Interview with Prof. Dr. H.C. Hermann Simon | German business leader & author

First published in M+V’s India Insight in September 2011

Using agencies, importers and distributors does not help companies to achieve their goals!

M+V: You came up with the concept of the Hidden Champion — how do you define them?

Simon: Hidden Champions are among the top 3 companies in their global market, they have revenues of less than 3 billion euros, and they are relatively unknown. They are defined by two distinctive features of their strategy: their focus and their globalisation. On the one hand, focus is a prerequisite for achieving world class, but makes a market small. Through globalisation, even small markets become sufficiently large. In this respect, the twin pillars of focus and globalisation are inextricably linked.

M+V: What do Hidden Champions have in common in terms of globalisation?

Simon: Hidden Champions do not delegate entry into new markets to importers, distributors or agencies, but instead establish their own presence in the target markets. Many of them have more than 50 subsidiary companies in other countries and more than half of their staffs are employed outside the companies’ home markets. Not only production but also research and development are increasingly being relocated to the target markets. The BRIC countries are playing a key role for the Hidden Champions.

M+V: Why is it that Germany plays a leading role in the global economy?

Simon: There are a multitude of medium-sized German companies which have long been much more internationally positioned than equivalent firms in France, the USA or Japan. But, we should also bear in mind that the establishment of an international market presence requires enormous resources and long time periods. In this respect, the bottleneck is most often not the financial side, but qualified personnel. Hidden Champions have very autonomous corporate cultures and require specialist expertise, so they usually have to develop their own executive personnel from within. This process takes many years and in this respect the establishment of subsidiaries in the target markets cannot proceed as quickly as one would like.

M+V: You called a chapter of your book “The Economic Trends of the Future” [Die Wirtschaftstrends der Zukunft] “accelarated globalisation”. How can (or must) medium-sized companies prepare themselves for this acceleration or the next phase of globalisation?

Simon: It is clear that the bottleneck on the route into a new market lies with personnel. I think that the major challenge in the next phase of globalisation will be the internationalisation of executive personnel. Smaller countries such as Switzerland or Singapore are much further ahead in this regard than Germany, who again is more advanced in this than other larger countries.

M+V: What opportunities do you see for medium-sized foreign companies in India?

Simon: Medium-sized German companies have proven themselves to be incredibly flexible when it comes to adapting to foreign markets and understanding their customer habits. However, we should not underestimate the complexity of the situation. These firms, which are still relatively small, must be present in an increasing number of markets, but they do not possess the staff and the major administrative machinery required to manage and monitor the entire situation. This is why they require different, decentralised styles of management which are only possible with highly-trained employees who can be trusted one hundred percent. Not all efforts are immediately successful and it often takes several attempts to find the right managers and employees. India is the second most important emerging market for medium-sized German countries after China, and this position is becoming stronger. The newly emerging ultralow-cost segment presents a particular challenge. I wrote an entire chapter about this in my book “The Economic Trends of the Future” [Die Wirtschaftstrends der Zukunft]. Of course, the most famous example of this is the Tata Nano. This car model is essentially a German car: Bosch is the main supplier and a further nine German suppliers also provide parts for this vehicle. A few of these are typical medium-sized companies. Of course, it is becoming very difficult to make a profit due to the extremely low prices (the Tata costs approx. 2,500 dollars or 100,000 Rupees). But if we manage to get this problem under control, there is unlimited potential for growth for medium-sized German companies in India and similar emerging markets.

M+V: Frugal innovation is the hot topic in India. Foreign companies are developing products for the Indian market in their own R&D departments in India. Do you think that foreign companies can also score points in other markets such as South Africa, Brazil or China with products that are “Made in India”?

Simon: Absolutely. The world‘s population is currently reaching 7 billion people, but most industrialized products are only reaching 1.5 to 2. billion people. These are the typical customers from highly developed countries, which is why I am a staunch advocate of tackling the cost issue. However, this is not possible with the current complex high performance-products and this is why companies must localise. On the one hand, this involves manufacturing in India, but it also requires relocating R&D for these countries to these countries. In many circumstances, products will then be created for other markets such as South Africa, Brazil or China, because their needs are similar to India’s.

The average medium-sized company thinks that markets such as India will develop towards meeting their product; they wait for the market to reach “maturity” and orientate themselves towards the standard of the developed markets. Only very few medium-sized companies actually deal properly with the target market, and some even adopt a contrary stance and believe that they could ruin their leading brand by opening up a market with a second cheaper brand. Instead of adopting this position, medium-sized companies should concentrate on the target market and its consumer requirements. They should be market, rather than product driven.

M+V: The European businessman thinks that he cannot earn any money in the mid-range and low-end segments. Is this also true in the case of companies that are involved in globalisation — how do you see it?

Simon: The high-end segment is often only a single-digit percentage of the overall market. Let’s take the market for plastic injection moulding machines as an example. European manufacturers are the technological leaders in China, selling approximately 1,000 machines there per year. However, beneath that is a segment that is not so demanding in terms of technology and this accounts for 5,000 units and is covered by Japanese and Korean companies. Then comes another segment that is slightly lower again, in terms of its technological requirements, accounting for 20,000 units. This segment is covered by local Chinese companies. So, the overall market is 26,000 devices, but the European manufacturers only account for 1,000 of these — just under a mere 4% — and now, we have to ask the question as to whether a company in the top segment can survive in the long term, when the mid-range to low-end segments are catching up year on year in terms of technology. I don‘t think so.

M+V: So, companies essentially need to get fully involved with the target markets and often radically simplify their products without affecting the basic quality. Get rid of the extra frills and instead adapt to the requirements of the target market and then provide products at marketable prices?

Simon: Yes, the third wave is definitely the relocation of R&D. First pure sales, then production, followed by relocation of R&D, in order to address the needs of the low-price segment — the true mass market in emerging countries. Siemens developed a diagnostic device in China to be sold in China but also in other emerging markets. The price is approximately € 600,000, while the equivalent standard device sold in highly developed countries costs around € 2,000,000. The cheaper device of Chinese origin became a success in the target markets because it much better suits the available financial means and also the lower technological requirements. But, this device has since become a huge success in the USA, but it’s not by “cannibalising” the more expensive device. Quite the reverse: the company has opened up a new target group in the form of smaller hospitals that cannot afford and do not wish to buy the device that costs €2 million, but are satisfied with the performance of the leaner instrument. This is a case which proves that a product that originates from the emerging markets can be successful in traditional, high-price markets.

Adaptation to the market and simplification of products do not equate to inferior quality. It is to be expected that successful companies will get to grips with this balancing act, no matter where the product is manufactured or developed. And believe me, successful companies will pass this test with flying colours!

Thank you Prof. Dr. Simon for this interview!

Prof. Dr. H.C. Hermann Simon is a German business leader and author. He is the founder and chairman of Simon-Kucher & Partners Strategy & Marketing Consultants. Simon has published over 30 books in 25 languages, including the worldwide bestseller Hidden Champions, and he writes articles for several international newspapers and business magazines like the Manager Magazin. Simon is an expert in strategy, marketing and pricing. In the German language area he was voted the most influential management thinker after the late Peter Drucker.