Scotland’s business landscape is diverse, but large multinationals, recently anointed “unicorns” and start-ups overshadow the contributions made by many of the SMEs that make up and power the majority of the nation’s economy.
While “Mittelstand” – or Germany’s SME sector – is fully recognised and lauded in Germany, Scotland’s middle market receives comparatively little attention despite its many successes. In fact, my own research at the University of Edinburgh’s Business School indicates that Scotland’s “hidden champions” – relatively unknown firms attaining world market leadership in quirky or unsexy niches – are more prevalent than anyone had realized.
These hidden champions can sometimes reach market shares of 70 to 90 per cent in niche segments, have export ratios that can reach 99 per cent but remain under the radar of the public and media eye. During my study on best-kept secrets in the corporate sector, I identified 50 across Britain, including eight in Scotland.
Prime examples of Scottish hidden champions include Livingston-based Touch Bionics, a global market leader in the area of upper limp prosthetic technologies. Through continuous innovation and a tightly defined and focused niche strategy, Touch Bionics grew its team and revenues in 2015 with sales up 11 per cent to £15 million.
Also in Livingston is Cyberhawk Innovations, which claims world market leadership in aerial inspection and surveying using remotely operated aerial vehicles (ROAVs) – better known as drones in the energy industry. Its pioneering approach and aim to make Scotland the world leader in this area allowed the company to increase revenues by over 100 per cent since 2014, during which time their team has almost doubled in numbers.
With the contributions of innovators such as these, Scotland can claim the existence of a successful mid-cap sector or a “McMittelstand” – a smaller equivalent of the successful German Mittelstand. Germany, my nation of birth, has 26 times more hidden champions than Britain, with more than 1,300 identified.
These companies form the backbone of the economy and are largely responsible for the sustained export success and economic growth, particularly in the manufacturing sector. This divergence between Germany and Britain, including Scotland, can be explained by several factors: differences in the mechanics of capitalism, institutional frameworks and, not unimportantly, the mentality of business owners.
Anglo-Saxon companies tend to be more short-term orientated in terms of managerial style, policy and innovation. British firms often use shortcuts to boost growth but in retrospect many of these big leaps backfire, revealing initially flawed business models of unrealistic aspirations. This mind-set of fast growth appears to weaken the economy and differs from the German Mittelstand mentality of long-term planning and slower but more sustainable organic growth.
German hidden champions tend to remain independent, are often family-owned business and preen themselves with generational continuity but most importantly they are known for their regional and social contributions, all of which are typical qualitative definitions of a classic Mittelstand company. British counterparts have a greater tendency to go public, aim for non-organic international growth through M&A activity and show less regional commitment with many more inclined to consider moving headquarters. As we know, this area has been well covered in the media around the time of debates on Scottish independence and Brexit.
The CBI and Scottish economists like Jim and Margaret Cuthbert are big supporters of the mission to show more support to middle-market firms through policies and tax incentives. Such backing will hopefully support the growth of a more robust and sustainable McMittelstand and champions of the not infrequently undervalued and forgotten army of middle-market firms in Scotland.
• Dr Alessa Witt is a board member of the German British Forum and contributor to the recent book The Best of German Mittelstand