to implement: putting the customer at the centre of the company's decisions. Volker Bartels, head of the management board at Sennheiser, the world's leading headphones producer, says contact with customers highlighted new trends such as the need to shrink headphones in order to keep up with changes in mobile telephony and listening to music on the move.
A lot of companies – particularly larger, listed ones – focus blindly on chasing market share rather than pleasing the customer, observes Hermut Kormann, chief executive of Voith, a maker of paper machines and turbines.
“If a customer has a problem, we don't say it is their fault and not ours. We go to the customer and ask: ‘What do you need to fix it?'”
Call of the east: transatlantic companies book a passage to China
Hidden champions do many things right but they still face challenges in the 21st century. Hermann Simon, a management consultant who specialises in small companies, says: “The biggest challenge for hidden champions is to transform themselves from transatlantic companies into Eurasian ones.”
Prof Simon thinks the typical proportion of their business – 70 per cent in Europe and the US – needs to change to 70 per cent in Europe and China.
“This will have a huge impact on the culture of companies: for some, China has become a second home.” An example is SMS Demag, a maker of machinery for the steel industry, which earns more than 40 per cent of its revenues from China.
Diether Klingelnberg, chairman of machine maker Klingelnberg, sees a bigger problem in Germany's shortage of engineers. “China is producing 300,000 a year and we are barely making 30,000. That is going to hurt us soon.”
He admits this may be more of a problem for Germany's economy than German companies that are building expertise in other countries. Klingelnberg is trying out another solution: this month it advertised for engineers aged 60 and over to answer its need for experienced problem-solvers.
Labels: Germany
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