Chinese Investors’ Interest in Germany’s Hidden Champions

It is no secret that Chinese investors tend to have an appetite for Germany’s small and medium-sized companies. We explain why Chinese companies are so interested in Germany’s Hidden Champions.

It is no secret that that Chinese investors have an appetite for Germany’s small and medium-sized companies. But the takeover of the Swabian concrete pump manufacturer by construction giant Sany from Changsha (长沙) in 2012 brought a new investment strategy to the public eye. Instead of acquiring struggling enterprise, investors now seek very successful, established and specialized companies, the so-called “hidden champions”. 

What are Hidden Champions

These often family-owned companies are almost exclusively small and medium-sized enterprises. They are among the Top 3 on the global market, have a revenue below $4 billion, and enjoy a low level of public awareness. Within their niche markets, they are sometimes a single product manufacturer who work closely together with their customers to find specific solutions. This customer interaction is the key driver of innovation, which allows the hidden champions’ R&D to beat that of large companies by a factor of five. Consequently, they earn their market share through performance and not price.

Now there are three reasons that make hidden champions an interesting investment opportunity for Chinese investors. First, according to the German Association of Chambers Commerce and Industry, an aging population and an alternation of a generation without heirs or children willing to take over their parents’ business, many of these companies are up for sale. Since owners of family enterprises attach great emotional value to the company, they are looking for an adequate investor, who holds comparable ideas about the enterprise’s future.

Hidden Champions as Strategic Investment

This is where Chinese investors become relevant because they often see acquisitions in Germany as long-term, strategic investments. This corresponds with the hidden champions’ focus on long-term growth instead of short-term gains.

The third reason why hidden champions are interesting for investors from China is the opportunity to acquire know-how without the costs and time of development. Buying a German high-tech enterprise allows applying this knowledge to their own market at home.

The advantages are not only on the investor’s side but also on the side of the German business. A Chinese investment allows the company to have access to more capital and easier entry to the Chinese market. China is a country of rapid development and high demand for services and technological know-how. Therefore, it opens up possibilities of getting a foothold in a new market and consequently ensuring further long time growth.

Boon or Bane?

It is not all positive, though. Foreign acquisitions of companies strongly embedded in their market do often encounter skepticism and concern by employees and the public. The fear that the enterprise’s identity and future are under threat is, as history shows, often unsubstantiated. Actually, acquired businesses tend to retain their identity after a take-over.

The hardest part about the strategy of investing in hidden champions is in the name itself. There hidden status makes it hard to identify them, especially by foreign investors. They, therefore, require a partner to help find the optimal investment opportunity. 

Even 4 years after the deal between Putzmeister and Sany, the topic is still highly relevant. Individuals, companies and private equity firms compete for the famous German small and medium-sized enterprises. But it seems that Chinese – German cooperation is a general success. As the previous owner of Putzmeister Karl Schlecht stated: “What Sany is doing in China is something we can only dream of.”