Germany is the obvious example within the EU. In Asia, it’s Taiwan.

In 2012, in the midst of the Euro debt crisis, Germany boasted gross domestic product (GDP) growth of 0.7%, outperforming both the UK (0.0%) and France (0.3%). In 2013, its GDP grew a further 0.4%, while its trade surplus rose to an historic high of €198.9 billion (roughly US$270 billion), an amount equal to 7.3% of its GDP, on the outstanding performance of its exports.

Germany’s rock-solid external trade owes much to its medium-sized enterprises. Neither as large or as well known as Siemens, Mercedes-Benz, Apple, or Sam­sung, these companies provide irreplaceable products and technologies to the global market, enabling them to weather economic storms and buttress Germany’s balance sheet.

Taiwan’s small and medium-sized enterprises are similarly vigorous and similarly structured. And we too have a number of medium-sized enterprises that dominate their specializations.

Can Taiwan and Germany somehow trade tips to promote the success of the “hidden champion” model? What can we do to help more SMEs grow into resilient medium-sized enterprises? These are important questions for Taiwan’s economic development.

The 27th annual Tai­pei International Cycle Show opened in March at the Tai­pei World Trade Center. Representatives from the world’s bicycle manufacturers and distributors navigated boisterous crowds in search of new trends, new business opportunities, and new relationships up and down the supply chain.

Ford Motor Company attended the show for the first time this year to introduce its newly developed folding bicycle. Miranda, a well known Portuguese cycling components manufacturer, attended for the second time. Having achieved far better results at last year’s Tai­pei exhibition than at similar shows in Europe and the US, the company was already looking into the possibility of expanding its booth in 2015.

The show makes plain Taiwan’s leading position in the cycle industry. In fact, more than 7,000 buyers attended the expo, up 4.9% from the previous year.

Figure I: Twin cycling titans Giant and Merida have joined hands in an endeavor seeking to upgrade Taiwan's cycling industry by integrating its entire production chain The photo shows the 2014 Taipei International Cycle Show, an event attended by buyers from around the world..

Inside, Giant and Merida, two medium-sized enterprises that generate tens of billions of NT dollars in exports every year, made Taiwan proud.

Commitment to excellence

Switching gears, another scene may help illustrate the power Taiwan’s medium-sized enterprises wield in every­day life.

Walk into any of Taiwan’s major medical supply outlets and you’ll see innumerable blood sugar testing devices and test strips. The fact that these products are always among these stores’ biggest sellers points to the enormous opportunities available in the blood-sugar test market

“I’ve encouraged many friends to buy testing devices because testing at home is just so much more convenient,” says a Ms. ­Zhang.

Changes to our lifestyles and diets have made diabetes the most ubiquitous chronic condition of the modern era. According to the International Diabetes Federation, as of the end of 2013 some 382 million people around the world had diabetes. The IDF projects that this figure will rise to 592 million by 2035.

The increase in the number of diabetes patients has been increasing the demand for blood sugar testing devices. With a global market currently estimated to be worth about US$12 billion, the outlook for the industry is exceptionally bright.

The Taiwanese firm Apex­Bio has been active in the field for nearly 20 years and boasts R&D, manufacturing costs, and market penetration figures that compare favorably with those of the world’s major device makers. The company has also been ranked among the top 200 SMEs in Asia four times by Forbes magazine.

Company CEO Thomas Shen was previously a professor of molecular biology at National Tsing Hua University. He gave up teaching and started his own business to prove that his studies had commercial applications.

Well aware that his own background was in academia and that he didn’t have the capital to compete head to head with major corporations, he resolved to leverage his professional expertise by focusing on diabetes-related medical supplies. Because the disease can only be treated, not cured, he felt that there were great business opportunities in developing accurate, easy-to-use home testing devices and the consumable testing supplies that go with them.

Drawing on his knowledge of electrochemically based biological testing, in 1996 Shen developed a blood sugar testing device that used disposable test strips. His was the first company in Asia and the fourth company in the world to develop this kind of testing technology in-house and patent it.

In 1997, Shen took the key patents on the blood testing system and used them to solicit investment from a number of institutions, giving rise to Apex­Bio. Because Shen’s team had already developed a prototype, the company was able to get a product out quickly and turn a profit in its first year of business.

It then spent the next dozen or so years operating on an OEM model. During that period, it joined the supply chain of a major international medical devices manufacturer and established itself in both the European and American markets. Seeking to build its business, it introduced its own brand, Gluco­Sure, in markets with little loyalty to particular brands, including those in mainland China, Southeast Asia, Russia, Brazil, India, the Middle East, and Africa.

The company’s leading technology and ability to anticipate the market have enabled it to grow 30–40% per annum since its establishment in 1997. This success has encouraged other Taiwanese firms to enter the blood sugar testing field, placing Taiwan at the heart of the blood sugar testing device industry, and earned it a 2013 Taiwan Mittelstand Award from the Ministry of Economic Affairs.

Hidden champions

Giant, Merida, and Apex­Bio encapsulate what Taiwan’s Mittelstand companies are all about. Viewed in the context of Taiwanese industry as a whole, such companies are the foundation of our competitiveness.

“Mittelstand” is a relatively new term that originated with Hermann Simon, chairman of the German management consultancy Simon-Kucher & Partners, who mentioned it in his book on “hidden champions.”

In 1986, Simon was studying the business models of 400 German SMEs that were performing exceptionally well in the global marketplace. He discovered that while they were far less known than transnationals like Siemens and Mercedes-Benz, they were making important contributions to the German economy. When Simon extended his research to Japan, the US, South Africa and New Zealand, he discovered a similar phenomenon: relatively unknown medium-sized companies dominating their niches.

Simon coined the term “hidden champions” to describe them.

Most hidden champions have annual revenues of less than US$5 billion, making them considerably smaller than what is generally considered a “large” corporation. Nonetheless, their role in stabilizing their nations’ economies has earned them their own designation: Mittelstand companies.

Such companies include Germany’s Brita, a maker of water filters and filter pitchers that distributes its products in more than 70 countries, and Enercon, which controls more than 40% of the world’s wind-power patents; the UK’s De La Rue, which manufactures paper money for more than 150 countries; India’s Essel Propack, which makes the tubes for more than 30% of the world’s toothpaste, cosmetics, and medicated ointments; and Japan’s Shimano, which controls more than 70% of the global market for bicycle drivetrain systems. None of these Mittelstand­ companies are particularly well known; all just quietly go about their business.

Supporting growth

Taiwan’s industrial structure is similar to Germany’s. According to the Small and Medium Enterprise Administration of the Ministry of Economic Affairs, Taiwan’s 1.3 million SMEs accounted for 97.67% of all its businesses and employed 78.11% of all its workers in 2012. If Taiwan can continue, as Germany does, to implement an industrial policy aimed at supporting and promoting SMEs, creating still more Mittelstand enterprises with a significant presence in global markets, our exports and overall economy will surely benefit.

Hoping to help SMEs with potential “grow up,” the Executive Yuan ratified a new program in October 2012, and put the Industrial Development Bureau of the MOEA in charge of implementing it. The program aims to foster the development of innovative medium-sized enterprises that possess their own core technologies, markets, and brands.

The IDB developed a three-pronged approach focused on building supporting infrastructure, choosing the best companies, and fostering growth. Its goal was to select over the course of three years 30 Taiwan Mittelstand Award winners and another 150 “future stars.” It would provide intensive guidance to the latter to aid them in developing their own technologies and niche markets, and to that end would also integrate counseling resources on technology, manpower, intellectual property, and branding from across various ministries and bureaus.

Staying rooted in Taiwan

IDB director-general Wu Ming-ji says that after considering Taiwan’s specific circumstances and level of industrial development, the IDB determined that to be selected for the program, our Mittelstand enterprises should meet two key criteria. First, they should have annual revenues of less than NT$20 billion or fewer than 2,000 domestic employees. They should also possess a solid technological foundation, including a unique and crucial technology within their specific field; be highly competitive internationally; and utilize Taiwan as their primary hub for either operations or production.

“We believe that it is very important for these companies to have their roots in Taiwan,” says Wu. “If they don’t use Taiwan as their principal base of operations, they’re not going to bolster domestic economic growth or create local jobs.”

The IDB put prospective companies through a stringent review process and has so far selected 20 Taiwan Mittelstand Award winners and 114 future stars.

Globally competitive bellwethers, the prize winners have now been recognized with the highest honor available to Taiwan’s SMEs. They include: ApexBio, a maker of blood sugar testing devices; Hiwin Technologies, the world’s second-largest manufacturer of ball screws and linear guideways; Pai Lung Machinery Mill, the world’s top manufacturer of circular knitting machines, with a 12% market share and a client list that includes Nike, Zara, and Uniqlo; porcelain designer Franz Collection, which has earned the United Nations’ Seal of Excellence for Handicrafts and is capable of going toe to toe with the world’s top porcelain brands; LCY Chemical, one of the world’s three largest manufacturers of thermo­plastic elastomers; Sheico, the world’s largest supplier of water-sports apparel (65% market share); Cyberlink, maker of the market-dominating PowerDVD media player (85% market share); Elan Microelectronics, a leading manufacturer of intelligent human–machine interface technology which has successfully defended its patents against the likes of Synaptics and Apple; and high-end bicycle makers Giant Manufacturing and Merida Industry.

These companies have become the backbone of Taiwan’s economy.

Building on manufacturing

Broken down by industry, some 46 of the Mittelstand companies and future stars come from the consumer goods and chemicals sector, 45 from metals and machinery, 28 from information technology and electronics, and 15 from knowledge-based services.

Wu says that Taiwan’s Mittelstand companies tend to be concentrated in manufacturing, which is also true in Germany. The reason is that manufacturing provides companies with opportunities to accumulate technologies and innovations that enable them to establish themselves more solidly within their markets.

While the service sector garners a great deal of global attention and has the largest number of businesses of any single sector, it caters largely to the domestic market. Manufacturing, meanwhile, generates export revenues and creates more jobs.

Over the last few years, the world’s advanced nations have begun reemphasizing manufacturing. In the US, for example, the offshoring of 89% of its manufacturing has cost the country 6–7 million jobs, compelling President Obama to promote “reindustrialization” by encouraging American and international firms to return to American factories. Fortunately for the US, the reestablishment of US manufacturing operations by Apple and others indicates that these efforts are beginning to bear fruit.

Taiwanese manufacturing currently occupies a strong position in global markets, and Wu makes a point of noting that our service sector can go international as well if it can develop innovative ways of doing businesses. Bakery and café chain 85°C, designated a future star by the IDB, is a case in point. The company prepares its foods offsite from its retail outlets, which allows it to better control quality and provide its customers with consistently inexpensive and delicious coffees, cakes, and pastries. The model has helped the company expand to mainland China, the United States and Australia, and enabled its cafés to appeal to non-Chinese with sophisticated palates.

Setting an example

In fact, South Korea, Taiwan’s main rival in the international export market, recently announced its own strategy for incubating Mittelstand enterprises. It plans to provide companies with aid in a number of areas, including personnel, capital, tax breaks, and even assistance with the commercialization of intellectual property, with the objective of cultivating 300 medium-sized enterprises that are technologically competitive on a global scale by 2020.

Chang Chien-yi, director of Research Division II at the Taiwan Institute of Economic Research, says that South Korea has been aggressively developing its version of “state capitalism” since the end of World War II, offering national support to conglomerates that include Sam­sung, LG, and Hyun­dai. Those efforts have turned its ten largest business groups into the cornerstones of its economy. In fact, Samsung’s revenues alone account for one-fifth of the nation’s GDP.

But the long-term dominance of these groups has increased the wealth gap and made it difficult for SMEs to survive. Seeking to restructure South Korea’s industry, President Park Geun-hye has announced her desire to reform the conglomerates and support the development of the country’s long-marginalized SMEs and Mittelstand enterprises.

“If you look at Asia, Taiwan’s SMEs have performed remarkably well and become a model for the region, while South Korea’s are at the bottom of the class. With both countries now offering beneficial policies, Taiwan’s Mittelstand companies should maintain their tremendous advantage over their Korean counterparts in terms of their ability to innovate and their position within our industrial framework. Their future prospects look brighter as well,” says Chang.

Little giants

Francisco Tsai, an associate professor with Tam­kang University’s Department of Industrial Economics, feels that nimbleness and creativity are what have enabled Taiwan’s SMEs to develop their diverse niche technologies and products. These traits coupled with a cultural preference for being big fish in little ponds have helped Taiwanese companies establish leading positions in specialized markets.

Tsai adds that if our SMEs want to grow up into full-fledged Mittelstand enterprises, they need to target areas that are not high priorities for major corporations from other nations. They should avoid direct competition with large American, Japanese, and Korean firms occupying advantageous market positions, and instead aim to become a key link in a supply chain, to develop a radical new consumer product, or something similar.

Tsai cites HTC, which used to compete at the top end of the cellphone market, as an example of the perils of excessive ambition. In spite of strong R&D and marketing, the company just hasn’t been able to compete with larger rivals like Apple and Sam­sung. Tsai believes that if it had instead chosen from the outset to do as ­Xiaomi has done, establishing its position with low-cost, high-performance handsets, it might be in better shape today.

“Taiwanese firms that want to become ‘little giants’ within their given niche should avoid competition based on size or being mainstream,” says Tsai. “Instead, they need to develop product lines or technologies that place them among the top three in the world for their category. Companies able to manage that can enjoy great success.”

Taiwan’s vigorously developing SMEs are both a source of pride and the cornerstone of our economy. Making these stars shine even brighter and helping still more of them become hidden champions on a global scale is crucial to enhancing our competitiveness in the international marketplace.

(Lin Hsin-ching/photos by Chuang Kung-ju/tr. by Scott Williams)