Hidden Champions of the Twenty First Century

What makes a good company? Reading Hidden Champions of the Twenty First Century, I feel I’ve taken a step closer to understanding.

It’s not an investment book. It’s about well-established businesses, narrow in focus, global in outlook, with loyal staff, and often ancient visionary owner-managers with big ambitions (“monomaniacs with a mission”) who nevertheless delegate and decentralise where they can.

The defining features of a hidden champion are it owns a big proportion of a relatively tightly defined market, and it has a low profile.

Investors ought to be interested in these businesses though, because they are extraordinarily profitable.

Their customers generally pay a premium for their products and services, and their managers think decades or even generations ahead.

They’re not miracle companies, many operate in competitive markets, and some, like Reflecta, the former market leader in slide projectors, become failed hidden champions.

By and large they succeed by doing lots of little things right. Hermann Simon’s mission in this book is to identify the sometimes conflicting things they do so well. Many are old fashioned virtues: they work very closely with customers, they reward loyalty, they don’t borrow much, they innovate, they keep costs down, and they don’t outsource core competencies.

To expand on just one example, there’s an obvious problem for growing companies in tight niches: What happens when they can grow no more because they already dominate the global market? The answer, in many cases, is ‘soft diversification’: setting up autonomous operations in closely related and equally tightly defined markets. Make new hidden champions in other words. Not all diversification is diworseification.

As early as chapter two I surprisingly felt unabashed joy as Simon briefly introduced the champs. They manufacture or supply shopping carts, casters for hospital beds, cell-phone ring tones, stage equipment, sensors, gummy bears (that’s Haribo by the way – my kids love ‘em. Personally, I prefer Ritter, also a hidden champ), and the citric acid in every drop of Coca-Cola. We learn:

Warsaw, Indiana, has a population of only 12,145 and is called the “orthopaedic capital of the world.” This little town hosts three world leaders in orthopaedic… implants.

Klais, whose organs can be heard from Beijing to Brisbane, has a staff of only 65, and Essel Propack of Mumbai makes 33% of the world’s toothpaste tubes. Nivarox, has a 90% (not a mistake) share of the market for watch regulating mechanisms.

Some of the hidden champs, like Gore and Zimmer, are famous but most are hidden because they don’t make consumer products, but crucial bits of them, or bits of things that make them:

How many hotel guests care about which software is used for making room reservations?

Simon asks

…When consumers buy a bottle of soda, do they stop to consider how the liquid got into the bottle or how the label was attached?

The oldest hidden champion is Achenback Buschütten, which produces three quarters of the world’s aluminium roller mills. It was founded in 1452.

I’m sorry for listing so many hidden champions, but they’re the stars of the book, the cogs of capitalism or as Simon says, the companies that built the factories that made China the workshop of the world. The enthusiasm I feel as I recall them comes from the revelation that there are so many diverse companies for investors prepared to look beyond the super-giants of the FTSE-100.

But you have to look hard because hidden champions are rare, only 10% of hidden champions in Simon’s database are listed, cheap listed hidden champions are even rarer I imagine, and most of them don’t want to be found. The ceo of the world’s largest sewing needle manufacturer says:

…every unwanted public mention of our company counteracts our efforts to stay unknown.

Hidden champions don’t want their customers and competitors to know how big their profit margins are. They prefer to focus on their businesses than make it onto the front page of Fortune magazine.

I’m sometimes asked if being a journalist gives me privileged access to companies. Well sometimes, but not to this kind of company.

The company Simon founded in 1985, Simon Kucher & Partners, is something of a hidden champion itself, a consultancy focused on practical profit improvement strategies.

His consultancy benchmarks champs and contenders against quantitative and qualitative factors established over decades of study. In defining what makes a hidden champion, the book can’t tell you whether a company is cheap or not, but it can help enormously with the other side of the investing coin: what you’re getting for your money.

The bad news for UK investors is Simon reckons 80% of all midsize world market leaders (aka hidden champions) come from Germany and Scandinavia and the only UK companies I recall reading about are Regus and the somewhat tarnished De La Rue. I can’t help wondering whether the pre-eminence of the US and UK stock markets, and the extreme short-term focus listings tend to demand of companies, has stymied their development in our countries.

Even so, I see some of the qualities of hidden champions in companies like Diploma (currently under consideration for the Thrifty 30 portfolio), FW Thorpe and Dewhurst, and I intend to keep looking thanks to Simon’s occasionally repetitive but mostly inspirational book.

I made 299 notes on my Kindle reading Hidden Champions. I intended to page through them summarising and reordering the key points. I got as far as note 16 before skimming the rest and writing this review. I’m afraid you’re just going to have to buy the book or I’ll be writing about it for the whole of next week.

It was recommended to me by Geoff Gannon, a blogger who really seems to understand business. He tweeted:

It’s such a good book. Anyone who internalizes what’s in there is halfway to understanding how Buffett looks at businesses.

He must be talking about Warren Buffett’s concept of ‘durable competitive advantage’ which is notoriously difficult to identify.

Buffet can spot it, and so I think, can Simon.

BTW: Bargain hunter Peter Cundill’s biography is also only my reading list. Yorkiem’s just reviewed it.