In the steps of Adidas

How smaller firms can survive globalisation

GLOBALISATION is daunting for many smaller firms that lack the financial and human resources to follow their customers as they move offshore. At the same time many of them are feeling the effects of globalisation in their domestic and export markets. Clusters of smaller firms in Italy and Germany that were once successful exporters have suffered as commoditised textiles, footwear and toys from China have swamped the market. They offer particularly instructive examples of how European firms are adapting to the challenges of a globalised economy.

Politicians and economists in western Europe look to small and medium-sized business to create the jobs that have gone in big companies. As the giants move production offshore, they turn their domestic operations into capital-intensive or high-added-value niche businesses that do not create many jobs. Export-minded small and medium-sized enterprises in Italy and Germany are also gradually transforming themselves, often with the help of new finance from private-equity investors; but they do not create a lot of jobs either.

Many will have to move some of their production offshore. Take Bechstein, a famous piano-maker, whose best instruments are made in a quiet little town called Seifhennersdorf, near the border with the Czech Republic. But the company has widened its product range, buying Zimmermann, an East German producer, and now makes pianos to less demanding standards in the Czech Republic, Indonesia and China. In its own way, this small company is doing much the same as giants such as Siemens, Philips or ABB, a Swedish-Swiss electrical giant. They all keep the production of core parts of their output at their home base, sometimes sending components for assembly in low-wage countries such as China. A growing number of other companies is now doing likewise.

Herzogenaurach is a town of 25,000 people in northern Bavaria, near Nürnberg, with a river running through its centre beneath a towering baroque castle. This sleepy stopover on the tourist trail hosted the Argentine football team during last summer's World Cup. It is a handy place for a footballer to be billeted because it is home to two of the world's leading sportswear companies, Adidas and Puma.

Herzogenaurach is living proof that as jobs drain away to China and other parts of East Asia, small local businesses in Europe can also go global. Adidas grew out of a little family business in the 1920s when two brothers, Adolf and Rudolf Dassler, started making leather goods in their mother's kitchen. The pair fell out in the late 1940s and Rudolf set up his own firm, Puma, to rival his brother's business, which took the name Adidas in 1948. Adidas nearly went bust in the 1980s and went through two rescue operations, sending production offshore to Asia and converting to a design and marketing company. In 1997 it bought the Salomon ski and sportswear brand, only to sell it last year as it bought Reebok to become the world's number two to Nike.

Puma was floated in 1986 but racked up losses for eight years. In 1993 it hired a new chief executive, Jochen Zeitz, a cosmopolitan brand-marketing executive from Colgate who had been educated in Italy and America. He thought Puma needed much the same treatment as Adidas. Production would have to go offshore because Germany could not possibly compete with low wages in South-East Asia. But design, product development and marketing carried on at the company's German base. For a while, after he took Puma into North America, he even moved his office to Boston to keep hands-on control of the most important expansion the company had made. Puma quickly got back into profit.

These days the company is expanding through joint ventures in Japan, China and Taiwan, as well as through subsidiaries in India and Dubai to serve the booming South Asian and Middle Eastern markets. In 2005 profit before interest and tax was around €398m on sales of €2.4 billion, with a gross trading margin of more than 50%, about the highest in the business.

Success stories such as Adidas and Puma are an inspiration to Europe's smaller companies as the winds of globalisation sweep around them. Many realise that they will have to go global, transforming themselves from manufacturing to marketing companies and keeping only 10-15% of their total workforce in their country of origin.

An hour's drive south-west of Herzogenaurach lies Göppingen, in the Neckar valley outside Stuttgart, the heartland of Germany's famous Mittelstand. These are the formidable medium-sized firms that helped to produce Germany's post-war economic miracle. They were financed by their local and regional banks, whose mission was to foster local enterprise. There are reckoned to be about 500 such companies that are world leaders in the tiny market niche they have chosen for themselves. Some of them, such as the Schuler metal press company in the centre of Göppingen, are suppliers to the German car and car-parts industry, down the valley where Mercedes, Porsche and Bosch have their factories.