Key Takeaways:

• Indian SMEs are central to manufacturing growth but are constrained by gaps in finance, technology, skills and compliance.
• Policy initiatives create an opportunity to scale SMEs’ role in raising manufacturing’s share of GDP.
• Germany’s ‘Hidden Champions’ show the power of niche focus, innovation and long-term strategy.
• The article outlines a practical roadmap for Indian SMEs to achieve global competitiveness.

India’s manufacturing sector is at a critical inflection point, driven by national ambitions, shifting global supply chains, and rapid technological change. Small and Medium-Sized Enterprises (SMEs) lie at the centre of this transformation, contributing significantly to employment, innovation, skills development, regional growth, women’s participation, and exports. Drawing on my experience working with Indian SMEs from a German industrial perspective, this article explores the opportunities and challenges facing this segment, the role of SMEs in advancing India’s manufacturing ambitions, and how lessons from Germany can accelerate their growth. 

The Strategic Importance of SMEs in India’s Manufacturing Vision 

India’s manufacturing ambition is anchored in initiatives such as Make in India, Atmanirbhar Bharat (self-reliant India), and production-linked incentive (PLI) schemes across key sectors. These initiatives aim to increase manufacturing’s contribution to GDP from approximately 17–18 per cent to 25 per cent and to create millions of high-quality jobs. Unfortunately, the SME’s share in GDP has stuck around 15-18 per cent over the years. SMEs, defined in India as enterprises with investment in plant and machinery up to Rs 0.5 billion and turnover up to Rs 2.5 million, make up over 90 per cent of all industrial units in the country. They account for nearly half of industrial production and about 40 per cent of total exports. 

The quantitative contribution of SMEs is matched by qualitative significance: they serve as feeders to large manufacturers, incubators for innovation, and agents of regional economic development. The mass-scale employment potential of SMEs must be leveraged to prevent the demographic dividend from becoming a demographic disaster. Their presence in Tier II and Tier III cities and smaller towns ensures that manufacturing benefits are distributed beyond major urban centres, aligning with the objectives of inclusive growth.

Strengths That Propel Indian SMEs Forward 

Several intrinsic strengths enable Indian SMEs to play a central role in driving manufacturing: 

Cost Competitiveness: Indian SMEs benefit from relatively low labour costs, which, when coupled with a growing supply of skilled labour, provide a compelling cost base for labour-intensive and value-added manufacturing segments. During recent engagements in India, I noted that labour costs are a relative advantage in sectors such as textiles, automotive components, casting & forging, and electronics assembly compared with many developed markets. 

Flexibility and Agility: Unlike large corporations bound by rigid processes and hierarchical decision-making, SMEs demonstrate flexibility in product design, customisation, and niche market penetration. This agility supports rapid switching among product variants, tailoring to customer specifications, and responding dynamically to demand shifts—attributes increasingly valued in global markets that demand responsiveness. 

Local Market Knowledge: Indian SMEs possess nuanced insights into local supply chains, consumer behaviour, and regional business practices. These insights equip them to navigate India’s diverse market landscape more effectively than multinational corporations that may overlook cultural and microeconomic differences. 

Challenges That Temper Growth Potential 

Despite their strategic strengths, Indian SMEs confront several structural and operational challenges that can constrain scalability and international competitiveness. 

Access to Finance: Limited access to affordable credit remains a perennial issue. Although schemes such as the Credit Guarantee Fund Scheme for Micro and Small Enterprises (CGTMSE) and priority-sector lending have improved the financing landscape, many SMEs still face high interest rates, stringent collateral requirements, and complex documentation. During discussions with SME leaders in Kolhapur and Pune, a recurring theme was the difficulty in securing working capital for capacity expansion and technology upgrades. 

Technological Adoption: Technology adoption, particularly in Industry 4.0 domains (automation, IoT, AI), is uneven. While some SMEs have begun digital transformation journeys, a significant proportion rely on conventional equipment and manual processes. This gap affects productivity, quality consistency, and integration into global supply chains that increasingly require digital readiness. My exchanges with German manufacturing partners underscore how digital maturity correlates directly with supply chain inclusion and quality benchmarks. 

Skill Gaps: While India has a large workforce, skill quality varies drastically. SMEs often struggle to recruit and retain employees with advanced technical capabilities, especially in precision engineering, automation, maintenance, and data analytics. Workforce training programs exist, but alignment with evolving industry needs remains a work in progress. SME often do not have resources, methods or vision to train their employees 

Regulatory and Compliance Burden: Although reforms such as the introduction of the Goods and Services Tax (GST) and simplification of labour laws have reduced compliance complexity, many SMEs still face procedural hurdles in licensing, certification, and tax compliance. These hurdles consume managerial bandwidth and divert attention from core manufacturing, development, and marketing priorities. Corruption at ground level also remains a major obstacle.  

The German Experience: Learnings from German Hidden Champions 

Prof Dr Hermann Simon has been conducting and updating a long-term study (over three decades) of Germany’s Hidden Champions. These are mostly mid-sized, family-run B2B companies. Mostly manufacturing niche industrial products, hence less known outside their own ecosystem, but still tend to be amongst the top three worldwide in their niche. 

Some of the key strengths of Hidden Champions (According to Prof. Simon) are: 

Extreme Market Focus (Niche Leadership) 

Hidden Champions deliberately focus on very narrow, well-defined global niches rather than broad markets. 

• Typically ranked #1 or #2 worldwide in their niche 
• Avoid diversification that dilutes expertise 
• Possess deep, application-level understanding of customer needs 

Global Orientation from an Early Stage 

Despite being headquartered in small towns or rural regions, Hidden Champions think and act globally. 

• High export ratios (often 70–90 per cent) 
• Early internationalisation 
• Presence close to customers via subsidiaries rather than distributors 

This global mindset compensates for the limited domestic market-size. 

Strong Customer Proximity 

Hidden Champions maintain unusually close relationships with customers. 

• Direct, long-term customer relationships 
• Deep integration into customer processes 
• Frequent co-development of products and solutions 

This closeness enables: 

• High switching costs 
• Early detection of emerging needs 
• Superior customisation capabilities 

Relentless Innovation Leadership 

Innovation is continuous, incremental, and customer-driven. 

• Above-average R&D spending (relative to revenue) 
• Focus on practical, application-oriented innovation rather than disruptive hype 
• Strong internal engineering competence
• Many Hidden Champions dominate patent filings in their niche. 

Long-Term Strategic Orientation

Hidden Champions prioritise long-term value creation over short-term financial results. 

• Often family-owned or privately held 
• Stable ownership structures 
• Willingness to invest patiently in R&D, skills, and market development 

Large companies think in quarters, Hidden Champions think in generations. 

Decentralised, Lean Organisational Structures 

Despite global operations, organisations remain lean, fast, and entrepreneurial. 

• Flat hierarchies 
• Short decision-making paths 
• Strong accountability at the management level 

Top management remains deeply involved in technology, customers, and strategy. 

Highly Motivated and Loyal Workforce 

Hidden Champions exhibit exceptional employee loyalty. 

• Low staff turnover 
• Strong identification with company mission 
• Heavy investment in vocational training and skill development 

Many benefit from Germany’s dual vocational training system, creating a steady pipeline of skilled technicians. 

Operational Excellence and Quality Leadership 

Quality is non-negotiable and embedded in the company culture. 

• Zero-defect mindset 
• Strong process discipline 
• High reliability and durability of products 

This results in premium pricing power despite operating in industrial markets. 

Selective Use of Branding 

Hidden Champions rely less on mass marketing and more on reputation within professional circles. 

• Brand recognition is high among customers but low among the general public 
• Marketing budgets are modest 
• Sales are driven by technical credibility and trust 

Hence the term “hidden”—they are well known to customers, unknown to the public. 

Strong Leadership Continuity 

Leadership is stable and often internal. 

• CEOs often stay for decades 
• Leaders typically have technical backgrounds 
• Strong personal commitment to the firm’s niche 

This continuity ensures consistent strategy execution over long periods. 

Why This Matters for Indian SMEs 

Prof Simon repeatedly notes that Hidden Champions are not a German monopoly. The model is transferable to other countries—provided firms embrace: 

• Focus over scale 
• Capability over cost alone 
• Long-term thinking over opportunism 
• Quality over quantity 
• Skilled resources over cheap labour 
• Focus on premium customers over a large number of customers 
• Margins over volumes 

For Indian SMEs aspiring to global relevance, the Hidden Champion framework offers a practical roadmap rather than an abstract theory.

Conclusion: Transforming Ambition into Reality 

Indian SMEs are indispensable to the country’s manufacturing ambition. Their scale, entrepreneurial drive, and adaptability are potent assets. However, realising this potential at scale requires a concerted effort across multiple fronts: enhancing access to finance, deepening technology adoption, bridging skill gaps, and fostering quality and export orientation. Drawing on the German Mittelstand (SMEs) experience can provide actionable insights for Indian SMEs and ecosystem stakeholders. 

As India positions itself in the global manufacturing map, SMEs are not just contributors; they are catalysts of growth, innovation, and resilience. Their success will determine the extent to which India can translate its manufacturing ambitions into sustained industrial leadership. 

Reference: 

Most of the findings are from Dr Manoj Barve’s PhD thesis: Comparative study of Indian and German SMEs: Innovation, Skills Development and Internationalisation / http://hdl.handle.net/10603/621310)

About the author:

Dr Manoj Barve is the Head of the BVMW Representative Office in India, he supports cooperation between Indian and German/European SMEs at various levels, like technical and commercial collaborations, joint ventures, and business development. He has over 30 years of global corporate experience, with a career footprint across several countries. He previously served as the Director of Finance and Member of the Board at Alfa Laval India, and held similar positions at ThyssenKrupp India, Hydro Aluminium Deutschland in Malaysia, Eaton CEAG Sicherheitstechnik, ITT Richter Chemie-Technik, PwC in Germany, and McDermott Inc Dubai.