The state government wanted to know exactly: How many hidden world market leaders are there in NRW? These companies, known as hidden champions, make a significant contribution to the economic success of North Rhine-Westphalia. They are regarded as the driving force behind regional and national economies and are often major employers in their region. At the same time, they usually have only a low level of public awareness. Until now. The Institute for SME Research at the University of Trier, under the direction of Jörn Block, has set out to find the hidden champions in NRW. And discovered 690 hidden world market leaders in NRW – more than anywhere else in Germany.
In an interview, director of studies Block explains why so many hidden champions are so successful in NRW, what challenges await these companies in the coming years and why they are becoming increasingly interesting for investors and startups.
- When we think of a hidden champion, we often imagine a screw manufacturer from Sauerland, without which no shelf in the world would stay together. Is there any truth in that?
Yes, you could say that. But the screw from your example is a product that everyone is aware of. However, a hidden champion usually produces things that are hardly known. These are often products that are used in other products and only then result in a device or a machine. Or a piece of equipment is sold to other companies, which in turn produce something that everyone in the world knows...
- ... and all this is controlled from the company headquarters in Meschede or Arnsberg?
Hidden champions are indeed often located in more rural regions such as the Sauerland, Siegerland or Märkischer Kreis. Our study also showed that more than two-thirds of the hidden champions are found in the rural counties in NRW, while only one-third are based in the cities that are independent of counties. It is primarily the business-to-business markets in which the hidden champions are disproportionately represented.
- In your study, you identified 690 hidden champions in NRW. Can you give us an example of a company that is one of the world's major players but is hardly known in this country?
For example, there is the Prym company from Stolberg near Aachen, which is the world market leader in snap fasteners for clothing. Or Wilo from Dortmund, which specializes in pumps. There is Phoenix Contact from the Lippe district, which produces terminals, connectors and plug-in connections for the energy industry all over the world. Or CRUSE Spezialmaschinen from Wachtberg, where special printers and scanners are manufactured that can reproduce large-format images. Archives, libraries and museums worldwide access this technology. But for background: The term "hidden champion" is over 30 years old. Back then, people had companies in mind that are now so big that everyone knows them. Just take Würth, ZF, Trumpf or SAP from Baden-Württemberg. Those were hidden champions back then.
Did you know?
The term hidden champions was first used in the 1990s by economics professor Hermann Simon to describe a particularly successful subgroup of medium-sized companies. Although the hidden champions have achieved considerable success in their industries and are regarded as the spearhead of the German economy, they are usually relatively unknown to the public.
- Is it a problem for a hidden champion to operate under the public radar like this – or is it perhaps even an advantage?
That has changed. Today, a hidden champion can no longer afford to be completely "hidden”. It must cultivate a brand that is also known outside its industry or the niche in which it operates. Only in this way is it attractive to skilled workers and to other companies with which it can work on innovations.
- Almost every third hidden champion in Germany comes from NRW – why is that?
On the one hand, NRW is the most populous federal state. On the other hand, there are also numerous regions in NRW that have a very strong tradition of medium-sized companies. This tradition exists because, historically speaking, products have always been manufactured there. For example, there is the Siegerland region, where a lot of mining was carried out and the materials were then of course processed locally. More and more companies then settled around these historical economic clusters and continued to specialize over four, five or even six family generations.
- You've already mentioned the Siegerland as a region full of hidden champions. What others are there in NRW?
Above all in places where there is a long industrial tradition and a more medium-sized economy. There are also clusters around certain products, raw materials and skills, such as the knife cluster in Solingen and the wire cluster in the Märkischer Kreis. In addition to the Siegerland region, regions that stand out in NRW are the Sauerland, the Märkischer Kreis, East and South Westphalia and the Bergisches Land. What is striking is that where large companies are located, there are fewer of them, such as in the Ruhr region. Hidden champions also tend to be less represented in large cities – and these do not shape the regional economy as much as a hidden champion often does.
- Is there an explanation for this rural clustering?
There is no single explanation for why so many hidden champions have settled in one place or another. What's more, these regions are usually not cut off from the cities and metropolitan regions. Just take the Märkischer Kreis district. There is a cluster of companies there that produce and process wire. The Ruhr region with its steel companies is very close by and only a short freeway drive away. The situation is similar in the other regions. Without a good infrastructure, the hidden champions would not have been able to assume their leading role in the world market. But it's also important to remember that the settlements in these places have grown historically. Today, a mayor can no longer simply say, I want to become a hidden champion city. That doesn't work.
- But that also means that some regions in NRW would look different today if the hidden champions had not existed there?
Yes, because these regions were not so dependent on a few large companies that then eventually ceased to exist. So these regions are more diversified in terms of companies, but not necessarily in terms of industry. Because in the case of hidden champions in NRW, it's mainly concentrated on mechanical engineering and the metalworking industry. These companies shape the regions very strongly through their jobs. Problems arise, however, when skilled workers no longer want to live in these regions and move to the cities.
- How do the hidden champions react to this?
For certain skills, especially in IT and marketing, hidden champions set up branches in major metropolises such as Berlin, but also in Düsseldorf and Cologne. That's how they get the skilled workers they need....
- ... but people do not have to leave the city where they studied.
Exactly. For example, there is a branch of Grohe AG in Düsseldorf, but the company's (historical) headquarters are actually in Hemer in the Sauerland region. However, this is also interesting because hidden champions have not traditionally needed academics at all, but have focused on skilled workers with dual training. Yet hidden champions are now also looking for academic skills in addition to skilled workers. And companies are responding.
- Many hidden champions are already over 100 years old. Younger hidden champions, on the other hand, are rare – is it even possible to become an unknown world market leader today?
It's still possible, and it's happening with the startups. These are also strongly positioned in Germany – just like the hidden champions – especially in the B2B sector. With their products, these companies can also become world market leaders. However, we will no longer find them in the countryside, but rather in Munich or Cologne or in Dortmund. I think it's rare and unlikely that a new startup will emerge from the provinces as a hidden champion. The existing companies must continue to deliver.
- You describe hidden champions as family businesses that want to operate soundly and be independent. So why are investors nevertheless also becoming more important for these companies?
Hidden champions always strive to defend their world market leadership or to open up new markets. In this context, cooperations with (foreign) companies and investors are becoming increasingly important. The existing markets of the hidden champions are changing and partnerships are needed to continue to be successful. This can be a joint company foundation, a spin-off or a joint venture, or even the financial injection of a private equity partner.
- Investor Warren Buffet likes to say that he thinks German SMEs are great. What do hidden champions offer investors?
Anyone who invests in hidden champions is making a sound medium-sized investment. The companies earn good money, have a business model that evidently works very well and are very often very solidly financed. Often, however, the question for the investor is: Does the owner want to give up any of his independence and look for a partner? And an investor has to ask himself whether the respective market of the hidden champion will last long enough. Take the shift to alternative drives and autonomous driving in the automotive industry and the automotive suppliers in Baden-Württemberg as an example. No one can say whether they will still be world market leaders in their field 20 years from now. Concentration trends can currently be observed in the automotive supplier sector in particular.
- Where must hidden champions prove themselves in NRW?
The old business model of the hidden champion was as follows: I have a physical product, this product is high quality, but extremely expensive, but also usually the best in the world in the respective application market. That was the niche. However, if customer requirements change, this is no longer sufficient.
- Because the customer wants what instead?
The customer may suddenly value other things and no longer, for example, the fact that the product is very durable or has the best performance. Instead, there should be a good service to go with it, the product should be digitized, or he no longer wants to buy the product, but only rent it. With all this, the hidden champion must rethink and adapt its products. It will not be enough to build the best physical product – the best business model will be needed. And the hidden champion has to think about whether it can still do all this on its own or whether it needs to look for partners with whom it can do it together. Competition sometimes takes place at the level of business models rather than products.
- In your honest opinion – can this succeed in NRW?
Hidden champions have always been ambitious. So the question is: Why shouldn't they succeed in transferring their business to changed markets as well? They just have to change the recipes a bit: They have to work more with external partners, they can no longer rely exclusively on their home region and have to set up subsidiaries in other parts of Germany or the world to get the skilled workers they need there. And they need to digitize their products – but many companies I talk to have already been doing this for some time.
- You just mentioned a new recipe. The company can work on it, but the state can also do something. Where does NRW have to help the hidden champions?
In principle, the state can create good framework conditions. In NRW, these are already in place in many areas. In addition, the hidden champions can be given exposure, as is the case with our study commissioned by the state government of North Rhine-Westphalia or with this interview. We can help to network the hidden champions with each other. NRW has not only hidden champions, but also outstanding startups, for example in the Aachen, Cologne or Dortmund regions. These must be brought together with the hidden champions and the manufacturing SME sector to avoid the creation of two ecosystems that exist side by side. Instead, they must benefit from each other mutually. The same applies to the universities. NRW has a dense network of excellent universities and universities of applied sciences. This is where the skilled workers of tomorrow are trained for the hidden champions of today and tomorrow.
Mr. Block, thank you very much for speaking with us.