China has become the best testing ground for innovation



Special: WE Talk 东西问 中外对话

(ECNS)– European countries such as Germany are home to a large number of “hidden champions” who dominate the respective industry but remain little known to the world. In contrast, Chinese companies often dream of growing stronger and possibly going public. What are the implications of these different approaches? What can Chinese companies learn from German “hidden champions”? And will they become the toughest future competitors of Germany’s “hidden champions”?

In the last WE Talk, Hermann Simon, founder of the “Hidden Champion” theory and renowned German management researcher and Chen Jin, professor in the Department of Innovation, Entrepreneurship and Strategy at the School of Economics and Management and director of the Technology Innovation Research Center at Tsinghua University were invited to discuss the above topics.

Mr Simon believes that three pillars – ambition to be the best, focus, globalization – combined with a long-term orientation, will lead to the success of a “hidden champion”. Deep technology and concentration are the advantages of German companies, while Chinese companies do better in terms of development speed and better environment for R&D. China has become the best testing ground for innovation, especially digital innovation.

Professor Chen said American companies are strong in strategic innovation, German companies in technological innovation and Chinese companies in resource integration and innovative business models. If we can follow the trend of global operations, establish multinational enterprises that integrate different cultures and civilizations, and achieve coordinated development through Sino-German-American cooperation, it will be very conducive to the development of the entire global economy.

Here is an excerpt from the dialogue:

China News Service: The “hidden champion” theory proposed by Professor Simon is famous all over the world. Germany and other European countries are home to a large number of “hidden champions”. In contrast, Chinese companies often dream of growing stronger and possibly going public. What are the differences between German and Chinese companies?

Herman Simon: A “hidden champion” is a company that is among the top three in the global market, has a turnover of less than 5 billion dollars and is little known to the public. Because they are medium-sized companies that serve particular markets, niche markets. But they do it very quietly. And in all of them you can be the global market leader and these are the “hidden champions”.

We must understand that the Chinese economy is at a different stage of development than the German economy. First, if we look at globalization, Germany is very advanced in globalization. German hidden champions generally have more than fifty subsidiaries of their own. And the Chinese, usually less than ten.

The second aspect is innovation. The Chinese “hidden champions” invest very heavily in innovation, in research and development. Nokia is gone and HUAWEI is in the lead. So I think this is a basis for very strong future competition from Chinese “hidden champions” against German “champions” (and other European countries).

Chen Jin: The German “hidden champions” perform well because the country is highly industrialized while China is still in the intermediate and advanced stages of industrialization. It is therefore necessary for Chinese enterprises to continue to increase their investment in technological innovation. At present, some Chinese companies have stepped up efforts to develop “hidden champions” or specialized ones, but there is still a big gap between the number and level of development of “hidden champions” in China and Germany.

China News Service: Professor Simon said Chinese companies will repeatedly be the toughest competitors to Germany’s hidden champions. Apart from competition, is there enough room for companies from both countries to have win-win cooperation?

Herman Simon: Yeah, that’s definitely the case. And it is already happening. We see that the German “hidden champions” are very strong in China already that they operate more than 2000 factories.

In the other direction, you see the same thing. We have had over the last 7 years more than 300 acquisitions of German companies by Chinese companies. And of those, about 50 are hidden champions. So now many companies in Germany are actually Chinese owned and still operated under the German name and this company is doing very well. But the total number of Chinese greenfield factories in Germany is still very small. Now it’s 5 compared to those 2,000 Germans in China. This again reflects a different stage of globalization, but we expect a very strong wave of Chinese investment in Germany.

Chen Jin: There is plenty of room for Sino-German cooperation because China is a developing country with a large population and modernizing consumption. Its huge market offers good opportunities. Both traditional infrastructure and new infrastructure based on digitalization have provided golden opportunities for cooperation between Sino-German enterprises.

China News Service: How do you see the shortcomings of Chinese, American and German companies in terms of innovation capacity?

Herman Simon: I would say that the two outstanding abilities of the Germans are deep technology and concentration. The Americans are very good at organizing processes. And then the Americans often set the international standards. The Chinese have several other assets. Its speed. I am always impressed by how quickly Chinese entrepreneurs develop and implement things. And then a kind of new finding that Chinese consumers are more willing to accept, to adopt innovations than German consumers. China has thus become the best test market for innovations, especially digital innovations. You really see if you will succeed.

We have quite a few areas where China is a market leader, railway technology, high-speed trains, artificial intelligence, also in other industries. For example, a German hidden champion establishes its artificial intelligence center in Shanghai. Because they say that in China we have better opportunities, better conditions to develop artificial intelligence products and processes than in Germany.

Chen Jin: American companies are strong in strategic innovation, German companies in technological innovation, and Chinese companies in resource integration and innovative business models. So mutual learning must be practiced. If we can follow the trend of global operations, build multinational enterprises that integrate different cultures and civilizations, and achieve coordinated development through China-Germany-US cooperation, it will be very conducive to the development of the whole world. economy

China News Service: How can Chinese enterprises learn from successful German “hidden champions” and embark on the path of independent innovation for long-term success and specialization?

Herman Simon: Three pillars – ambition to be the best, focus, globalization – combined with a long-term orientation, is the hidden champion’s receipt for success.

Ambition to be the best. Focus, only focus leads to world class, Focus however has a downside. It makes the market small. Because you may find yourself in a niche. How to make it big? by globalization. With globalization, the niche market becomes important enough for medium-sized businesses. These are the most important guidelines for the Hidden Championship.

And another very important aspect of this long-term orientation is employee retention. The annual employee turnover rate in German Hidden Champions is only 2.7%, so extremely high employee loyalty.

Chen Jin: Some Chinese enterprises have begun to step up their investment in core technologies, and the Chinese government has realized that small and medium-sized enterprises should strive to become “hidden champions”. There is a need to make them powerful players in the market rather than followers of big business. In terms of innovation ability, we aim for specialization and strength, and our business philosophy should focus on long-term and sustainable development.

China News Service: Are the rules played by “hidden champions” still in effect today?

Herman Simon: It’s a totally new game where exports are increasingly being replaced by direct investment. So we’ve seen since COVID-19, since the US-China trade disputes in particular, now since the Ukrainian disputes, that global supply chains have collapsed. We are witnessing a totally new reconfiguration of global valuation.

We have to do them in the target markets and not ship products all the time all over the world and have those risks in the supply chain. So it’s a whole new game. I see it as a development of globalization, more regional and complete value chains and less exports between regions.

China News Service: How do you see the similarities and differences between Chinese and German entrepreneurship?

Herman Simon: First, both people are very industrious, hard-working. This is an important similarity. We also both have a kind of engineering spirit. And when I give speeches in China, I often ask a question, who among you wants to become a hidden champion? who has the ambition to become hidden champion? 50% raise their hands. It is even more than in Germany. That entrepreneurial energy and ambition is very, very similar, and I think it all has to do with Confucian and German ethics, work ethic, and so on. And this, in a broader sense, is a very good basis for win-win cooperation. In fact, things work better between Chinese and Germans than between Germans and Americans.

Chen Jin: I think Chinese entrepreneurs are deeply influenced by Confucian culture. At the same time, some Taoist ideas were integrated, thus forming a new Confucian culture with combined order and flexibility. Many ideas of Chinese and German philosophers are similar. In the future, we should emphasize global business enterprise unity and work together with universal love.


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