Introduction
The growth of emerging economies has arguably
been the greatest talking point in international economics over the past 30
years. A number of geopolitical, social and economic events in the 1980s and
1990s effectively put in motion a series of consequences that brought many
emerging economies to enter the world economy on a much greater scale than had previously
been the case.
Although this process continues today, the
events of five countries in particular merit attention on the basis that they
provide clear examples of where this was the case. These countries are Brazil,
Russia, India, China and South Africa (now colloquially referred to as ‘BRICS,’
more of which later)[1].
All five have achieved astonishing growth over the past 30 years, moving from
being economic backwaters to the forefront of global trade.
The events that contributed to the growth of each
are too numerous and diverse to list here, but highlights include the fall of a
military dictatorship and restoration of full democracy in Brazil in 1985, the
fall of a socialist regime, mass privatization and move to free-market
capitalism in Russia after 1991, India’s move to liberalize its economy in
1991, China’s ongoing opening up of its economy and South Africa’s rejoining
the world economy after the end of Apartheid in 1991.
A combination of these events, combined with
the sheer scale and growth potential of the countries in question, put them
firmly on many large companies’ radars. (McDonalds began discussions with
Russian party officials to open in Russia as early as 1976 – a full 14 years
before finally opening its first restaurant in Moscow(marketwired, 2010)). Several
case studies have been written on the strategies taken by such large firms
entering these countries in the intervening period, and the findings that can
be taken away from them.
Large firms weren’t the only ones becoming
interested in these countries, however. Somewhat inevitably given the
opportunities inherent in this group of countries, smaller firms also began
carrying out business in these countries, contributing to the striking upward
trend in global trade that they have experienced over the past 30 years. Most
of the firms aren’t nearly as visible as a global giant like McDonalds but
nevertheless, occupy niches where they can thrive in these countries.
At least one empirical survey into the activities
of German Hidden Champions in the BRICS, discovers that the BRIC markets are
perceived to be of high and growing importance (Buse and Tiwari, 2014, p.1) This wave of small- and medium-sized firms into the BRICS has brought
with it increasing attention not only on the BRICS, but also on the firms
themselves.
Kapoor and Tewari (2010, p.151) note: “Each of the BRIC countries has had different models of economic development.
Brazil is a domestically oriented service economy. Russia’s economic development
is heavily dependent on energy and raw material resources. Indian economy is
essentially service-led. And China’s economic developments driven by
manufacturing exports and investment.” Therein lies one of the difficulty in
any study on the BRICS group. And this is before South Africa is even
considered.
Several other questions also arise: what is
that makes their exports to these countries thrive? Are there some strategies
that can be seen to be working in the BRICS, despite the relative hardship
they’ve experienced in the past couple of years? And are there lessons provided
by the group of small- and medium-sized firms that can be taken on even by
larger firms active in the BRICS?
This paper seeks to provide some context for
these questions, from the perspective of an elite group of firms known as ‘Hidden
Champions.’ It will begin by providing a historical context for the terms BRIC,
Hidden Champions, FDI and international trade before moving onto an individual
analysis of each one of the BRICS. From there, based on existing research of Hidden
Champions, it will seek to develop a strategy framework for a German Hidden Champion
looking to enter Brazil in the coming years. The paper will conclude with
current analysis of the BRICS and assess whether they will continue to be of
importance to Hidden Champions.
1.1 Defining Key Terms
Hidden
Champions
In 1986, the US economist and Harvard
professor, Theodore Levitt posed the question: “why is Germany so successful in
exports?” It was a reasonable question. Then, as now, Germany dominated world
exports. In 2015, Germany’s exports were the second biggest in the world,
despite the German economy being far behind those of the USA and China in pure
GDP terms.
The question also attracted the attention
of various students in the management field, among them, Hermann Simon, a
principal of the German management consulting firm, Simon-Kucher &
Partners. Kucher noted that the majority of German exports were not made by
large, visible German firms like BASF and Mercedes, but rather thousands of
smaller firms with revenues under $1 billion.
 |
| Hermann Simon: the brains behind the 'Hidden Champions' concept. |
Upon closer inspection, Kucher noticed
that these firms shared more than a revenue bracket. He developed a term, ‘Hidden
Champions,’ a group of companies – not only German, but typical among the
thousands of Mittelstand companies in particular – which broadly shared a
number of characteristics that made allowed them to be grouped under the term.
According to Simon’s model, these characteristics are:
1.
The company should be among the top 3 (by sales
figures) in the world market or number 1 in its home market
2.
Generally, the firm’s total revenue will not
exceed €5 billion
3.
The firm as a general rule will pass unknown to
the general public (it appears “hidden” to them)
This “hidden” element makes the firms more
inclined to be B2B businesses, rather than B2C businesses – insinuating less
contact with the end consumer. Likewise, they tend to be non-listed businesses
which are family-owned and often held by fourth or fifth generations of the
family. Simon (2009) estimates that of nearly 3,000 worldwide, just under 50%
of these businesses are located in Germany. This in itself is significant in
that it means these firms cannot count on the cheaper labour of, say, a Chinese
business in the same industry. In fact, Simon (2009) estimates a typical price
premium of between ten and fifteen percent for a Hidden Champion product – sometimes even
higher.
The “hidden” element is not always coincidental,
either. Simon (2009) notes several CEOs of Hidden Champions which revel in
their own company’s veil of secrecy. The CEO of the world’s leading
manufacturer of textile needles said: “Every unwanted public mention of our
company counteracts our efforts to stay unknown.” The CEO of a global leader in
electronic connectors told Simon: “I welcome your research but at the same
time, I am reluctant for our company to appear in your publications.” With two
more CEOs telling him: “I’m sure I don’t have to tell you that Hidden Champions
are successful because they handle their success strategies with discretion,”
and “We have cherished our anonymity for years and feel very comfortable about
it. Nobody has noticed our niche.”
These businesses are models for small and
medium-sized enterprises on how to export. Their global leadership is based
primarily on exports, with some such as Saes Getters of Italy, to take one
example, earning 98% of revenues outside their home country. When small and
medium-sized firms like these have been so successful in exports, an incentive
exists for onlookers to find out how the pattern might be repeated,
particularly in markets like the BRICS.
It also has to be remembered that, at least in the case
of emerging markets, these exports come against the backdrop of a customer base
with much lower incomes. Buse (2014, p.3) cites the example of a German car
component manufacturer who says to deal successfully in that industry in India,
“you need a product which costs 30 % of the global price and offers 95 % of the
performance.”
Finally, Venohr and Meyer (2007, p.9) provide a list
(see below) of the characteristics which are typical to Hidden Champions. These
are adapted from Hermann Simon’s findings and are indicative of what it means
to be a Hidden Champion.
1. Hidden Champions strive for world market leadership to become No. 1 in
the world in their markets/segments
2. Market definition is an important part of strategy development, usually
leading to narrowly defined markets, both from a customer and technology
perspective and a highly focused strategy.
3. Specialization in product and know-how is combined with global selling
and marketing. They serve the target markets through their own subsidiaries and
do not delegate the customer relationship to third parties.
4. Hidden Champions are very close to their customers in particular to
their top customers. They are value, not price oriented.
5. They are highly innovative in both products and process, not only
confined to technology. Innovation activities are globally oriented and
continuous.
6. The overall company orientation is not one-sided but both technology and
market driven.
7. Hidden Champions create competitive advantages in product quality and
service. They are close to their top competitors and defend their position
ferociously.
8. They rely on their own strengths. They mistrust strategic alliances and
outsource less than other companies. Their value chains are deep. They see the
foundation of their competitive superiority in things which only they can do.
Together with lesson 2 their strategies could be defined as “deep rather than
wide”: Deep in their value chain, not wide in their coverage of different
markets with different needs.
9. Hidden Champions have very strong corporate cultures associated with
excellent employee identification and motivation. Selection for jobs is sharp.
10. Their leaders are very strong and stay at the helm
for decades.
BRICS
On November 30 2001, the investment bank Goldman
Sachs released its Global Economic Paper #66, under the title, “Building Better
Global Economic Brics.” Therein, it was suggested that in the following ten
years, the ‘BRIC’s (standing for Brazil, Russia, India and China) would
increase their collective share of the global economy from 8% in 2001 to
anywhere between 12% and 27% (O’Neill, 2001,p.7).
On the basis of this growing economic clout, the
author also suggested that the BRICs should have an increased say in global
policy: ‘following on from the above, it seems quite clear that the current G7
needs to be ‘upgraded’ and room made for the BRICs in order to allow more
effective global policy making.’ (O’Neill, 2001,p.10). As one Financial Times
article later noted: ‘the paper immediately sparked interest among Goldman
Sachs’s corporate clients.’ (Tett, 2010).
In 2010, the term BRIC moved from being what was
effectively a marketing term for ETFs (global asset management giant BlackRock
has had a BRIC ETF since 2007[2])
to a summit of its constituent nations in 2009 (Faulconbridge, 2009) to a
five-country summit in 2011 on the addition of South Africa (Hervieu, 2011) to
a fully-fledged economic bloc with its own development banks, the NDB and the
CRA, in 2014 (The Economist, 2014).
Jim O’Neill told the Financial Times in 2006: ‘I
believe…that opportunities from investing in either the BRIC economies or
BRIC-,like companies with exposure to the BRIC economies are the best strategic
investment of our time by some distance.’ (The Financial Times, 2006) A 2013
Marketwatch article (Wood, 2013) stated that: ‘collectively, the five BRICS
nations account for 42% of world population, 20% of output and nearly all of
the growth in the global economy.’
The success of the BRICS acronym was also
arguably responsible for the emergence of several more acronyms in the years
after 2003. Among them, where the MINTs, coined by Fidelity Investments in 2011
and standing for Mexico, India, Nigeria and Turkey, (Boesler, 2013) and the
“Next 11” or “N11,” introduced by Goldman Sachs again in a research report in
December 2005, which comprised 11 potentially attractive emerging markets
(Martin, 2012). Ultimately, none gained the popularity of the BRICS acronym –
arguably, because none had as strong a logic.
As of late 2015, the BRICS are experiencing
levels of economic growth far below their heyday of the early part of the
millennium, which can also affect managers decisions to invest there. Khanna,
Palepu and Sinha (2006, p.5) for example, state that firms tend to “follow key
customers or rivals into emerging markets; the herd instinct is strong among
multinationals.” The vogue for BRICS seems to have diminished somewhat over the
past year with Goldman Sachs dropping its $100 billion assets under management
BRICS fund in late 2015 (Timmons, 2015). Nevertheless, the sheer size of the
markets in question will continue to make them relevant, long into the future.
Taking into account everything discussed above,
including statistics surrounding the BRICS, their own development bank and
their increasingly organized inter-political structures, the BRICS present not
only a logical destination for transnational companies looking for new markets,
but also create the need for a BRICS strategy whereby those firms looking to
operate in these markets do so in a more effective manner. Examining the
breadth of these strategies is the goal of this paper.
Foreign Direct Investment
The World Bank defines Foreign Direct
Investment (FDI) as: “direct investment equity flows in the reporting economy.
It is the sum of equity capital, reinvestment of earnings, and other capital.
Direct investment is a category of cross-border investment associated with a
resident in one economy having control or a significant degree of influence on
the management of an enterprise that is resident in another economy. Ownership
of 10 percent or more of the ordinary shares of voting stock is the criterion
for determining the existence of a direct investment relationship.” (World
Bank, 2015)
Given the World Bank’s definition, we can
assume that most, if not all, of the investment made by Hidden Champions in the
BRICS can be categorized under the FDI umbrella. In 2013, the UN estimated that
total FDI in the BRICS had doubled from its pre-crisis level to approximately
$322 billion (UNCTAD, 2014). That meant that FDI in the BRICS accounted for
over 20% of global FDI, with three of the countries in the top 10 biggest
recipients of FDI: China (2nd), Russia (3rd) and Brazil
(7th). In total, FDI was up by 21% on the previous year.
Despite various complications in the BRICS in
2014, research shows that the combined FDI flow for the BRIC countries
(excluding South Africa, for comparison’s sake) was again up on 2013. China
moved to the number one spot on the largest FDI recipients with $128 billion in
inward FDI (BBC, 2015) while Brazil’s inward FDI was slightly down at $62 billion
(Deloitte, 2015), India’s inward FDI was up 25% at $35 billion (Economic Times,
2015). Russia’s FDI was distorted by the investment bans imposed by both the US
and the EU and was estimated at around $41 billion in 2014, down from $80 billion
the year before (Gregory, 2014).
If the importance of the BRICS in companies’
agendas wasn’t clear until now, the FDI figures should confirm it. Likewise,
the growth of FDI in this group of countries (with the presumably temporary
exception of Russia) suggests their growing importance. Everything therefore
points to a situation where Hidden Champions will want to gain a further
understanding of these markets, in turn develop effective strategies for them
and ultimately, increase their own direct investment (FDI) in them.
There
is more than one way to invest in a country, but it’s important to make the
distinction (as we have done) between FDI and international trade. Over 340,000 German companies export, and over 100,000 companies have some
form of direct investment abroad. We estimate that SMEs with annual revenues of
less than € 1 billion account for about 40% of all German manufactured goods
exports. However, not only German SMEs are prospering in global markets, ¾
of the Hidden Champions have direct sales. In the following section, the issue
of direct sales and international trade is addressed.
International Trade
International trade is a measure of all goods
and services that a country trades with other countries. For any country, its
total international trade is the sum of its imports and exports. China is the
the world’s leading country for international trade, which has the tendency to
distort the figures for the BRICS nations. Nevertheless, India and Russia are
also among the top 20 in the world in this regard.
One might view the BRICS trading bloc as a
significant move towards increasing the international trade of its constituents
and so it has proven. The World Trade Organization (Brazilian Government,2013)
shows that between 2001 and 2011, the group increased its share of
international trade from 8% of the global total to 16%. In addition,
inter-BRICS trade grew from $27 billion to $276 billion in the same period.
As with those for FDI, the growth in
international trade figures suggests several things are happening inside and
outside BRICS:
-
A rising consumption class in the BRICS who not
only look for foreign products and services in their own countries, but are
also travelling in increasing numbers
-
Increased willingness among their domestic
companies to export
-
Falling trade barriers like the BRICS trading
bloc discussed elsewhere in this paper
-
BRICS moving up the agenda of companies (among
them, Hidden Champions)
A word of caution should be stressed about the
future growth of international trade in the BRICS, however. Barriers to trade
such as quotas and tariffs still exist in abundance in the BRICS, which are
sure to hinder further growth of their international trade. The International
Chamber of Commerce (ICC)’s Open Markets Index (OMI), compiled through ongoing
analysis, provides an overview of their openness of to conducting international
trade. In its 2015 edition (ICC, 2015, p.13), Brazil ranks 70th,
Russia 57th, India 63rd,China 59th and South
Africa 50th. Clearly, there is considerable room for each of the
BRICS in order to increase their share of international trade, despite the
considerable progress made over the past decade.
1.2 Who are the Hidden Champions?
 |
| The largest manufacturer of shopping trolleys in the world is a Hidden Champion. |
Given the criteria employed by Simon (2009) to
be a Hidden Champion, there are several hundred firms worldwide that qualify.
This paper will examine one such firm from the German-speaking world.
Nevertheless, an overview of the type of firms that have been categorized as Hidden
Champions is indicative. In the table below, a sample of such firms is
presented (adapted from: Simon (2009)).
Company
|
Country
|
Overview
|
Baader
|
Iceland
|
80% global share of the world’s fish processing systems sales.
|
3B Scientific
|
United States
|
Global leader in anatomical teaching aids.
|
International SOS
|
Singapore
|
World leader in international emergency rescue
services.
|
Tetra
|
Canada
|
world market leader in aquarium and pond supplies.
|
Bobcat
|
United States
|
World leader in compact, industrial, construction and
agri-business equipment
|
Gallagher
|
New Zealand
|
Global market leader for electric fences.
|
Saes Getter
|
Italy
|
85% global market share for barium getters and 98% of
revenues are from outside Italy.
|
Hamamatsu Photonics
|
Japan
|
World leader in light sources for technical and
medical applications.
|
Arnold & Richter,
|
Germany
|
World leader in camera technology
|
Petzl
|
France
|
World innovator in harnesses, rope-blocking snap
links, front lamps and similar products.
|
Lantal
|
Switzerland
|
Global leader in cabin interiors for passenger
aircraft with a global market share of 60%.
|
Tandberg and Polycom
|
Norway
|
Global market share of 40% in video conferencing
technology.
|
De la Rue
|
United Kingdom
|
World’s largest printer and maker of security paper,
producing banknotes for over 150 countries.
|
Belfor
|
United States
|
Global leader in removal of fire and water damages.
|
Ulvac
|
Japan
|
Global market share of around 96% in LCD panel coating
equipment and a 70% share in plasma display coating.
|
Orica
|
Australia
|
Global leader in explosives for mines and quarries.
|
GEAG
|
Germany
|
25% global share of cell phone charging devices.
|
Gartner
|
United States
|
Global leader in skyscraper facades.
|
Zimmer, De Puy, Biomet and Stryker
|
United States
|
Global leaders in orthopaedic products.
|
Technogram
|
Italy
|
World leader in fitness equipment.
|
Garriets
|
United States
|
World leader in large stage curtains.
|
O.C. Tanner
|
United States
|
World leader in recognition programs.
|
Klais
|
United States
|
World leader in church organs.
|
Electro-Nite
|
Belgium
|
Global market share of 60% in sensors for the steel
industry.
|
Sappi
|
South Africa
|
World leader in coated fine paper and dissolvable
pulp.
|
Essel Propack
|
India
|
Global market leader in toothpaste tubes with 33%
global share.
|
Plansee
|
Austria
|
World’s leading manufacturer of high-performance
materials made with refractory metals and composites.
|
Dickson Constant
|
France
|
Global leader in technical textiles used for blinds,
truck sheeting, inflatable advertising objects and special protective
clothing.
|
Molex
|
United States
|
World no. 2 in electronic, electrical and fiber optic
interconnect solutions.
|
Jungbunzlauer
|
Austria-Switzerland
|
World’s largest provider of citric acid.
|
Universo
|
Switzerland
|
Global market share of 90% in and watch hands.
|
SGS
|
Switzerland
|
World leader for product auditing and certification.
|
Brainlab
|
United States
|
World leader in instrument-positioning systems for
surgeons with about 60% global market share.
|
Delo
|
Germany
|
World leader in adhesives.
|
Enercon
|
Germany
|
World leader in turbine technology.
|
Omicron
|
Germany
|
Global market leader in scanning probe and tunnel-grid microscopes.
|
Beluga
|
Germany
|
Among the global leaders in heavy-duty shipping.
|
Nissha
|
Japan
|
Global market share of 80% in small touch panels.
|
Amorim
|
Portugal
|
Global leader in cork production.
|
EOS
|
Germany
|
Global leader in laser sintering.
|
Wirtgen
|
Germany
|
World leader in road-recycling machines
|
Leitz
|
Germany
|
World leader for wood-processing tools
|
2. Strategies employed by Hidden Champions
In his 2009 book, ‘Hidden Champions of the 21st
Century,’ (Simon, 2009), Hermann Simon provides several insights into the
strategies employed by Hidden Champions -
both within the German-speaking world and without. His observations of
the Hidden Champions shows that if they are to maintain their leadership
positions, it follows that not need to develop suitable strategies. Clearly,
the strategy will depend on the industry the company operates in but a broad set
of strategic has nonetheless been observed among Hidden Champions.
Simon (2009) states that developing a Hidden
Champion strategy rests in the company’s leaders asking a set of questions
about their company and its competitive environment. This set of questions
follows:
·
Analyzing the current position: “Where
do we stand?” and other such questions are asked at the “strategy audit.”
·
Setting strategic goals: Where does the company
want to go?
·
Defining the business/market: What
exactly is the core business of the company? Which market is the company going
to do its business in?
·
Analyzing internal competencies: What
are we capable of? What skills do we have?
·
Analyzing the market/customers: How
large is our market? How quickly is it growing? Who are the customers?
How much are they willing to pay?
·
Analyzing the competition: Who are
our current and potential competitors? What are our competitive advantages?
·
Establishing a plan of action: Who
will do what, and when?
·
Anticipating outcome analysis/forecast: What
outcomes do we expect?
Adapted from Simon (2009)
2.1 The Hidden Champion formula in the BRICS
Given the broad scope of commercial activities
conducted by Hidden Champions, it follows that there is no one formula involved
in approaching a group of countries like the BRICS. Indeed, one company could
have five different strategies – one for each of the markets. However, it is
safe to assume that the Hidden Champions formula which worked so well in other
markets is also applied while approaching the BRICS with some flexibility to
account for the generally more volatile nature of emerging markets compared to
say, that of North America or Western Europe.
This means that a relationship is first
established with a new client in a BRICS market. This could be as
straightforward as sending a sample of some of the Hidden Champion’s products
or arranging a visit from one of the Hidden Champion’s representatives. Contact
established, direct sales (refer to section on International Trade) can begin.
Simon (2009) notes that 75% of Hidden Champions run direct sales – nearly
always the precursor to FDI This trend was Lael Brainard (1993, p.521), who in
the “proximity-concentration” hypothesis, noted that exporting becomes more
pronounced relative to FDI, the larger are plant-level economies of scale (i.e.
when capacity for direct sales are exhausted, FDI begins).
This is a well-trodden path by the Hidden
Champions, in particular. Simon (2009) notes: “Five times as many employees in
Hidden Champions have regular contact with customers than in large
corporations, leading to pronounced closeness.” Away
from generalities, there are specific strategies which need to be employed for
each of the countries. For example, China’s business culture demands that
connections (“guanxi”) are made in order to be successful. Firms entering that
country also often face an uphill struggle to compete against Chinese firms in
their industry which are being given a leg-up through government subsidies and
tax incentives (Schuman, 2012).
In Russia, intermittent sanctions (both those
imposed in 2014 and before), corporate strategy demands that Hidden Champions
pay particular attention to dramatic changes in every part of their business.
McDonalds, again, offers a case study about the challenges that firms can face
in the market. In 2014, there were calls in the Russian parliament for all of
its 400 restaurants to be closed as a result of EU and US sanctions against
Russia for its invasion of the Ukraine (Popov, 2014).
In one 2014 study of 22 Asian countries
(Economic Times, 2014), India emerged as the most difficult country to do
business in due to high consumer inflation, external risks caused by an ongoing
conflict with its neighbor Pakistan and “policy paralysis and poor decision
making.” Another example of the myriad of laws that companies entering India
will face is provided by the corporate
law demands that any foreign firm entering the country should have been
profitable in the five consecutive years before entering (Madaan, 2015).
Finally, in Brazil, there is no rail
infrastructure, which has the potential to create issues for any company
looking to distribute their products throughout that country. Likewise, Brazil
has one of the most complicated tax systems in the world and notoriously high
import tariffs to boot. Its large cities, São Paulo and Rio de Janeiro, home to
a combined 30 million people, are clogged with traffic and as of late 2015, the
country is experiencing its worst economic period for nearly 20 years.
None of this is to say that the BRICS are not
an attractive destination but it’s worth remembering that despite huge strides,
they remain emerging economies and entail all the highs and lows that such
economies bring. Before entering, companies should be aware that these (often)
high-growth environments will bring unique challenges and aren’t a silver
bullet, even if they are sometimes believed to be so because of how their
moniker came into being nearly 15 years ago.
Above all, these issues demand that Hidden
Champions develop strategies for the BRICS. To date, few if any academic papers
have addressed the issue of Hidden Champions developing strategies of this
type. Perhaps only Buse (2014), who looks at the innovation strategies being
pursued by Hidden Champions in the BRIC countries in terms of product
development and R&A locations comes anywhere close. This paper is an
attempt to redress that balance and focus on Brazil.
An overview of Brazil follows in the section. By
definition, each Hidden Champion will face specific challenges and
opportunities in any specific country, but Brazil’s location, the size of its
economy and the presence of so many German companies there makes it a useful
and indicative starting point for a study for the strategies of Hidden
Champions in emerging markets (Simon, 2009).
3. Analyzing
the BRICS in further detail: Brazil
 |
| Rio is Brazil's second largest city and home to many of the Hidden Champions in Latin America. |
Brazil’s location
in South makes it an effective base for Hidden Champions who wish to reach
latin America and a potential customer base of around 400 million. Although it
is the only Portuguese-speaking country on the landmass of South America, its
population of over 200 million makes it something of an inevitable first location
for any companies who wish to find a market there.
At
various stages since the inception of the BRIC acronym in 2001, Brazil was
considered the most promising of all the countries in the grouping, due to a
variety of factors. Most notably, in 2009, the Economist magazine published a
cover with the heading, ‘Brazil takes off’, (Economist, 2009). The article notes,
‘in some ways, Brazil outclasses the other BRICs. And, in some ways, Brazil
outclasses the other BRICs. Unlike China, it is a democracy. Unlike India, it
has no insurgents, no ethnic and religious conflicts nor hostile neighbours.
Unlike Russia, it exports more than oil and arms, and treats foreign investors
with respect.’
Therefore, at least among the BRICS,
Brazil would appear to be attractive in many respects. German
consulting firm Rödl and Partners (2012) surveyed 1,000 mittelstand firms on
their corporate goals in Brazil. They addressed potential obstacles and success
factors as well as issues surrounding the political, legal, fiscal and economic
conditions for doing business in Brazil. According to their findings, the
primary goal of these firms on entering Brazil was to gain market access or
increase an existing market share.
The sheer size of the market
demands that firms make it relevant. Brazil’s economic centre, São Paulo, is now a major
international metropolis with many of the characteristics that one would expect
of the same. As such, it is home to the South American headquarters of hundreds
of foreign companies of all sizes. Some of these are Hidden Champions, of
course, which thereby begs the question – what are the determinants for them to
invest there? (that is, the determinants of Hidden Champion FDI) Before
answering this question, it’s worthwhile to look at the components of FDI
itself.
3.1 FDI in Brazil
Brazil’s
stock of FDI was estimated by the CIA World Factbook at $755.5 billion at the
end of 2014, making it the 12th largest of FDI in the world. Of the BRICS, only
China ranks ahead of it, in 5th position with $1.34 trillion in the same
estimates (CIA, 2015). In 2012, the annual AT Kearney FTI Confidence
Index made Brazil the 3rd most attractive country in the world to
invest in (AT Kearney, 2013). And after considerable economic turmoil in the
intervening years, by 2015, it was still only in 6th position (AT
Kearney, 2015).
The
donors of this FDI vary by year. In 2014, Deloitte estimates that German FDI in
Brazil amounted to around 2% - considerably below the Netherlands (20%), the
United States (16%) and Luxembourg (9%) (Deloitte, 2015). It might appear from
these figures that FDI in Brazil is not particularly high on the German
corporate agenda. There is plenty of evidence to suggest otherwise, however. For
example, Simon (2009) notes that São Paulo is the place with
the largest number of German subsidiaries in the world. And in one survey of
German firms, Buse and Tiwari (2014, p.7) 88% of respondents said that BRICs
would be important over very important in their companies’ strategies in the
next five years.
Brazil has done so well to attract FDI inflows primarily because of “the
open investment regime with no restrictions on remission of profits and
repatriation of profits and repatriation of capital registered with the Central
Bank.”(Kapoor and Tewari, 2010, p.152). The
concept of BRIC in 2001 arrived shortly before the Presidential term of
President Lula in 2003. President Lula became somewhat notorious in Brazil for
spending so much time outside trying to attract FDI – according to one report,
spending over a year and three months of an eight-year term outside the country
attracting investors (Costa, 2010).
These efforts of Lula, and that of others in the private sector, almost
certainly helped increased FDI inflows to Brazil during this period. However,
there is also considerable merit in Brazil’s existing rules for investors.
Kapoor and Tewari (2010, p.152) note that Brazil’s relative attractiveness in
relation to other emerging market destinations like India and Russia “comes
from its strict adherence to the principles of protection of property rights
and free trade. Due to these factors, foreign multinationals own approximately
45% of the 500 largest companies in Brazil and been successful in raising
capital locally.”
Which sectors this FDI attracts have varied considerably over the years,
depending on a variety of factors, not least commodity prices, which are not at
considerably lower prices than just a few years ago. Significant growth in
salaries not only changes the dynamics of the domestic economy, but it also has
the potential to attract German Hidden Champions whose focus more often than
not lies in high quality products sold at a premium rather than affordable
products, as might have been the case in the past.
Dyr-Ulrich,
Boyd and Hollensen (2014, p.434) outline a list of entry modes, which is
indicative of the various ways that Hidden Champions can enter a country using
various levels of commitment to the venture. For the purpose of differentiating
between international trade and FDI, their list of entry mode types is adapted
below:
Entry mode
|
Type
|
Direct sale to international
customers
|
International trade
|
Online sale to international
customers
|
International
trade
|
Agents/Distributors
|
International
trade
|
Joint Venture
|
FDI
|
Establishing a 100% subsidiary
|
FDI
|
Others such as incubator
offices, own man in offices, etc.
|
FDI
|
Clearly, whichever route the Hidden Champion
chooses will incur different levels of resources in terms of time, finances and
personnel. Making the decision on whether to commit to FDI in Brazil therefore
demands that the company look at a number of factors before choosing their entry
mode. Understanding the factors, as with any investment, is critical to
maximizing ROI. In the section which follows, these determinants are examined
in more detail.
Determinants for Hidden
Champions to invest in Brazil
The
export decision for any company is usually the result of push and pull factors.
On the push side, the home market might not be large enough to cater for the
company’s ambitions or the home tax regime provides an incentive for the firm
to seek a new jurisdiction (as was the case with the recent move of Pfizer from
the US to Ireland) (Kauffman,A.C., 2015). Factors on the pull side include
demand among foreign clients or even suppliers for the goods and services of
the company in the second country.
Given
that many of the Hidden Champions are world leaders in their respective area of
business, the pull factors are presumably stronger than for more generic firms;
it follows, for example, that if one company is the dominant world leader in a
product or service, that eventually either it will be sought in countries
outside of its own or “me too” companies will try to enter the niche.
Underpinning all of this, is the company’s natural inclination to grow – with
establishing foreign operations of some form being a conventional way for any
company to do so.
In a
similar vein, it’s important to remember that the term Hidden Champions is a
broad grouping. By the estimates of Simon (2009), there are over 2,000 such
firms in Germany, so caution is required when discussing their individual motivations.
Some Hidden Champions may decide that Brazil isn’t a suitable market for their
product – or rather, that their product isn’t suitable for the market. An
example of this can be seen in Buse and Tiwari (2014, p.1) who note that ‘An overwhelming majority of the surveyed
firms market their global, adapted or exclusively developed products for those
countries.’
Nevertheless, for those Hidden Champions that do
decide to invest in Brazil, what are the factors influencing that decision?
Several papers in the academic field have investigated just this question and
serve to shed some light on the subject. One such paper, by authors Dyr-Ulrich,
Boyd and Hollensen (2014) investigates the entry mode of Danish SMEs in the
BRIC markets and notes: ‘more traditional internal factors (control,
flexibility and risk) were deemed less important by companies entering the
BRICs than personnel and financial resources and using a survey, provide the
findings below (Dyr-Ulrich, Boyd and Hollensen, 2014, p.432).
Indices such as the World
Bank’s Doing Business Report can also provide clues as to why companies make
the export decision but there is
an inherent danger in depending on the figures churned out by such indices to
decide on whether a company should enter a country. Even the most reputable
indices often only provide a blanket overview of a particular focus area. As Khanna,
Palepu and Sinha (2006, p.10) note: “In 2003, Brazil, Russia, India and China appeared similar on
several indices. Yet, despite the four countries’ comparable standings, the key
success factors in each of those markets have turned out to be very different.”
This lack of clarity demands that any study such as this delve further into the
quantitative and qualitative components of any country’s indicators.
For the sake of this paper, we have divided the
components into five separate sections. These are similar to those used by
Dyr-Ulrich, Boyd and Hollensen (2014) but adapted for our purposes. They are:
location and infrastructure, human resource factors, cultural barriers,
financial and economic factors and the political system. While the list isn’t
exhaustive, it does cover the major decision points that leaders of Hidden
Champions and others must confront when making the decision to invest or not. A
breakdown of each follows below.
4.1 Location and Infrastructure
The
geographic location of all the BRICS with the possible exception of Russia generally
require a high commitment of resources from German Hidden Champions. These
resources can manifest themselves in terms of the time and cost required in
developing personal relationships with local intermediaries, establishing a
value chain that is sustainable, or even investing in a JV or subsidiary. ““If
Western companies don’t develop strategies for engaging across their value
chains with developing countries, they are unlikely to remain competitive for
long.” (Khanna, Palepu and
Sinha, 2006, p.5).
The largest economic centres of Brazil are São Paulo,
Rio de Janeiro and Porto Alegre. This is advantageous from
a value chain perspective as all three cities are based on – or in the case of
São Paulo, within 40km of - the coastline and within relatively easy reach of
each other. Secondary cities on the coastline include Florianopolis, Santos,
Salvador, Natal, Fortaleza and Recife. Each has an international airport with
regular daily flights. There are significant ports at Salvador, Rio de Janeiro,
Porto Alegre and Santos for international trade. Brazil’s fourth largest city,
Belo Horizonte, is approximately 300km from the Atlantic coast.
There is no rail transport in Brazil and given
how built up its cities have become, there is unlikely to be any rail transport
in the foreseeable future. This hasn’t proven a huge stumbling block, as the
motorways linking large cities are of a high standard. Cities themselves tend
to be over-crowded, which has a knock-on effect on several aspects of
infrastructure. As of November 27th 2015, São Paulo’s major water
reservoir, from which the majority of the cities homes and businesses obtain
their water, is at 19.1% of capacity – entering the driest period of the year
(Globo, 2015).
In terms of telecoms infrastructure, Brazil lags
behind. The World Bank estimates that less than 60% of the population have
access to internet (World Bank, 2015)(although this figure is skewed by the
considerable chunk of Brazil’s population which lives in poverty). Anecdotal
evidence also suggests that the telecoms infrastructure has serious catching up
to do with emerging economies. One Economist article (Economist, 2013) on
Brazilian telecoms notes: “Mobile telephony in Brazil is extremely expensive
and reliability is rock-bottom.”
4.2 Human resources
Staying ahead of the curve in any industry
naturally demands that a company recruits the best talent in that industry.The knowledge-based
global economy that has evolved over the past century means that human
resources is no longer a case of attaining enough labor but also the highest
standards of labor. As one MIT Sloan paper notes: “There is a surplus of
capital chasing a scarcity of talented people and the knowledge they possess.
In today’s economy, that is the constraining – and therefore strategic –
resource,” before adding: ‘human resources must move up near the top of the
agenda in discussions of the company’s strategic priorities.” (Bartlett and
Ghoshal, 2002).
The jostling among firms for the best talent only
intensifies in emerging markets. On an anecdotal level, human resources are
seen as one of Brazil’s major weaknesses when attracting FDI to the country. Despite
a population over half that of the European Union’s, it cannot provide itself
with all of the workers that it needs. According to more than one quarter, Brazil’s
‘rapid development has far outpaced the quality and availability of talented
workers.’ (Kaslow, 2014). This creates an obvious challenge for Hidden
Champions looking to hire – particularly in a country where networks of
contacts are considered so important.
Hiring is not the only issue, where human
resources are concerned; a further issue arises in dealing with intermediaries.
With so many Hidden Champions operating in the B2B sphere, having capable intermediaries who can create
mutually beneficial relationships with the Hidden Champions are important. Khanna,
Palepu and Sinha (2006, p.5) note that: “in general, advanced economies have
large pools of seasoned market intermediaries and effective contract-enforcing
mechanisms, whereas less developed economies have unskilled intermediaries...”
This is presumably particularly costly in cases where Hidden Champions
operating in the technology sector and training is required.
The shortage of skilled labour is caused by a
myriad of factors. Perhaps the greatest
of these is Brazil’s education system – or rather, in some cases, the
lack of one: only 11% of the working-age population has a degree (Economist,
2012). In its Better Life Index, the OECD estimates that only about 45% of
adults aged between 25 and 64 have completed secondary upper level education
(significantly below the OECD average of 75%), while the average student scored
402 in reading literacy, maths and science in the PISA programme (OECD, 2015).
Fortunately, Brazil’s leadership has recognized
the issue and indeed, has already begun to respond. Government expenditure for
each student from primary up to upper secondary education rose by over 120%
between 2000 and 2008 – the steepest increase among all countries studied by
the OECD for which data were available (OECD, 2011, p.1). In the same period,
government expenditure at the tertiary level increased by 48%, with enrollments
increasing by 57%. The 2011 OECD report notes that: “Brazil spends the
equivalent of 106% of its GDP per capita on each tertiary student by
educational institutions, the highest proportion among (OECD) countries.”
Elsewhere, in 2011, President Dilma Rousseff
launched a youth training scheme to fill the country’s skill gap (Langellier,
2011) in technical trades. The President also aimed to send over 100,000
Brazilian students abroad to study science and math in English (which only an
estimated 5% of Brazilians can speak)(Maslow, 2014). The dramatic increase in
education expenditure, while still not enough to keep up with the population
growth, should gradually feed into the country’s workforce and address the
skills shortage. For the moment, however, challenges in this area remain.
Labour unions are another issue. Khanna, Palepu
and Sinha (2006, p.5) note that: “trade unions are strong and pragmatic, which
means that companies can sign agreements with them.” In a sign of the
comparative strength of unions, Brazil’s previous President, Lula da Silva, was
a former union leader. Brazil’s workers, unionized or otherwise, can expect to
receive: paid legal advice, paid weekly rest, insurance as standard, maternity
leave to pregnant women, 30 days prior notice to dismissal and 20% premium for
hours between 10pm and 5am (Novais, 2015).
As the above paragraphs indicate, Brazil is
making strides in improving its human resources and Hidden Champions will stand
to benefit from this. However, in at least the short-term, there are still
drawbacks which include a generally poorly skilled workforce (including an
acute lack of fluent English speakers) and strong labor unions.
4.3 Cultural barriers
The leaders of German Hidden Champions are no
doubt familiar with the cultural clashes that undermined the merger of German
auto manufacturer Daimler-Benz with Chrysler in 1998 (Kwintessential, 2012).
The case of the failed merger between the two auto giants from opposite sides
of the Atlantic Ocean become a case study for the importance of cultural
factors in M&A. Perhaps it’s one of the most profile of its kind, but it’s
almost certainly not an isolated incident. Global FDI has more than Doubled
since 1998 (Romei and Mance, 2010), so several unreported incidents of cultural
breakdown can be assumed to have occurred in the interim.
Corporate culture is just one aspect of culture
that a Hidden Champion needs to contend with when moving abroad. Culture
outside of corporate structure also impacts on the success of the move.
Cultural interactions are everywhere in the new country: with employees,
suppliers, partners, consultants, state institutions and even the product
itself. On innovating products for new markets, Buse (2014, p.4) notes: “The
dynamic landscape raises the question that to what extent a global innovation
strategy is needed to coordinate the market interfaces and to link diverse
consumer expectations in new markets with the product portfolio of a company.
Even though this question is relevant for all MNCs independent of size and
industry, its significance for mid-sized companies in an export-driven economy like
Germany can be hardly overstated.”
German Hidden Champions looking to penetrate the Brazilian
market will be pleasantly surprised by the unusually strong leanings of many
Brazilians towards Germany. The south of Germany experienced large German immigration
at the beginning of the 20th century and the ancestors of these
immigrants now make up a highly visible part of Brazil’s population. Most live
in the wealthier southern cities such as Curitiba, Florianopolis and São Paulo.
Perhaps as a result, fair-haired individuals in Brazil are often colloquially
referred to as ‘alemão’ – German.
That said, Brazil is a hotbed of different races
and nationalities so while Hidden Champions can expect small aspects of German
culture – particularly in the south – they should be mindful that Brazil is a
very different environment to their homeland. Podrug et al (2014, p.826)
conduct a study into four separate cultures (Brazil, Germany, Serbia and
Croatia), the results of which are indicative for Hidden Champions looking at
cultural barriers to operating in Brazil. The results from the authors are
adapted below.
Indicator
|
Germany score
|
Brazil score
|
Power Distance Index (PDI)
|
41.8
|
57
|
Uncertainty Avoidance Index
|
50.06
|
67.83
|
Individualism/Collectivism
Index
|
69.30
|
55.33
|
Masculinity/Femininity Index
|
67.55
|
64.34
|
Long-term/short-term
orientation Index
|
37.67
|
43
|
On the basis of the authors’ findings, there are
some cultural points for German Hidden Champions to note before entering
Brazil, so that the points don’t become cultural barriers Brazil has a much
higher power distance index score than Germany, meaning its business
environment is typically far more hierarchical than Germany’s. Likewise, there
is a significantly higher score in Brazil on the Uncertainty Avoidance Index,
suggesting that Brazilians want stability far more than their German
counterparts (might this be to their detriment in R&D?).
Findings by a different author (Borker, 2012,
p.316) are remarkably similar with regard to Brazil’s cultural context. That
author notes: “Brazil has a score which means that in this country people from
birth onwards are integrated into strong, cohesive groups, especially
represented by the extended family, e.g., uncles, aunts, grandparents and
cousins. Protection of the group members is performed in exchange for loyalty.
In business interactions, it is important to build up a trustworthy and long
lasting relationship. A business interaction meeting usually starts with
general conversations before doing business. The preferred communication style
is context-rich, so people will often speak profusely and write in an elaborate
fashion.”
In general, German Hidden Champions have little
to worry about with regard to cultural barriers. Enough German firms are
present in the market to present B2B opportunities as well as some possible
collective knowledge from the Brazilian experience. Nevertheless, being aware
of the Brazilian cultural environment in Brazil will inevitably lead to better
work outcomes.
4.4 Financial and economic factors
The importance of financial and economic factors
in a company’s decision to engage in FDI cannot be overstated. In a study of
the relationship between economic growth, FDI and trade in China, Liu et al
(2002, p. 1439) conclude that: ‘two-way causal connections exist between
economic growth, FDI and exports.’ The type of financial interactions that a
Hidden Champion undertakes will also be a factor. HID Global, A US Hidden
Champion, makes proximity access systems, cards and card readers – by extension,
it requires a stronger banking infrastructure in a new country than another
non-finance related Hidden Champion.
The BRICS as a group have a particularly colorful
economic history and Brazil is no different. The Brazilian currency, the real,
was only established as the country’s sovereign in 1994 as something of a last
resort: Brazil had suffered a period of hyperinflation in the years before and
annual inflation had not been registered below 100% since 1982 (Economist,
2014b). Aside from anything else, the country also suffered high unemployment,
high levels of tax and below-average levels of international trade.
Thankfully for companies looking to enter the
market, things took a turn with the introduction of the real in 1994. Inflation
has been curbed (although is still high by OECD standards) and the economy has
grown approximately fivefold in the twenty years between 1995 and 2015 (Trading
Economics, 2015). This progress was initially reflected by Brazil’s inclusion
in the Goldman Sachs report in 2003. However, as of late 2015, the economy
faces serious structural challenges if its growth is to progress in the near
future. Hidden Champions looking to enter the market, even taking into account
their general focus on the long-term, should be mindful of this.
The economic crisis currently gripping Brazil
demands that Hidden Champions – both those entering Brazil and those already
present – take heed. In the 2014-2015 period, per capita income is expected to
fall by a dramatic 2.3% and is not expected to recover to its pre-crisis levels
until some time after 2020 (Arbache, 2015). In September 2015, S&P moved
the country’s debt rating to junk status, prompting one article to claim: “if
Brazil was a hospital patient, emergency room doctors would diagnose it as
being in terminal decline.’ (Financial Times, 2015).
Outside of the current economic malaise, there
are other economic and financial issues that Hidden Champions will have to
contend with. The tax system is generally unwieldy. Although the rate that companies
face is below the international average at 34% (Trading Economist, 2015), a
2013 study noted that it is the world’s most time-consuming corporate tax
regime, with tax accountants spending 2,600 hours per year complying with the
Brazilian tax code (Harpaz, 2013).
Despite all this – there are positives. Brazil
has embraced IFRS almost unlike any other emerging economy. Borker (2012, p.314)
notes: “all the BRIC countries have committed to the adoption of IFRS, but,
except for Brazil, their progress trails the EU countries and many others.” The
same author notes that Brazil adopted IFRS in December 2010 for banks and
listed companies and for individual company accounts progressively since 2008.
So, while the country continues to labor under a difficult economic strain,
Hidden Champions entering the market can at least be assured that reporting
standards are above what they could expect in other emerging economies.
4.5 Politics
The
term politics, as intended for the purposes of this section, covers the spectrum
of what happens under a country’s political system. It refers to everything
from how active a government is in pursuing FDI and establishing trade
missions, to broader themes such as political corruption and the level of
political stability. Of the latter, Wei (1997) examines the relationship
between corruption-induced uncertainty and inward FDI. His research shows: ‘the
result (of the relationship) is striking. The effect is negative, statistically
significant and quantitatively large. An increase in the uncertainty level from
that of Singapore to that of Mexico, at the average level of corruption in the
sample, is equivalent to raising the tax rate on firms by 32 percent.’ (Wei,
1997, p.4)
Brazil
”has a vibrant democracy but pockets of democracy exist in federal and state
governments” but “bureaucracy is rampant.” (Khanna, Palepu and Sinha, 2006,
p.5). In the past ten years, it has experienced two major political scandals
which gained international attention: the Mensalão
scandal and the ongoing Lava Jato
scandal. As of November 2015, the investigation into Lava Jato (which alleges that Brazilian politicians took huge
amounts of money from state owned enterprises) has included a range of
businessmen, congressmen and senators.
However,
it’s important that Hidden Champions looking at entering Brazil remember that
the corruption scandals happen against the backdrop of greater political
change. In 2015, Brazil celebrates only its 30th year of democracy,
having lived under the rule of a military dictatorship until 1985. The
corruption probes at least point to a system wherein corruption undoubtedly occurs
but is at least being accounted for. As one article notes: “it may be a price
worth paying in the long run if it helps to clean up the underbelly of politics
and business in latin America’s biggest economy.” (Leahy, 2015).
Transparency
International says of Brazil’s ongoing struggle against political corruption: “corruption-related
challenges in Brazil are perceived to be a result of the high costs of election
campaigns, weak oversight mechanisms and a very bureaucratic public
administration.” (Transparency International, 2015, p.2). In the same country
report, Brazil scored 43 out of 100 where 0 is highly corrupt and 100 is highly
clean. There is a long journey ahead but Brazil is already taking the first
steps. As authors Khanna, Palepu and Sinha (2006, p.5) note: “Successful
companies work around institutional voids.”
SWOT Analysis
Strengths
|
Weaknesses
|
Excellent access point for Mercosul markets.
|
Complex tax system
|
Internal market of 200 million potential consumers, meaning that there
is sufficient demand even for premium segment Hidden Champion products
|
Complex judicial system
|
Rich in natural resources
|
Generally poor standard of workforce
|
Stable geopolitical backdrop and democratic elections held every 4
years
|
Brazil’s transport infrastructure is crumbling, with no inter-city
trains in the country
|
Presence of large second- and third-generation German community means
links are perhaps easier to establish for German Hidden Champions
|
Brazil’s government budget is characterized by mismanagement
|
Brazil’s economy is characterized by family-run businesses, so the
typical family-run Hidden Champion is presented with one less cultural
barrier
|
Rampant political corruption
|
Opportunities
|
Threats
|
Improving infrastructure will bring with it improved opportunities for
Hidden Champions
|
Brazil currently seems to be caught in a situation known as ‘fiscal
dominance’
|
New trade pacts with other BRIC countries means Hidden Champions can
begin to look at an integrated BRICS strategy
|
Rising fiscal deficit
|
Growing middle class of consumers willing to pay extra for premium
goods
|
Corruption at the political and social levels
|
2016 Olympics may present new opportunities for firms in various
industries
|
Lava jato scandal
threatens not only to destabilize politics but the economy as well
|
Growth in hydroelectricity may present opportunities in Brazil with
its rich hydroelectric resources
|
Economic hardship could continue past 2020 (mitigated by the long-term
strategies taken by Hidden Champions)
|
Build Brazil into the company’s long-term strategy, rather than depend
on it in the short-term
|
The threat that the current political quagmire leads to a more long-term
quagmire in politics
|
Lack of strong domestic brands creates opportunities for
premium-segment German brands
|
|
The close contact that Hidden Champions’ develop through direct sales
may make the hiring process easier in Brazil, even with its shortage of
highly-trained workers
|
|
Lack of innovative culture presents opportunities for typically
innovative Hidden Champions
|
Conclusion
Perhaps the real dawn of the BRICS nations will
be when they are no longer recognized by the acronym but as five highly
significant economies in their own right. The irony of Goldman Sachs recently
retiring its BRICS fund is that the countries have made so much progress (and
not just economic) since the term was coined almost 15 years ago. Brazil’s
economy alone is nearly 5 times the size it was when Goldman Sachs Paper 66 was
published.
Growth was considered the norm for the BRIC
countries then but it was unrealistic to expect it to be exponential and
without hiccups. Besides, as this paper has shown, qualitative as well as
quantitative aspects have made huge strides. Simon (2009) notes that “there is
no single driver of growth” for hidden champions before suggesting that
globalization and innovation are the strongest categories. Similarly, the BRICS
are more than just the sum of their collective GDP, encompassing everything
from demographics to politics. One author quotes someone as saying: “Brazil has
achieved in the past 20 years what it took the United States to accomplish in
200 years.” (Kaslow, 2014)
There
are inevitably different challenges in such markets and some of them have been
outlined here. This doesn’t mean that, like a fund manager, Hidden Champions
should avoid the BRICS altogether. Rather, it creates an imperative for
strategies which allow these businesses to progress there. Many Hidden
Champions are already doing this, allowing them to maintain their leadership
positions and in some cases (SAP, for example) even outgrowing the Hidden
Champion tag to become a well-known world leader.
This presents a further two issues – the need for
a long-term perspective and the need to evolve. On the first, it is considered
that Hidden Champions take long-term perspectives which is one of the tenets
that has allowed them to achieve their success. Simon (2009) provides the
examples of Alfred T Ritter of Ritter Sports Chocolate manufacturers who told
him: “We do not think in years but rather in generations,” and Dr. Karsten
Ottenberg, CEO of Giesecke & Devrient, who said: “we don’t think about
producing good figures in the next quarter. We are more concerned with
sustainability over generations.”
The volatile nature of emerging markets makes a
long-term perspective arguably even more important than in a developed market.
Vladimir Putin won’t always be the President of Russia; twenty five years ago,
South Africa was an apartheid state and now its President is a native; Brazil’s
economy may look desperate in 2015 but who’s to say that it will still be the
same way in 2025? A long-term perspective allows the firms not only to avoid
schizophrenic decision-making, but also develop the value chain and their
network.
The second here is the importance of
the ability to evolve. The changing economics (to take just one aspect) of the
BRICS means companies also have to evolve. A rising middle class in each of the
countries creates a new demand for new products and services. Quickly improving
infrastructure also creates opportunities. The quickly improving telecoms
sector in Brazil is an example. As it improves, so will the range of B2B
businesses that Hidden Champions can interact with there. Its residents are
also likely to become more internet savvy with time, which brings further
opportunities both within and without the company.
It is perhaps for these reasons that companies
sometimes adopt emerging market-specific strategies GE created an emerging
market unit based on the reality that many emerging markets had similar
characteristics. (Khanna, Palepu and Sinha, 2006, p.18). They say:
“While
companies can’t use the same strategies in all developing countries, they can
generate synergies by treating different markets as part of a system. For
instance, GE Healthcare (formerly GE Medical Systems) makes parts for its
diagnostic machines in China, Hungary, and Mexico and develops the software for
those machines in India. The company created this system when it realized that
the market for diagnostic machines was small in most low-income countries.”
What emerges from studying the BRICS
is that the Hidden Champions are ideally suited – even taking into account
their premium price segment – to prospering in them. A combination of a
long-term vision, a focus on quality contacts, a vision for market leadership
(which is too often lacking in firms in these countries) as well as the German
stamp of quality make them prime candidates for success in the BRICS. Once this
has been established, it then just becomes a matter of developing the right
strategies for entry.
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[1] For the purposes of this
paper, BRICS is used interchangeably with BRICs. The addition of South Africa
to the grouping in 2011 means that there remains very little literature on
BRICS. There is considerably more available on BRICs, which allows for a broader
range of literature to be studied.
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