The Hidden Champion's Dilemma

Marc Kuri

— 9 min read

Why Waiting Is the Riskiest Strategy

An Open Letter to German Mittelstand CEOs

You've heard it a thousand times: Germany is falling behind in digitalization. The consultants arrive with alarming charts. The press writes about the "Mittelstand digital gap." Politicians demand transformation.

And you, running a company your family may have built over generations, competing successfully in global markets, maintaining the quality standards that made "German engineering" synonymous with excellence, are told that everything must change. That you need a digital strategy. That you're behind.

Here's what they don't tell you: The narrative is half right, and the half that's wrong could destroy you.

What Made You Champions

Let's start with what you already know but rarely see articulated in the breathless digitalization discourse.

Hermann Simon spent decades studying firms like yours: the Hidden Champions who hold #1 or #2 global market positions in narrow niches while remaining largely unknown to the general public. His findings weren't about luck or circumstance. They identified a coherent strategic logic (Simon, Hidden Champions of the 21st Century, 2009):

Focus beats breadth. You chose narrow markets and went deeper than anyone else. While conglomerates spread themselves thin, you accumulated expertise that became insurmountable.

Self-reliance protects advantages. You kept core activities in-house when others outsourced. This wasn't stubbornness. It was strategic protection of the knowledge that differentiated you.

Customer intimacy drives innovation. Your R&D didn't come from labs disconnected from markets. It came from solving customer problems so closely that you anticipated needs before customers articulated them.

Incremental improvement compounds. You didn't bet on moonshots. You got 2% better, every year, for decades. The compound effect created moats that looked impossible to replicate.

Institutional support enabled patience. German vocational training provided skilled workers. Hausbank relationships provided patient capital. Codetermination aligned workforce interests with long-term investment (Hall & Soskice, Varieties of Capitalism, 2001). These weren't constraints on your freedom. They were the infrastructure that made your strategy viable.

This is not nostalgia. This is a strategic system that worked, and continues to work, under specific conditions.

The question is whether those conditions still hold.

The Scope Conditions Are Shifting

Every strategic framework has boundaries: conditions under which it applies well and conditions under which it breaks down. The Hidden Champion model applies brilliantly when:

  • Technology evolves incrementally along stable trajectories
  • Markets have clear boundaries that define your niche
  • Deep expertise creates cumulative advantage
  • Physical products dominate, where German engineering excellence translates directly to value

The model struggles when:

  • Technological discontinuities redefine markets overnight
  • Platform dynamics blur industry boundaries
  • Software becomes the locus of value creation
  • Scale economics shift from production to data

Here is the uncomfortable truth: For some of you, the scope conditions have already shifted. For others, they haven't. And telling the difference is now the most important strategic judgment you'll make.

The Crisis Is No Longer Abstract

Let me be blunt about where we stand in January 2026.

German manufacturing has now declined for four consecutive years, with output down 2.1% through October 2025 (BDI, January 2026). The December 2025 Manufacturing PMI fell to 47, marking the sharpest contraction in ten months (HCOB/S&P Global). Real GDP in 2024 roughly equaled its 2019 level. We have experienced half a decade of stagnation.

The automotive sector, long the locomotive of German industry, is shedding jobs at a pace not seen since reunification. Volkswagen will eliminate 35,000 positions by 2030, roughly 25% of its German workforce, while closing the Dresden plant this year and Osnabrück in 2027 (Volkswagen AG, December 2024). Mercedes-Benz is cutting 40,000 positions. Bosch, Continental, ZF Friedrichshafen: the roll call of suppliers announcing layoffs grows weekly (Automotive Manufacturing Solutions, January 2026).

Industry job postings in Germany have declined 34% year-over-year. Assembly roles have collapsed by 58% (JobsPikr, January 2026).

This is not a cyclical downturn. This is structural adjustment.

The Real Digital Divide

The IfM Bonn's Future Panel Mittelstand 2025, released this month, confirms what many suspected: for the fifth consecutive year, executives ranked skilled worker shortages and demographic pressure as their top challenge, with four in ten companies unable to recruit qualified personnel (IfM Bonn, January 2026). Rising labor costs compound the pressure, particularly as competitors in other regions face neither constraint.

But here is what the headline obscures: the Mittelstand is not uniformly struggling. It is bifurcating.

Roughly 15% of Mittelstand firms have become digital leaders, investing 4x their peers in digital capability, building 20%+ productivity premiums, attracting the talent that others cannot find (ZEW ICT Survey; Acatech Industry 4.0 Maturity Index). Companies like Trumpf spent a decade building digital platforms, not because consultants told them to, but because they recognized their core laser technology business would increasingly compete on software-enabled services.

The remaining firms fall into two categories requiring completely different responses:

The legitimately resilient (30-35%): Your niche remains physics-dominated. Your competitive advantage lies in process knowledge, material science, precision manufacturing: domains where software is a tool, not a displacement. For you, the "digital transformation" narrative is mostly noise. Your job is to digitize operations incrementally without abandoning the strategic logic that made you successful.

The vulnerable majority (50%+): You're in niches where digital is redefining value, but you've convinced yourself you're in the first category. Or worse: you've recognized the threat but framed the response as a massive transformation program you're "not quite ready for."

This last group faces the gravest danger, because they've combined accurate threat perception with paralyzing response framing.

The Perception Trap

Here is what we observe across hundreds of Mittelstand firms:

When asked about digitalization, the majority describe it as a large-scale transformation program requiring €500K-5M investment, uncertain ROI, multi-year timelines, and significant organizational disruption.

When presented with this framing, rational managers delay. They wait for more certainty. For the "right time." For a clearer path.

This waiting is the highest-risk strategy available.

Not because the transformation programs are wrong, but because the framing crowds out alternatives that don't require waiting.

Consider what the same firms overlook:

  • Process automation: €20-50K, 6-month ROI
  • Predictive maintenance pilots: €30-80K, 12-month ROI
  • Digital customer portals: €50-100K, 18-month ROI
  • Data analytics foundations: €10-30K, immediate operational insight

These aren't transformation. They're improvement: the same continuous improvement logic that built your competitive position. They compound. They build capability. They generate learning.

Yet Mittelstand AI investment actually fell in 2025, to 0.35% of revenues from 0.41% in 2024 (Handelsblatt/IfM study, January 2026). Firms are retrenching precisely when they should be building capability.

The firms that started incremental digital investments in 2019 now have six years of accumulated learning embedded in their operations. That learning doesn't sit in documentation. It's structural. It's in their processes, their people's skills, their data foundations.

You cannot catch up to embedded learning with a transformation program. You can only start accumulating your own.

The Chinese Mirror

While German industry has been contracting, a different competitive logic has been materializing.

BYD sold 4.25 million vehicles in 2024 and expanded aggressively in Europe throughout 2025, gaining ground against Tesla (whose German sales fell 48%) and established European manufacturers (Charged Fleet; BYD investor reports). The Nissan-BYD pool held 35% of European BEV sales in November 2025 (ICCT European Market Monitor).

But the headline obscures the mechanism.

BYD builds 75% of vehicle value internally: batteries, semiconductors, motors, electronics. German OEMs build 30-40% internally and coordinate the rest through tiered supplier relationships optimized over decades for internal combustion complexity.

When BYD built factories, they built greenfield: purpose-designed for EV production with no legacy constraints. When German OEMs convert factories, they retrofit at 2.5x the cost while working around architectural limitations that constrain how fast they can learn.

The cost differential is stark. Teardown analyses show BYD producing comparable vehicles for €10,000-12,000 less than German competitors. Not because of labor cost alone (German labor costs €45/hour versus €8 in China) but because of structural differences in production architecture that compound learning velocity.

And now BYD is coming to Europe directly.

The first production equipment arrived at BYD's Szeged, Hungary plant in December 2025. Trial production begins Q1 2026, with full mass production in Q2 (ChinaCarNews; Battery-Tech.net, December 2025). Initial capacity: 300,000 vehicles annually. The Dolphin Mini will be first, followed by the Atto 3, Dolphin, Seal, and Seal U.

By manufacturing in Hungary, BYD avoids the 17% additional EU tariff on Chinese EV imports, on top of the existing 10% duty. They're not just exporting to Europe. They're establishing European production with their supplier ecosystem following.

For many Mittelstand suppliers, the question isn't whether you'll work with Chinese OEMs. It's whether Chinese suppliers will displace you.

Two Futures, One Choice

Let me be direct about what the evidence suggests:

If you're in a digitally vulnerable niche and you wait:

  • The productivity gap with digital leaders will widen to 30%+ by 2030
  • Your best talent will leave for firms where the work is more interesting
  • Your customers will increasingly require digital interfaces you can't provide
  • You will become an acquisition target, either for digital leaders consolidating or for foreign competitors seeking market access
  • When competitive pressure finally forces action, you'll attempt catch-up via large transformation programs: the most expensive and riskiest approach

If you're in a legitimately resilient niche and you over-transform:

  • You'll waste capital chasing digital capabilities that don't translate to value in your market
  • You'll confuse your organization with initiatives disconnected from competitive reality
  • You'll weaken the focus that made you successful
  • You'll look sophisticated while your physics-based advantages erode from neglect

The strategic imperative is the same in both cases: Know which game you're playing.

Trumpf and KUKA: Two Paths

Consider two German Hidden Champions who faced digital disruption.

Trumpf recognized in 2011 that their laser technology leadership would increasingly depend on software-enabled services. They didn't launch a transformation program. They started building digital capability incrementally: pilots, platforms, integration, over a decade. By 2020, their TruConnect platform was operational. They maintained self-reliance (building digital capability internally rather than depending on external platforms) while adapting the expression of that principle to new competitive requirements.

Patient capital from family ownership enabled the ten-year horizon. Skilled workers from the German vocational system enabled the technical learning. The institutional infrastructure that supported their analog excellence supported their digital transition.

KUKA faced a different trajectory. Strategic uncertainty about digital positioning created vulnerability. In 2016, Midea acquired them for €4.5 billion. German institutions protected workers (employment guarantees) but not ownership. By 2022, KUKA was delisted from the Frankfurt Stock Exchange.

Both were Hidden Champions. Both faced digital pressure. One adapted through patient, self-reliant capability building. One hesitated and lost independence.

The difference wasn't resources. It was clarity about which game they were playing, and the willingness to start before the path was certain.

What To Do Monday Morning

I'll end with practical counsel, knowing that generic advice serves no one:

First, assess your niche honestly.

  • Is software redefining value capture in your market, or enhancing operational efficiency within stable value definitions?
  • Are platform dynamics creating new competitive structures, or is deep expertise still the primary differentiator?
  • Are your customers being served by digital-native alternatives, or do they still require your specific capabilities?

If you're uncertain, you're probably in the vulnerable category. The legitimately resilient know exactly why digital disruption doesn't threaten their core.

Second, reframe your response. Stop asking: "Are we ready for digital transformation?" Start asking: "What's the smallest digital investment that would generate learning?"

Transformation is not the unit of action. Improvement is. Start with €25K, not €2.5M. Prove value. Build capability. Compound.

Third, protect your actual advantages. Your customer intimacy, your process knowledge, your quality standards, your workforce expertise: these remain valuable. Digital capability should amplify them, not replace them.

If you're being advised to "become a platform" or "move to a subscription model" without clear connection to your existing advantages, you're being sold a strategy designed for a different type of company.

Fourth, watch the suppliers. BYD's Hungary plant begins production this quarter. Track whether Chinese OEMs integrate local suppliers or bring their ecosystem. The answer tells you how much time you have, and whether capability gaps are closeable.

Fifth, consider what patient capital enables. If you have family ownership or long-term investors, you have something Chinese competitors cannot replicate and public companies struggle to maintain: the ability to invest for ten-year returns. Use it. Trumpf's decade-long digital build was possible because no one demanded quarterly results.

The Real Risk

The narrative that German Mittelstand is "falling behind" misses the structural reality. You're not behind. You're bifurcating. Some of you are compounding digital advantages. Some of you are compounding delay.

The consultants who present transformation programs are selling solutions to problems they've framed. The politicians who demand action are responding to narratives they didn't create. The press that covers the "digital gap" is reporting statistics without context.

Your job is harder: to see your specific competitive position clearly, to choose the game you're playing deliberately, and to act with appropriate urgency.

The Mittelstand firms that thrive through the next decade won't be those who transformed fastest. They'll be those who understood which transformation actually mattered, and started building that capability while others were still waiting for certainty.

Certainty isn't coming. Start anyway.

References:

  • BDI (January 2026). "Tiny Growth in Germany After Two Years of Recession." Federation of German Industries economic report.
  • Charged Fleet (January 2026). "BYD EV Sales Unseat Top-Ranked Tesla in 2025."
  • ChinaCarNews (December 2025). "BYD Production Line Equipment Arrived in Hungary as Assembly Start Is Looming."
  • European Commission (January 2026). Economic Forecast for Germany.
  • Hall, P. A., & Soskice, D. (2001). Varieties of Capitalism: The Institutional Foundations of Comparative Advantage. Oxford University Press.
  • Handelsblatt/IfM Bonn (January 2026). Mittelstand AI investment trends.
  • HCOB/S&P Global (January 2026). Germany Manufacturing PMI, December 2025.
  • ICCT (December 2025). European Market Monitor: Cars and Vans, November 2025.
  • IfM Bonn (January 2026). "Future Panel Mittelstand 2025: Skills Shortages and Rising Labour Costs Are Putting Pressure on Companies."
  • JobsPikr (January 2026). "Germany Layoffs Deepen: VW Slashes 35,000 Jobs."
  • Simon, H. (2009). Hidden Champions of the 21st Century: Success Strategies of Unknown World Market Leaders. Springer.
  • Volkswagen AG (December 2024). "Agreement Reached: Volkswagen AG Positions Itself Competitively for the Future."
  • ZEW Mannheim ICT Survey; Acatech Industry 4.0 Maturity Index. Digital leader productivity analysis.

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