Chinese companies in the German economy: from quantitative growth to qualitative change

Source: Yicai.com Pan Yinru 2015-11-04 15:55:00

From October 29 to 30, German Chancellor Angela Merkel concluded her eighth visit to China during her tenure. In addition to setting a new record for the number of visits by Western leaders to China, Merkel brought with her a total of 18,600,000,000 euros worth of cooperation agreements. Furthermore, she secured an order for 130 Airbus aircraft, a strategic partnership between German Volkswagen and China's Industrial and Commercial Bank, and the joint establishment of China-Europe International Exchange Co., Ltd. by the Deutsche Börse, the Shanghai Stock Exchange, and the China Financial Futures Exchange. These major deals spanned manufacturing and finance, illustrating the breadth and depth of Sino-German economic and trade cooperation.

Since 2008, an increasing number of Chinese companies have been active in the German market. Particularly in 2012, China's leading construction machinery company, Sany Heavy Industry, acquired 100% of the shares of Putzmeister, the global leader in concrete machinery, known as the "elephant" in Germany. This acquisition became a milestone in the German M&A market for Chinese companies and garnered significant attention in the European market.

Today, Germany has become the preferred destination for Chinese enterprises investing in Europe. According to the latest foreign investment report by the German Federal Agency for Foreign Trade and Investment, in 2014 China became the country with the highest number of project investments in Germany for the first time, with a record 190 projects, significantly surpassing the second-place United States (168 projects) and third-place Switzerland (130 projects).

Why has Germany become the most popular destination for Chinese enterprises in Europe? In which sectors are Chinese companies investing in Germany? What trends can we expect in the future? Recently, a reporter from the First Financial News Daily interviewed Huanping Zhang, the Managing Director of Eurasian Consulting GmbH, a company with extensive experience in the German M&A market.

Huanping Zhang, based on his extensive experience in the German market, told reporters from the First Financial News Daily that Germany is very welcoming to Chinese investments. In addition to traditional strong sectors such as automotive components and machinery, Chinese enterprises are increasingly making appearances in Germany's healthcare, automation, and even finance sectors.

Currently, Fosun International is planning to acquire the German private bank Hauck&Aufhäuser for 233,000,000 USD (approximately 1.82 billion HKD). This transaction is awaiting approval from German regulatory authorities. If Fosun ultimately completes this acquisition successfully, it will signify another victory for Chinese enterprises in the German M&A market.

Chinese Enterprises' Mergers and Acquisitions in Germany: From Quantity to Quality

Founded more than a decade ago, Huanping Zhang's Eurasian Consulting GmbH has witnessed the vigorous development of Chinese enterprises in the German market. Reflecting on the past 10 years, Zhang Huanping notes that there have indeed been significant changes. Specifically, there are two turning points. Before 2008, Chinese enterprises' acquisitions in the German market were primarily in pure manufacturing sectors, such as machine tools and equipment, with acquisition targets being mostly small-scale and bankrupt companies, with transaction amounts typically in the range of a few million euros per deal. One of the relatively successful cases was Beijing First Machine Tool Factory's acquisition of Waldrich Coburg, a world-renowned producer of gantry milling machines, on October 24, 2005.

Regarding the slow pace of Chinese companies in the German M&A market during this period, Huanping Zhang believes that the main reason is that Chinese companies had little understanding of German M&A and were inadequately prepared, often going there with just a translator or a domestic lawyer. Zhang also acknowledges that a pessimistic mood about repeated rejections abroad was spreading among Chinese companies at the time. "On top of that, during the 2008 and 2009 period of the financial crisis, many clients came to us asking how we viewed these failed cases," Zhang said.

Fortunately, after the financial crisis, the global economy exhibited a "scissors effect" with the US and Europe experiencing downturns while China saw an upward trend. The steady stream of orders from Chinese companies genuinely helped many German small and medium-sized enterprises. "Between 2008 and 2014, there were several landmark cases of Chinese companies in the German M&A market."

The benchmark cases mentioned by Huanping Zhang, in addition to the previously mentioned Sany acquisition of Putzmeister, include XCMG's acquisition of Germany's second-largest concrete machinery manufacturer, Schwing, and Ningbo Joyson Investment Group Co., Ltd.'s acquisition of the German automotive component supplier Preh. In Huanping Zhang's view, the latter is the most successful case of Chinese companies acquiring German enterprises to date, as through this acquisition, Joyson Investment Group transformed from a local private automotive parts company into a leading brand of Chinese automotive electronics, and achieved a global layout in Europe, the Americas, and Asia.

Summarizing the characteristics of this phase, Huanping Zhang believes that the number of large private enterprises, listed companies, and SOEs engaging in mergers and acquisitions in Germany has increased, and the targets of these acquisitions are often local renowned brands, such as Germany’s hidden champion enterprises, and even global champions. At the same time, many enterprises have completed industrial upgrading through mergers and acquisitions. The amount of these mergers and acquisitions has soared from several million euros to several hundred million euros.

After 2014, Huanping Zhang stated that Chinese companies' mergers and acquisitions in Germany have seen new improvements in both quantity and quality. "Currently, the transaction values of the cases we are looking at are all several billion euros," Zhang said. "There have also been many changes in the M&A sector, evolving from traditional manufacturing to fields such as healthcare, financial services, and automation."

According to German statistics, China's investment in Germany last year increased by 37% compared to 2013. The report by the German Federal Agency for Foreign Trade and Investment shows that last year, China's main investment areas in Germany were electronics and semiconductors (16%), mechanical engineering (14%), financial services (9%), and information and communication technology and software (7%). The primary commercial activities of Chinese enterprises in Germany were sales and market support (51%), followed closely by services (8%). Nearly 10% of the projects came from the production and R&D sectors.

In addition, Huanping Zhang and his team clearly felt that the decision-making speed for Chinese corporate acquisitions had significantly improved. "After 2014, it was a seller's market driven by the availability of targets, and for Chinese companies, if you were too slow, the opportunities slipped away," Huanping Zhang said.

German company points to Chinese buyer taking over

In the market after 2014, Huanping Zhang also noticed an interesting phenomenon: many German companies, when hiring Eurasian Consulting GmbH as their sell-side advisor, particularly emphasized that the international buyers must include Chinese companies or Chinese investors. "If you can't find a Chinese buyer, German companies feel like you haven't done your homework. Many German companies now explicitly want Chinese buyers to take over," Huanping Zhang quipped. In fact, it's not hard to understand why. China is now the largest market in global automotive, machinery, concrete, and other market segments. German companies believe that, given this context, finding other European or American buyers is merely "accompanying." "The enthusiasm of the seller's market indicates that German companies still have high expectations for Chinese buyers," Huanping Zhang said.

In Huanping Zhang's view, German companies, especially some small and medium-sized enterprises, whether they are hidden champions or not, hope that Chinese buyers will take them over because Chinese companies have stronger financial capabilities. Huanping Zhang pointed out that German small and medium-sized enterprises also face pressure from globalization. "Most are family-owned, and after several generations, the shareholders' enthusiasm is not as strong as that of Chinese family enterprises today. Many shareholders, who are often numerous, consider dividends rather than the long-term development of the company," Huanping Zhang said. "Moreover, European companies have relatively thin profit margins, and it is difficult for traditional family enterprises to raise capital through listings. Additionally, banks are strict in lending to small and medium-sized enterprises, which leads to limited cash flow for these companies." Therefore, the appearance of Chinese buyers with capital at the right time is like a "timely rain" for these small and medium-sized enterprises.

Moreover, German small and medium-sized enterprises have limited market penetration capabilities and face difficulties in entering the Chinese market, so it would be advantageous for them to be acquired by a local company that already has a sales network in China.

Of course, Huanping Zhang also pointed out that current Chinese acquisitions of German companies often leave 20% to 30% of the shares, not completely "buying out" the German companies. "20% to 30% of the shares also means that the overseas management still has substantial management authority," Huanping Zhang said.

In Huanping Zhang's view, Chinese companies acquire German firms for three main reasons: technology, the sustainability of the brand, and market access. For example, building a brand reputation takes time. Many German customers and other overseas consumers are not well-versed with Chinese brands, so through mergers and acquisitions, Chinese companies can quickly gain a brand that has been around for decades or even over a century. Joyson's acquisition of the German company Preh, whose history dates back to 1919, is a case in point. Zhang has also observed from past acquisition cases that Chinese enterprises are not merely taking the brand and technology and leaving in Germany; they are focusing on sustainable development.

Do Not Demonize German Unions

Regarding how to view German unions, a topic of widespread concern among Chinese investors, Huanping Zhang stated, "There is still a great misunderstanding about unions in China. In the projects we have taken over, none have been heavily opposed by unions. On the contrary, they have been very welcoming of Chinese investment." Zhang believes that in many cases, unions directly express support for Chinese investors, while they are more cautious about the entry of PE and other financial investors.

"If the union does indeed resist, we need to think about whether the mindset during the merger was correct. Sometimes, a wrong approach can set the stage for a series of obstacles later on," Huanping Zhang reminded.

In addition to German trade unions, Huanping Zhang believes that the German media's attitude toward the influx of Chinese capital has been pragmatic over the past decade. "A few years ago, there were still negative reports. Back then, German public opinion was concerned that Chinese companies would transfer all brands and technology to China after acquisitions. Later, it turned out that this was not the case," Zhang said.

For example, the current close attention to Fosun Group's proposed acquisition of a German private bank has been reported rather neutrally by German media, as the financial sector remains a relatively sensitive industry in the German economy.

Regarding the common issues faced by Chinese enterprises in mergers and acquisitions in Germany, Huanping Zhang believes there are mainly three categories. The first is the company's management culture and governance model. "Many Chinese companies are run by the boss, whereas in Germany, shareholders have the final say on strategy, and the management team is in charge of operations. Therefore, the 'one-man show' model of Chinese bosses is difficult to implement in Germany," Huanping Zhang said.

Second, there is a lack of talent with international management experience. Huanping Zhang gave an example, noting that many German small and medium-sized enterprises require personnel who are fluent in German and have management experience, which often poses a challenge for Chinese companies sending expatriates.

Moreover, there is still a significant difference in compensation between Chinese and German companies. "Regarding travel expenses, German engineers may be accustomed to flying business class, and it would be unreasonable to expect them to travel economy class as domestic employees do. Sometimes, German engineers earn more than the CEOs of domestic companies, and it is completely impossible to expect them to accept a salary reduction after the acquisition," Huanping Zhang said. In Huanping Zhang's view, it is inappropriate to reduce the costs of foreign employees and increase the costs of domestic employees. This requires the acquired company to make adjustments and gradually narrow the gap.

Therefore, for Chinese enterprises expecting to make gains in the German market, in addition to preparing their internal teams by building up talent reserves and accumulating experience, they also need to find a good investment bank or intermediary. During the acquisition process, they should gradually accumulate experience step by step, and a hasty and impulsive attitude is not advisable.

In Huanping Zhang's view, in the future, overseas mergers and acquisitions will have become a necessity for corporate survival, and the ability to conduct and integrate such acquisitions will be a core competitiveness in measuring China's excellent enterprises.