Hidden champions in small towns: why Germany's niche leaders cluster in the south
World leaders in chainsaws, tunnel boring machines and combi-steamers are run from towns most foreigners cannot place. What explains the hidden champions of Baden-Württemberg and Bavaria?
In 1990 the German management thinker Hermann Simon gave a name to something many industrial buyers already knew: a large share of the world's leading suppliers in narrow product categories were mid-sized, often family-owned and almost invisible to the public. He called them hidden champions. His criteria were specific. A hidden champion ranks among the top three in its global market, or first on its continent, has revenue below a set threshold (currently given as five billion US dollars) and enjoys low public recognition.
The concept travelled widely, and Simon's English-language book on it appeared in 1996. What is striking, on any map of such firms, is how many sit not in Berlin, Hamburg or Frankfurt but in small towns in the south-west and south of the country.
A tour of unlikely headquarters
Consider a short drive across Baden-Württemberg. Herrenknecht, founded by Martin Herrenknecht in 1975, builds tunnel boring machines from Schwanau, near the Rhine; its machines bored the Gotthard Base Tunnel in Switzerland. STIHL, founded by Andreas Stihl in 1926, makes chainsaws and outdoor power tools in Waiblingen and remains privately held. Kärcher, founded by Alfred Kärcher in 1935, is known worldwide for high-pressure cleaners and is based in Winnenden. Würth, the fastening and assembly materials group, is run from Künzelsau. fischer, inventor of the nylon wall plug, is in Waldachtal in the Black Forest. Festo is in Esslingen and SICK, the sensor maker, in Waldkirch near Freiburg. TRUMPF is in Ditzingen.
Bavaria has its own examples. RATIONAL, founded in 1973, invented the combi-steamer for professional kitchens in 1976 and still runs its business from Landsberg am Lech, a market town west of Munich.
Why the south?
No single factor explains the clustering, but several reinforce each other.
A craft and engineering inheritance
Baden-Württemberg in particular had limited raw materials and a tradition of small-scale manufacturing and precision trades. Watchmaking, toolmaking and mechanical engineering created a workforce comfortable with tight tolerances. When new technologies arrived, from electrics to pneumatics to lasers, there were local firms able to absorb them.
Family ownership and patient capital
Many of these firms are owned by founding families or foundations. That tends to favour long time horizons, reinvestment of earnings and reluctance to sell out. Simon's research highlights that leaders of hidden champions typically stay in post far longer than executives of large listed companies. Continuity makes it easier to pursue a narrow niche for decades.
Specialisation plus globalisation
A small domestic market for, say, tunnel boring machines forces a company to export early. Hidden champions typically combine extreme focus on a product with an international sales network run from headquarters. Depth in one category, sold everywhere, is the formula.
Training systems
Germany's dual vocational system, which combines apprenticeships in companies with classroom study, supplies skilled technicians who often stay with one employer for many years. For a firm in a small town, a reliable local pipeline of trained staff matters more than access to a big-city labour market.
The costs of being hidden
The model has weaknesses. Simon himself notes that attracting international professionals to remote locations is hard, a problem that grows as products become more software-heavy. Succession can be fraught when a family has no willing heir. And concentration on a single product line can leave a firm exposed when technology shifts, as automotive suppliers are discovering with the move to electric drivetrains.
Many of the companies above are responding by opening development centres in cities, investing in digital services around their hardware and recruiting abroad. Others are using their balance sheets to acquire software or sensor capabilities.
A caution on counting
Readers will often see headline figures for how many hidden champions Germany has, or what share of the world total it hosts. These numbers depend heavily on definitions, thresholds and the compiler's methodology, and they are rarely comparable across sources. They are best treated as indicative rather than precise. What is not in doubt is the pattern: a remarkable number of world-leading niche manufacturers are run from towns of a few tens of thousands of people in the German south.
How they compete
The firms in this group rarely win on price. Simon's research describes a preference for competing on quality, performance and total cost of ownership, backed by close contact with customers. A tunnel boring machine that finishes a project months early, or a commercial oven that saves a restaurant staff time every day, justifies a premium. That approach also explains why many of these companies keep core know-how in-house rather than outsourcing it, and why they invest heavily in service networks abroad.
What investors and partners should take from it
- Look beyond the big brands: many critical suppliers are private and rarely in the news.
- Expect long horizons: family and foundation ownership shapes strategy and negotiations.
- Watch the transitions: succession, digitalisation and talent are the pressure points.