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Emerging Multinational Companies from China – new competitors to Germany’s core industries?

(May 22nd, 2014)

By ECOVIS Beijing

Our last article was about Multinational Companies (MNCs) from Asia. In this article we take a closer look at the global brand presence of Chinese Emerging Multinational Companies (EMNCs) and the way they are perceived from outside of China as well as the growing competitiveness of China’s MNCs in Germany’s core industries. In the end we look at important abilities for successful M&A deals.

Global brand presence and perception of China’s MNCs outside of China

How many of these Chinese corporations do you recognize?

emerging_multinational_companies_from_china


Many of the EMNCs from China might be unknown to you, although among them there are large companies due to the massive Chinese domestic market. In 2001, a total of twelve Chinese companies were included in Fortune’s Global 500 list. Only a decade later, in 2011, that number had risen to 61 (including four companies with headquarters in Hong Kong). The global brand presence of China’s best-known multinationals is, however, nowhere near the likes of Coca-Cola, General Electric, Intel, McDonald’s, Google, Honda, Sony, Volkswagen and other such global giants. However, the level of awareness of consumers in Western countries with regard to Chinese companies is, overall, constantly growing.

emerging_multinational_companies_lenovo

Many people in Germany are, for instance, familiar with Huawei and Lenovo. One reason for this is that Germany does not have well-known companies in the respective industries anymore. Medion, the last German producer of PCs, was actually acquired by the Chinese PC producer Lenovo and smartphones were never produced by German companies on a big scale. What helped further was the fact that these two companies do not have the image of being low quality producers – an issue with which many Chinese companies still deal with today. However, this negative perception of Chinese products is slowly fading away.

In 2012, for instance, Oliver Rootsey, an account manager with Lenovo in Germany, said that after Lenovo bought the IBM PC business some IBM clients wondered whether Lenovo could still continue to deliver high-quality products. Lenovo in Germany lost clients at the beginning but most of them came back later when they realized that it was a soft merger and that Lenovo would live up to their expectation for high-quality products. He concluded that the perception among Europeans is changing and that China is actually moving away from imitation to innovation.

New competitors in Germany’s core industries?

Other than Lenovo and Huawei there are many large yet unknown Chinese companies in Germany’s core industries, for instance in the following sectors:

  • Automotive industry (Beiqi Foton Motor Company, Geely Holding Group, Chery Automobile Corporation)
  • Machinery (Sany Group, XCMG, China National Machinery Corporation, Zoomlion Heavy Industry Science & Technology Corporation)
  • Renewable energy (Goldwind Science & Technology Corporation, Trina Solar, Suntech Power Holdings, Sinovel Wind Group)
  • Transport and healthcare (COMAC, China CNR Corporation, China South Locomotive & Rolling Stock Corporation)

The traditional German industries, for example the automotive, machinery and renewable energy industries, are also the ones in which Chinese companies invest the most when looking at the Chinese acquisitions of German firms and where they are becoming more and more competitive. The motives of Chinese investors are the same. They want superior technology, foreign brands to overcome the low quality image and access to the European market.

emerging_multinational_companies_from_china_investment_in_germany

The catching-up-strategies of Chinese EMNCs play out in many different forms. Following, we take a look at two examples in the automotive industry and in the machinery industry:

Automotive

Whereas Korea and Japan succeeded in establishing an export oriented automotive industry, Chinese OEMs have been struggling for years until today. In the past, most Chinese cars failed miserably to meet Euro NCAP requirements, receiving only two or three stars. However, in 2013, the Chinese manufacturer Qoros was awarded the maximum five stars with its first ever produced automobile, the Qoros 3. In Slovakia, a neighboring country of Germany, the car is already being sold at around 21,000 Euros. Slovakia was chosen as the test market in Europe for the Chinese producer to gain experience and see how its car is perceived. “We are the only Chinese manufacturer producing cars according to Western standards” said Volker Steinwascher, former top manager of Volkswagen and now Vice Chairman of Qoros.

 emerging_multinational_companies_qoros

Qoros is actually an invented name – the Q is intended to represent quality while the pronunciation of Qoros is similar to the Greek word “khoros” which means a chorus of many voices. This is to reflect the multinational nature of the company – many experts from all over the world work together to create high quality products. Indeed, the company’s top-level managers come from European automotive companies and Qoros selects only world-leading technology and service companies as its suppliers.

Matthias Wissmann, head of the German Association of the Automotive Industry, said in 2013 that Chinese brands are still focusing on the growing home market but he thinks that Chinese companies will also increase their exports in several years, not only to emerging countries but also to Western markets. Though there are currently no exports to Europe, the Chinese have already arrived in Europe – not with own cars but strategically and financially in form of acquisitions, partnerships and cooperation. For instance, every foreign manufacturer which wants to sell cars in China has to establish a Joint Venture with a Chinese partner. This led to dozens of Joint Ventures with basically all Western car brands. Both sides profit from this as the Chinese profit from know-how and the foreign OEMs gain easier access to the market. The economic recession in Europe was also beneficial to the Chinese: Geely bought Volvo for a far cheaper price than paid by Ford years earlier and Dongfeng now owns the same amount of shares, 14 percent, of PSA as the French state and the founding family Peugeot.

You will gain further insight into the Chinese automotive sector including the international expansion and catching-up-strategies of Chinese manufacturers in an interview with an expert coming soon.

Discuss this topic in the LinkedIn Group FocusChina

Machinery

Another example of a new global market leader being born and Germany losing its presence as the number one can be seen in the machinery industry or, more precisely, in the mobile concrete pumps industry. Sany, a Chinese low-quality manufacturer, bought the high-quality manufacturer Putzmeister from Germany.

emerging_multinational_companies_from_china_sany emerging_multinational_companies_from_china_putzmeister

These pumps which could cost up to 1.5 million Euros are normally used for the pumping of concrete. For example, during the construction of the Burj Dubai, concrete was brought 450m vertically upwards with concrete pumps from Putzmeister and they were also used in the Fukushima nuclear disaster for the cooling and later the building of a sarcophagus over the Fukushima reactor.

After the acquisition of Putzmeister by Sany in 2012, the Chinese producer Sany became the world’s leading concrete machinery manufacturer. Before the deal, Sany was mostly focused on the Chinese market and produced mobile concrete pumps of lower quality compared to Putzmeister which had already sold its high-end mobile concrete pumps on many international markets for a long time. Dr. Dr. Renate Neumann-Schäfer, CFO of Putzmeister, said that the coming together of both companies was a strategically intended fusion. During the economic crisis, revenues of Putzmeister declined and at the same time the market for mobile concrete pumps moved more and more to China. Putzmeister reduced its activities in the US and Spain and began searching for a partner for the expansion in China which had turned into the largest market for mobile concrete pumps globally. The state-owned and worldwide number seven, Zoomlion, was also interested in acquiring Putzmeister and it was said that only Zoomlion would be entitled to come together with Putzmeister. But after three weeks of confidential negotiations, the worldwide number six, Sany Group, and Putzmeister sealed their deal. Dr. Dr. Renate Neumann-Schäfer said that “the Copy bought the Original for 525 million” EUR. As already mentioned above, all Chinese deals in Germany are asset-seeking but most at the same time also market-seeking. With the acquisition of Putzmeister, Sany became the world leader and not only gained access to new superior technological know-how but also to worldwide markets.

Important abilities for successful M&A deals

The ability of a firm to recognize the value of new information, assimilate it and apply it to commercial ends is a critical factor for successful M&A deals.

What has to be said is that Chinese EMNCs should not get too excited just because of their target company’s seemingly positive contribution. What the Chinese company should do first is to evaluate its ability to recognize the value of new information, assimilate it and apply it to commercial ends. If the company has weak abilities it may not be able to fully evaluate the target firm. If this is the case, the Chinese firm should choose appropriate business and financial consultants. With weak abilities you may be unable to assimilate and successfully apply the benefits of the acquired strategic assets. Always remember: The biggest challenge is not getting the right deal or target but having the capability to handle the post-merger integration. A firm with strong abilities can leverage the potential and enhance its competitive advantage. When Lenovo and Sany acquired their target firms they were successful because the management was aware of the importance of these abilites. There are other cases of Chinese companies where managers didn’t pay enough attention to them and the planned goals were not achieved. In our next article we will take a look at two cases that show the significance of these abilities.

With contributions by Markus Mönch (ECOVIS Beijing)

Richard Hoffmann Richard Hoffmann is a Partner at ECOVIS Beijing China. Richard obtained an honor’s degree in law and worked in Germany, America and China for various prestigious law firms prior to joining ECOVIS. He has published more than fifty articles in international magazines, frequently speaks at high profile events in China and abroad and is often invited as a legal expert by international TV. Contact: richard.hoffmann@ecovis.com
Ecovis Beijing is the trusted tax and legal advisor of several embassies and official institutions in China. It specializes in mid-sized international companies and focused on tax & legal advisory, accounting and auditing. If you’re interested in finding out more about tax and legal, don’t hesitate to sign up to our Newsletter or give us a call  +86 10-65616609 (ext 811/806)   or contact us directly via Beijing@ecovis.com
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Author:
Richard Hoffmann
richard.hoffmann@ecovis.com
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