While Singapore SMEs tend to lag behind in innovation, the 'Mittelstand firms' are at the cutting edge, despite a lack of heft
Germany and Singapore have many things in common, such as their strategic interests in value creation through innovation, and they continue to develop their strong partnership for mutual benefit. This was confirmed during a study trip to Germany that 28 Singapore Management University (SMU) undergraduates and I went on last month.
I had themed the trip Germany's "Hidden Champions" - Global Market Leadership through Innovation. Besides examining general aspects of business management and innovative entrepreneurship in several German states (Bundeslaender), the objective was to expose Singapore youth to the business logic of Germany's "Mittelstand firms", from which many lessons can be learnt.
The "German Mittelstand" refers to world-class, export-oriented small and medium-sized enterprises (SMEs). There are similarities between the German Mittelstand and Singapore's SME sector: German Mittelstand make up more than 99 per cent of all German firms, contribute almost 52 per cent of the country's total economic output, and employ about 60 per cent of the workforce.
Over 1,300 of these Mittelstand firms are regarded as "Hidden Champions", a term coined by Professor Hermann Simon to categorise these mostly family-run private companies which are among the top three in the global market with revenues below €3 billion (S$4.6 billion). "Hidden Champions" are extremely ambitious, growth-oriented and determined to maintain and further expand their global market leadership role. One of their "secrets" is operational excellence in (large) global market niches and the entrepreneurial ability to create real sustainable value for their customers.
The importance of science-driven, innovative entrepreneurship became obvious during our visit to Heraeus Holding GmbH, a global engineering group headquartered in Hanau near Frankfurt.
This leading international family-owned company was founded in 1851 and has over 12,000 employees worldwide in more than 100 subsidiaries in 38 countries. It leverages its deep material expertise and innovative technological know-how in business areas such as the environment, energy, health, mobility and industrial applications. Its new "3D start-up" (with its own laser and electron beam printers) is in the process of creating high-strength components for thrusters on navigation satellites made of precious metal powder for 3D printing.
Strategic innovation and R&D capabilities are at the core of what makes Germany's "Hidden Champions" tick.
In Baden-Wuerttemberg, my students took a closer look at the strategic business and innovation management systems of Durr AG and the Mann+Hummel Group to appreciate what it takes to create value through innovation management and to gain insights into the inner workings of Germany's (networked) automotive cluster.
One example of Durr's innovation efforts is its "Eco+Paintshop" which offers customers in the automotive industry around the world a paint shop with optimised energy utilisation, better environmental compatibility, paint cost savings and lower unit costs.
Mann+Hummel produces various filter elements for the international automotive and mechanical engineering industries. As engine compartments in cars require more space for new types of electronics, air filter systems must adapt to this trend in line with changing installation conditions. The firm's research and development specialists ensure that the company responds to this new development with innovative product solutions.
At the Mercedes-Benz Training Centre in Esslingen-Bruhl, the students gained deeper insights into Daimler's "dual" training and higher education approach. A key feature of the German dual system of vocational training is the close integration of both companies and educational institutions in teaching and training so that apprentices can apply newly acquired competencies within their companies.
Singapore continues to learn from the German experience as exemplified by the foundation of the German-Singapore Institute (now part of Nanyang Polytechnic) in the 1980s, an early pioneer of the Teaching Factory concept with its emphasis on a realistic, practice- oriented learning environment with a focus on problem-solving and productive employability.
The recently implemented collaborative Dual Studies Industry Sponsorship Pioneer Programme, comprising local polytechnics, Singapore Institute of Technology, German firms (which sponsor local polytechnic graduates who complete their university degrees in Germany) and Singapore's Economic Development Board is a more recent example.
A value-creating economy requires well-trained, loyal and highly qualified employees. The success of the German automotive cluster and participating firms such as Mann+Hummel or Daimler depends on a high quality technical and vocational training system. Trainees are well paid and acquire core competencies in an environment conducive to learning through highly skilled master craftsmen. One of the outcomes is a high performance work culture (another hallmark of Germany's "Hidden Champions"). This in turn provides a fertile ground for technology innovation and greater production efficiency as we observed during a visit to the Mercedes-Benz plant in Berlin (established in 1902) and a tour of the BMW factory in Regensburg (Bavaria) where robots work right next to auto workers.
Lightweight construction, digitalised (Factory 4.0) production systems, new materials, processes or the abolishment of the assembly line and the need to further reduce the harmful environmental impacts of mobility in general represent some of the challenges for R&D specialists in Germany's automotive cluster and beyond. DLR's (German Aerospace Centre) Institute of Transport Research which we visited in Berlin, for example, is involved in various innovative research projects on mobility and traffic with special focus on developing a "smart" inner-urban, sustainable cycling infrastructure, car and bike sharing and electro-mobility.
Closeness to customers was a common pattern in all firms we visited. Not only do they go the extra mile to reach out to customers in order to be of value and to further enhance their business models, but they also increasingly support the establishment of networked innovation hubs such as the new German Tech Entrepreneurship Centre (GTEC) at the European School of Management and Technology in Berlin.
GTEC is Germany's first open campus to unite technology-based start-ups, international corporations, academic institutions, accelerators, venture capital funds and business angels in one location. "Berlin Valley" has become a dynamic hub for digital entrepreneurs and start-ups driven by smart people, low rents and a vibrant alternative innovation culture.
At BMW's new Research and Technology House in Garching (near Munich), we could observe a similar trend. Like in many other German firms, the gates are wide open at BMW for external ideas. Through its BMW Start-up Garage, automotive start-ups (which target exclusively the automotive industry) and start-ups from other industries (with value- added technologies for the automotive industry) can enter into a co-development partnership with the BMW Group aimed at further improving BMW vehicles and customer experiences.
Innovation turned out to be very well governed in the firms visited via effective innovation management frameworks, top leadership support and capable managers. Besides relentless efforts to innovate with the objective of creating sustainable business and societal value driven by the need for better environmental compatibility and cost savings, "coopetition" (cooperative competition) emerged as a powerful driver of Germany's export-oriented automotive cluster.
While the government provides leadership and resources, it is the visionary business community which takes charge because it has realised that cooperation with other cluster firms, universities and research institutions deep into and across the value chain pays, as they are able to reach a higher level of value creation by jointly pushing the frontiers of new knowledge creation and R&D.
Singapore's vibrant SME sector would do well to learn from Germany's Mittelstand in going regional and global. Successful scaling requires the existence of international customers delighted about new products and services.
Besides a better understanding of the story of Germany's entrepreneurial innovators, we were humbled by the green hospitality of our hosts. All of them provided us with returnable water or juice glass bottles rather than non-returnable plastic bottles, a hallmark of the German recycling system.
The writer is Professor of Organisational Behaviour and Human Resources at the Lee Kong Chian School of Business, Singapore Management University (SMU), and Academic Director of SMU's Master of Science in Innovation programme.
A version of this article appeared in the print edition of The Straits Times on November 18, 2015, with the headline 'Lessons from Germany's 'Hidden Champions''. Print Edition | Subscribe
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