Wednesday, July 10, 2013

China Advances in Germany: Mittelstand Part Two

There was a lot of interest in my post last year on Chinese acquisition and investment  in German Mittelstand companies. That earlier blog tracked 2009 to 2010 activity. Uwe Karbent of Brentwood-International has sent me additional Chinese M&A figures for Mittelstand companies, covering 2011 and 2012. These were gathered from Die Welt and Ernst&Young .

2011:
Medlon (electronics), Essen
Sellner (automotive), Heilbronn
EMAG (machinery), Salach
KSM (automotive), Hildesheim
Format Tresorbau (industrial), Hessich Lichtenau
Gustrower Warmepumpen (machinery), Gustrow
Preh (automotive), Bad Neustadt
CEC Crane (engineering consulting), Freystadt
Rohde & Schwarz (mobile/radio), Munich
Saar Gumml (automotive), Waddern/Buschfeld

2012:
Sunways (solar), Arnstadt
Drossbach (machinery), Rain am Lach
Taltored Blanks (automotive), Duisburg
Schwing (machinery), Herne
Saunalux (industrial). Grebenhain
Kiekert (automatic)/ Helingenhaus
Kion (automotive), Wiesbaden
Putzmeister (machinery), Alchtal

As a businessman in China, I know anecdotally that 1,000  of China's 5,000 PE firms are searching Germany for more acquisitions. What they will come up with in 2013 and 2014 is any one's guess.
The German Mittelstand companies are fair pickings for Chinese technology enrichment in autos and industrial machine manufacture.

Why are the Mittelstand families selling? These companies are privately owned, while still contributing 70% to German GDP. Their owners are aging and their children are wealthy enough to choose their own independent road of new enterprise, endeavor or pure leisure...away from the  dense multi-generational bonds of family devotion to a specialized manufacture.

Every wealthy family business faces this prospect as their children seek fresh fields. But nowhere in the world is there so dense a cluster of family owned mid size enterprises that supply the automotive and industrial machinery industries, as their are in Germany. These are key sectors for China.

There is no entrepreneurial excitement of growth for these Mittelstand companies. One part of the EU is in recession and the better part is on the precipice of recession. What is the future of these wealthy family businesses, when the SDP and Green Party are calling for higher corporate and personal tax rates? Merkel and her coalition will not be around forever. Why wait for the inevitable tax pressure, while China is heavily investing in indigenous automotive and industrial machinery? In time the selling price will decline.

While Germany has restrictions on foreign investment in the automotive sector, this does not cover the multitudinous German private enterprises that supply this sector. Eventually, as Asians autos displace German autos, German will shut the door of Mittelstand sales to China. With no other buyers in the world, it will be too late for a private German family to cash in.

Milton Kotler
7.10.13




Sunday, March 10, 2013

Marketing Social Value


Social marketing has been around for several decades, since Philip Kotler’s pioneering work in social cause marketing. What started out two decades ago as an arena of marketing for non-profit organizations to help good causes raise awareness, action and money, has now evolved into a mantra of consumer and B2B branding.

 
 A new principle has been added to the traditional 4Ps of marketing – namely, the personal value to consumers of participating in the wellbeing of their environment and community through purchase of socially conscious goods and services. Let’s call this “P” people, in the sense of the personal value of social and environmental betterment.

 
            Companies in developed markets and in the advanced sectors of developing markets are embedding their product and service offerings in  tangible programs of social and environment improvement. Starbucks has pioneered cup recycling; Subway is a QSR leader in the cause of anti-obesity. PetSmart has performed great service for animal welfare. Many other companies have followed suit, like the wilderness protection programs of Timberland; the fair wage policy of Patagonia; and the renewable energy products of GE. Their purpose is to show the social benefit of their products and services to the better the health, diversity, human and animal rights, environment, education, and general well being of society. They are marketing their products and services to do good for society, and increasing their profits by doing this.

 
As quality differentiation in the marketplace has flattened; as business scale has achieved cost and pricing flexibility; as distribution has become universally accessible; and as promotion has becomes ubiquitous, social value has emerged a the new frontier of competitive advantage. Research has shown that all 4Ps being equal, customers will select the alternative that they sincerely believe is doing more good for society.

 
There a basically six ways that companies are demonstrating their product, service and corporate social value, as documented in GOOD WORKS, by Philip Kotler, David Hesekiel and Nancy Lee (2012, Wiley): 1) Taking actions that promote a good Cause; 2) Enabling consumer contributions to Causes based on product sales; 3) Marketing new products and services that motivate and support positive personal and social behavior change; 4) Making direct donations to a Cause; 5) Employee volunteering in Causes and communities; and 6) Adopting socially responsible business practices.

 
A few cases will suffice to illustrate this trend: Starbucks, PetSmart and Subway.  

 
Starbucks:  On the Cause awareness and action front, Starbucks provides attractive cup recycling containers and sponsors cup summits of manufacturers, materials suppliers, retailers and academic groups to explore new systems of cup recycling. For Cause related marketing, Starbucks contributes 5 cents for each bottle they sell of Ethos brand water to the Ethos Water Fund for projects in water stressed countries. In 2011, the Fund contributed $6 million to projects around the world. For corporate social marketing, Starbucks gives customers free bags of coffee grounds for organic composting, instead of using artificial fertilizer. For corporate donations, Starbucks gave $22.4 million in cash and kind for community building projects programs in 2010. With regard to volunteer service, Starbucks hosted in 2011 a global month of community service, supporting its employees to take positive actions to make a positive difference in their communities. With respect to socially responsible business practices, Starbucks is committed to the goal of buildings all new company owned stores according to environmentally sustainable LEED standards.

 
Subway: Some companies focus their responsibility on one or several of the six paths of responsibility. Subway’s corporate social marketing strategy to fight obesity has led it to a pledge to offer 50 percent of its six inch sandwiches at a 400 calories cap. This is a benchmark social marketing challenge to the entre QSR industry to attack obesity. Can McDonald’s meet this challenge?

 
PetSmart has partnered with local animal welfare organizations to promote the cause of animal welfare by providing free space for in-store adoption centers of homeless pets. PetSmart employees operate the adoption centers and the welfare organizations keep the adoption fees. In 2010, 403,000 pets were adopted. This brings traffic to the stores for the pet food and accessory accessories that adoption entails. It saves the lives of animals and is a win-win cause promotion program.

 
There are hundreds of exciting examples of corporate social responsibility in GOOD WORKS, by Philip Kotler, Nancy Lee and David Hessekiel (2012, Wiley). But let’s move on to why this is happening. Why has traditional corporate donor contribution to charities blossomed into an era of company cause promotion and branding, cause-related marketing, and corporate social marketing? Put another way, why has social value become a major force in brand strength and competitive advantage in the marketplace?

 
Tom Ostenton’s pioneering book, The Death of Demand (2004, FT Prentice Hall) documents the decline among large companies of the growth rate of sales revenues since 1980. Company earnings have since grown by cost reduction through corporate re-engineering; mergers and acquisitions, which captures already engaged customers of merged or acquired companies; and finally international sales expansion.

 
Ostenton argues that the domestic markets of developed countries have become saturated. The middle class largely has what it needs, except for replacements and incremental innovations; and there is no population surge or disruptive new technology to drive a period of expansionary demand.

 
How can companies grow in this “winter” of flat demand? Fortunately, there is a wellspring of new demand, still small but growing. Generation Y, or Millennials, were born since the 1980s and are the children of the prosperous Baby Boomer generation. They grew up buying, or having their parents buy, what they wanted. They number roughly 80 million in the U.S. and have intra-generational segments within this cohort. The central psychological character of this broad cohort is their sincere concern about the social and environmental conditions of society, the sustainability of natural resource and the planet, itself. This cohort has moved from the personal career and wealth ambitions that motivated their Baby Boomer parents to social concerns for human and animal rights, social justice, environmental protection, physical fitness, healthy food and preventive health, and help for the poor. Let’s call this agglomeration of concerns a desire for social value and it has had a profound impact on business offerings and business practice.

 
The Millennials are an alarmed generation. They despair at high unemployment; the greed of Wall Street manipulators who caused the financial crisis; the growing disparity of rich and poor; climate warming; endangered species and social violence. They occupied Wall Street and protested widely for many causes. Their attitude has impacted their consumption behavior. With the transparency of the Internet and rapid diffusion of knowledge and experience of marketplace through social media, they know a great deal about companies and their products. They have more confidence in self informed consumption of better products than they have in government regulation of health, safety and business practice.

 
Smart business has simply stepped in, when government stepped out. Millennials look to socially conscious businesses as a palpable social value. Social value and corporate social responsibility are a central new tenet of their product and service selections. Business has to creatively generate social value at part of the offerings to achieve consumer selection. It is marketing’s job to amplify the good that companies can do and the premium return on investment that comes with a new genuine contributions of social value for consumers.  

 
            This commitment of business to the fifth P, People, is the marketing challenge of the 21st century. It is not only a feature of developed markets, but of developing markets which will soon have more educated middle class consumers that developed economies. It is as relevant to Chinese companies as it is to American companies. The rewards for social value marketing for both society and business are great. GE Imagination, one of the pioneers of “Green” advocacy has just surpassed Vesta, as the largest wind power turbine maker in the world. Take social value seriously. It is a key to your future profits, as future middle class generations all over the world become more socially demanding.

          

Sunday, February 24, 2013


A Tale of Two Cities:

 New Market Economy or Old?

 

Milton Kotler

Kotler Marketing Group

Washington D.C. Beijing, Shenzhen, Shanghai





The center of middle class consumption and lifestyle is shifting from West to East, principally to China and India. This is driven by urbanization and global market economics. The West has been the primary home of urban, middle class life for over a hundred years. This has shaped their Western identity and confidence, and is inculcated in national self-consciousness. Hence, Westerners are confounded by their economic distress and decline. They are unaware that the middle class has moved elsewhere, to the more populous developing and emerging markets of the East, and will move at a faster speed in the next two decades.
 
 How can these other “other” people, without Western political, moral, economic and social institutions accomplish this? This question squiggles in the Western mind and dissolves into a denial that there is a larger middle class elsewhere and vain hope of economic recovery and middle class hegemony. 
 
The purpose of this essay is to open Western eyes to the reality of the vast urban middle class in the East, and other parts of the so-called developing world. The very terms “developing” and “emerging” blind Westerners to this new economic reality. There is a larger, urbanized urban middle class outside of the West than inside the West. Nations may be “developing”, but many urban centers in “developing” nations are as economically developed as those in the West. There is nothing like a particular example of this fact trend to break through prejudices and ignorant policies and lead to a better future. I have chosen to illustrate this trend in a comparative view of two great cities, one new and one old: Shenzhen, China and Chicago, Illinois. 
 
This realization of urban middle class growth and its vast consuming power in the East may lead to more sensible political relations between the West and East; but it definitely drives Western business expansion and investment eastward. Hopefully a clearer-sighted West can offset this imbalance by attracting Eastern business and investment westward. 
 
Shenzhen, China 
 
China did not have a market economy until 1980, when the PRC established special economic zones in Shenzhen, Zhuhai and Shantou in Guangdong Province and Xiamen in Fujian Province and designated the entire province of Hainan as a special economic zone. Special policies were applied to these zones to enable the establishment of private business, grant special development privileges for the business expansion of State Owned Enterprises, and to attract foreign investment. State banks issued loans and various credit instruments. Manufacture, commerce and property development grew rapidly. Hundreds of thousands of countryside people came to these cities for employment and enterprise. 
 
At the time of its designation as an SEZ, Shenzhen was a small fishing village of 30,000 people encompassing no more than three square kilometers of dilapidated buildings, lacking even a traffic light, upon which a new landscape of urban and economic development could be built. Shenzhen was the most “special” of the four SEZs, with the greatest freedom to explore economic policy innovations. Additional zones of the city were added to bring the population of Shenzhen to 351,871 in 1982. 
 
Within two decades Shenzhen reached a population of 7,008,428. From 2000 to 2010 the population soared 47.8% to 10,357,938 (Yue-man Yeung, Joanna Lee, and Gordon Kee, Eurasian Geography and Economics, 49, 3:304–325, 2008). 
 
 Shenzhen’s GDP reached US$ 13,581 by 2012 with a PPP of $23,897 (2012 CIA World Fact Book). At a 10% annual growth rate, Shenzhen’s PPP is nearly equal to the 2010 per capita GDP of $29,535 of Chicago. It has already exceed Cleveland’s per capita GDP and will soon, if not already, match Philadelphia’s per capita GDP (2010 United States Census Data and the 2006-2010 American Community Survey 5-Year Estimates.)  In short, the purchasing power of people in Shenzhen is roughly the same as Chicago.  
 
China’s urban population in 2012 reached 50% of the total country population. According to Helen Wang of Forbes Business (www.forbes.com/sites/helenwang/2012/11/30), China’s urban population has reached 691 million, with a middle class population of 474 million. “The middle class accounts for 68 percent of the urban population….Assuming two percent are super rich, still about 30 percent of the urban areas are poor.” If we focus on the urban districts of Shenzhen’s core city and suburbs, excluding new districts, we have a 2010 population of 8,000,307. At a middle class rate of 68 percent, there are 5,440,207 middle class residents of urban Shenzhen. 
 
Chicago 
 
The 2010 population of Cook Country, IL, which includes Chicago’s population of 2.7 million, as well as surrounding urban municipalities is 5,194,675 (U.S. Bureau of Census). Applying the Forbes ratio of 68 percent to Cook County, there were 3,116,805 middle class residents of the Chicago urban area. There are 60 percent more middle class residents of Shenzhen than Chicago and surrounding Cook County.
 
Chicago was a boom town between 1871 and 1900 during which decades its population grew 5.86 times from 289,977 in 1870 to 1,698,575 in 1900. Following the great Chicago fire in 1871 the city was rapidly rebuilt. Immigrants poured in and manufacturing flourished.  There are similarities between Chicago’s 19th century three-decade boom period and Shenzhen’s three decades of boom a century later. After the Chicago fire and from Shenzhen’s original fishing village, both cities grew rapidly from almost nothing. Both became manufacturing centers for domestic and external trade. Both were principally immigrant cities. By 1900 70% of Chicago’ population was foreign born. About the same proportion of Shenzhen’s population are born outside of Guangdong Province.  
 
Both Chicago and Shenzhen are headquarters of many of the largest companies in the U.S. and China. Shenzhen has Huawei, ZTE, Ping An Insurance, CATIC, BYD, Konka, Tencent, Skyworth, TCL, Foxcom, Vanke and many other large companies. Chicago has Motorola, McDonalds, Kraft, Boeing, Groupon, Morningstar, and many other large companies.
 
 
According to the 2010 Brookings index of GDP, The GDP of the Chicago Metropolitan Area was US$ 524.6 billion, while the Shenzhen GDP was US$362.4 billion. However, an adjustment must be considered, since the Chicago’s SMA area includes neighboring Joliet, Elgin, Naperville and additional jurisdictions. The total Chicago SMA has a 2010 population of 9.8 million. It includes roughly 4.6 million more people than the Cook County population.  
 
There are major companies in Chicago’s SMA, beyond Cook County. For example, Napervile is headquarters of Nicor, a major U.S. Natural Gas distribution company employing 4,000 workers with annual revenues in excess of US% 5 billion; as well as Alcatel Lucent with 3,600 employees. Joliet has 1,500 Caterpillar workers, as well as 1,100 workers at Harrah’s, a major U.S. apparel company. Dupage county, within the SMA, is headquarters of McDonalds, Navistar, Argonne Laboratories, Ace Hardware and other large companies, and is in itself one of the wealthiest counties in Illinois.  Is we subtract the GDP contribution of companies and institutions of Chicago SMA counties, beyond Cook county, we can surmise that the Cook County’s GDP is roughly equal to Shenzhen. Thus, the GDP economic output of familiar Chicago and its urban communities in Cook Country may be equivalent to the GDP of Shenzhen.
 
Shenzhen has reached a GDP roughly equal to Chicago in 30 years; while it has taken Chicago, which was incorporated in 1837, 173 years to reach this economic level.  Chicago’s rate of GDP growth in 2010 was -0.4 percent, while Shenzhen growth was 10 percent. Looking forward, with highly disparate rates of population and economic growth, it may take several Chicagos (Cook Counties) to fit into Shenzhen by the end of the decade. Most likely Shenzhen’s GDP will equal or exceed the GDP of the Chicago SMA by the decade’s end.
 
The point of this tale of two cities is fourfold. First, these numbers belie the observations of Americans or Europeans who visit the major cities of China. They are awed by the economic vitality that they see, though few understand what they see. They travel with their prejudices. If they come from Chicago they are flabbergasted and mystified by what they see in Shenzhen, or Shanghai, Beijing, Xiamen and other major Chinese cities, always comparing what they see to their beliefs about their home cities. They think of the economic power and problems of their home cities, and do not have a clue to how a Communist country can look so towering and bustling. They think that everything they see is a false or fragile illusion - a Potempkin village! This cannot be real and it will collapse! Their intellectual premise is that what they see cannot be real without political democracy. In short, while looking at economics, they are thinking politics.
 
Conversely, when the Shenzhen visitors come to Chicago or other major U.S. cities, they are cheered to buy luxury items at a lower cost than in China; and delighted by the diversity, low density single homes and free mode of life that Americans have. They like the freedom they see, but fail to see the weak economic fundamentals of what they delight in seeing. They see the open politics, which they do not have, and do not see the weakness of the economy. They think politics and not economics. The purpose of this tale of two cities is to open both American eyes to the economic realities of China and the West.
 
The second purpose is to open Western eyes to the economic dynamism of BRIC countries and their emerging and developing market cohorts in Asia, Africa, the Middle East and Latin America. The Middle Class in on the move all over the world, and is moving at a faster pace in the Developing and Emerging global sector than in the Developed sector. 
 
The third purpose is to show that ideologies bury an understanding of the fundamental dynamism of market economics and the different forms it takes. The U.S. or EU models of market economies do not define market economics. Private enterprise in China accounts for 60 percent of the country’s 2012 GDP (China State Administration for Industry and Commerce SAIC) There are many species of the powerful force of market economics in Mumbai, Singapore, Sao Paulo, Moscow, Mexico City, Seoul, Dubai and other fast-growing economies. They deal with credit and capital, entrepreneurial profit, production and innovation, employment, innovation, social welfare, wealth distribution and business cycles in different ways. If we are open to the variety of market economics and not dogmatic about free enterprise, we will be able to understand the economics of what we see.
 
Trends
 
Our final purpose is to review the current doldrums of Western economies to see if we might learn a few things from the growing economies of the developing and emerging economy world; as well as invent new adaptations to re-invigorate Western market economies.
 
The story of Shenzhen and Chicago can be extended to 150 global urban centers that collectively comprise 46 percent of current global GDP, and compete among each other for growth and share. They comprise only 12 percent of the global population. The trend of global urbanization in all market economies, whatever their variety, continues on the march.
 
China will reach a 60 percent urban population by 2020. India and other developing and emerging countries are on the same path of swift urban growth. Western urban centers are also growing in their ratio to total country population, but to a much slower degree. For example, Chicago’s population growth in 2011 was .05 percent and that was cheered as a major recovery, after earlier decades of decline.
 
According to McKinsey’s 2011 Urban World: Mapping the Economic Power of Cities (March 2011, by Richard Dobbs, Sven Smit, Jaana Remes, James Manyika, Charles Roxburgh, Alejandra Restrepo) 1.5 billion people lived in 600 cities in 2007 and comprised 22 percent of total global population. They contributed $30 trillion – more than half of global 2007 GDP. 485 million people produced an average per capita GDP of $20,000. The top ten cities generated $21 trillion, which was 38 percent of the global total.
 
The McKinsey Report estimates that by 2025, 2.0 billion people will live in these 600 cities, which will contribute $64 trillion to global GDP, or 60% of a total 2025 global GDP of $109 trillion. 735 million people living in these urban centers will have an average per capita GDP of $32,000. 235 million people in the developing urban centers of this urban market economy will have income above $20,000 per annum. There will be 1 billion new consumers by 2025. 
 
We can know, if we abandon our prejudices and preconceptions, where Shenzhen and Chicago are in today’s global economy. The situation and outlook for Shenzhen is positive. But Chicago is shrinking in comparative economic power. What about tomorrow? It has two options. It will take enormous political taxing and spending constraint and entrepreneurial innovation for Chicago to keep up with the rest of the growing middle class world; or it can fudge its decline by expanding the scope of its SMA territory to mask its failure.


Sunday, September 30, 2012


   
The Polemics and Realities of U.S-China Trade

 

Milton Kotler

President, Kotler Marketing Group

September 2012




 
 
During his August 2012 trip to China, Nebraska Governor Dave Heineman reported to the China Daily that “I want the Chinese people to understand the warmth, the hospitality and welcoming atmosphere we have in Nebraska - that we will give your businesses the opportunity to grow and prosper." China is Nebraska's fourth-largest trading partner and among its fastest-growing overseas export markets. He went on to say, “Obviously we have a good relationship with Canada and Mexico - they are our northern and southern partners. But we are looking throughout the world," adding that fast growth may make China the state's No 1 trading partner.

If this should happen, Nebraska will join Oregon, Washington, Alaska and Louisiana where China is already the #1 export partner. If China only reaches 2nd place in Nebraska, then Nebraska will join Alabama, Georgia, Maryland, Minnesota, Pennsylvania, North Carolina and Vermont as states where China is already the #2 export partner. If China reaches third place in Nebraska’s exports, that state will join Arizona, Delaware, Illinois, Maine, Missouri, Nevada, New Hampshire Ohio, South Carolina, South Dakota, Tennessee, Texas and Wisconsin where China already holds third place in 2011 exports.

According to the U.S. China Business Council, 30 U.S. States rank China among its top three export partners for goods and merchandise. The other 20 States are not far behind. Total 2011 U.S exports to China reached $103.9 billion, ranking third after its neighbors Canada and Mexico. By contrast, the U.S. is only China’s 5th largest source of imports. But note: China accounts for nearly 10% of all U.S. export of goods, which totaled $1.4 trillion in 2011. Since, $1 billion of U.S. export results in 7,000 jobs, according to Gary Huffbauer of the Peterson Institute for International Economics, U.S. export to China in 2011 produced roughly 70,000 jobs in the U.S. in that year alone. Not bad for a country starving for job growth!  

Notwithstanding the polemics of politicians who threaten China with punitive monetary and trade actions and a U.S. press that obligingly ignores U.S. export realities, the facts speak for themselves. China has as much on-the-ground trade leverage on the U.S. as the U.S. has on China. U.S. leverage rests on Chinese imports. China’s leverage rests on U.S. exports.

President Obama has called for a 15 percent annual increase in U.S. exports to China. The fact is that China is the only export market for U.S. goods that has consistently exceeded 15 percent since 2000. It has dropped below this mark for the first time in eleven years, but is likely to rebound with China’s new economic stimulus initiative. Governor Romney may declare that he will label China a currency manipulator on his first day in office, should he win election, but this astute businessman knows that if he wins, he will have to sugar coat this electioneering bluster.  

Polemics aside, China is deeply entrenched in the economics and politics of U.S. State and local governments and their business constituents. No U.S. Congress or President can politically subvert the economies of their Congressional districts and business contributors with currency sanctions, excessive punitive trade barriers and the fatal risk of trade war.

While politicians and the press assail China over monetary policy, unfair trade, human rights and a host of alleged Chinese abuses, the Chinese government and its State-owned and private businesses have been steadily building grass-roots trade relations with U.S. State and local governments and their indigenous businesses since 2000 for the export of crops, computers and electronics, chemicals, paper, transportation equipment, waste and scrap and other goods.  

In 2000 export to China was 16.2 billion. By 2011 it reached $103.9 billion, If we add export to Hong Kong, which is largely throughput to China, this figure reaches $140.4 billion, inching closer to Mexico’s $197.5 in U.S. export and more than double U.S. export to Japan. While the EU currently receives twice as much U.S. export as China, its annual import growth rate from the U.S. is less than 1/6th the growth rate of exports to China.  

The basic dynamic of U.S. export growth over the past decade has been State and city business delegations to China and the opening of State trade offices in China. As of 2010, Idaho, California, Ohio, Maryland, Virginia, New York, Illinois, Kansas, Georgia, Louisiana and 20 more U.S. State governments have registered trade offices in China. These offices promote export and manage a continuous stream of trade missions from their State to China and from Chinese provinces and cities to their own States and cities. Many American cities like New York City, Chicago, Philadelphia, Los Angeles, Washington, D.C. and others have their own trade offices in China. Even Columbus, Indiana, a city of only 44,000 people has a registered trade office in Beijing.   

As much as the 2012 Presidential election is ranking job growth as the #1 issue, it is the governors, mayors and their local business cohorts who have carried the load of export driven job creations in their jurisdictions for the past two decades.

National politicians can espouse export growth, while decrying China and proposing protectionist barriers to China trade; but State and local governments and their business leaders that praise China and do the leg work of China export promotion, deals and private sector job growth.  

What do we make of these realities in contrast to the polemics? Three things should be noted.

1. There is a disconnect between political rhetoric and political fact. China has been a well established scapegoat in American politics since the Liberation of China in 1949. The Korean War prolonged animosity. The McCarthy red scare   beat the bushes for all commies well beyond McCarthy’s death in 1957. Taiwan’s defense and the Vietnam War sustained the threat of China until Nixon’s visit in 1972, which began to purge this fear. President Carter stabilized relations and mitigated three decades of hostility with the establishment of the U.S. embassy in China in 1979. Reagan warmed feelings toward China as a tactical stress upon the Soviet Union until its collapse in 1989. In quick order, the U.S. reversed its tactical affection with post-Tiananmen economic sanctions and adverse relations. Under great pressure by business to return to the China market, Clinton promoted international trade and investment with China in the ‘90s.

Following the high tech crash of 2000, State governments and cities, along with their business leaders got worried about jobs and paved a trail of export to China. This fact on the ground had to continuously battle Congressional opposition and a hostile press, which always found new ways to curse China with a cudgel of human rights abuse, low wages and the off-shoring jobs, and currency manipulation. Notwithstanding, it has been the persistence of local political and business leadership, who feel the heat of poor economy and jobs pressure, that has brought us to the height of export trade with China that we enjoy today. Really, no thanks to Congressional politics or the press.

2. While the Chinese embassy in Washington jostled diplomatically with Congress and the Executive branch over trade and monetary policy, the commercial office of the embassy and its consulates in Chicago, New York City, San Francisco, Los Angeles and Houston divvied up direct commercial representation to all 50 states. The embassy in Washington handles relations with Delaware, Idaho, Kentucky, Maryland, Montana, Nebraska, North Carolina, North Dakota, South Carolina, South Dakota, Tennessee, Utah, Virginia, West Virginia and Wyoming. The consulate in New York City handles Connecticut, Maine, Massachusetts, New Hampshire, New Jersey, New York, Ohio, Pennsylvania, Rhode Island and Vermont. The consulate in Houston covers Alabama, Florida, Georgia, Louisiana, Mississippi, Oklahoma and Texas. The Chicago consulate handled Colorado, Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri and Wisconsin. The consulate in Los Angeles attends to Arizona, Southern California, Hawaii, New Mexico and Pacific Islands. The San Francisco consulate covers Alaska, Northern California, Nevada, Oregon and Washington.

As diplomatic commerce spread its wings, Chinese provinces and cities also established direct trade offices in U.S. cities. Shenyang set up a trade office in Chicago in 2008. Tianjin Economic-Technological Development Area (TEADA) has offices in Chicago and Dallas. Shenzhen has a trade office in Los Angeles. Other large Chinese cities and their local businesses have direct relations with U.S. states and cities not only to promote Chinese export, but also to put their own local Chinese businesses in contact with American producers for import.        

Chinese local trade offices along with the support of American business NGOs, like the U.S. China Business Council, did the heavy lifting of expanding U.S. exports to China from $16.2 billion in 2000 to $103 billion in 2011 – an increase of 542 percent. All of this under the radar screen of political and press polemic.

3. Any talk in the U.S. from politicians, union leaders and other special interest groups about getting tough with China must be taken with a grain of salt. U.S. job growth cannot come from any domestic recovery of its mature economy. It must come from export and this means China, as the world’s largest growing economy, however hobbled from 10% GDP growth to 7.6% growth, and a 2012 reduction in its export growth rate.

No matter which candidate wins the Presidential election, local economic pressure for export to China and its job creation will continue. China’s percentage of total U.S. exports will grow beyond 10 percent as the rate of export growth to the EU and our Canadian and Mexican neighbors declines. U.S. job growth needs export to China. Polemics are a drag on this local reality.

The best thing the U.S. Federal government can do to help State and local government and their indigenous businesses to grow is to get out of their way. The Federal government should curtail CIFIUS and other regulatory barriers to technology export, and increase export bank financing and other trade support services.

Chinese diplomacy will never change U.S. opinion in its favor, but it can change the self interest of local leaders by job facts on the ground. Eventually a more solicitous opinion and relationship at the national level may emerge.

Saturday, June 23, 2012

The Mittelstand is Vulnerable: Chinese Acquisitions in Germany




         


The Mittelstand is Vulnerable: Chinese Acquisitions in Germany 

Milton Kotler
President, Kotler Marketing Group
June 2012






            Mittelstand companies are the backbone of the German economy. The German Savings Banks Association (DSGV) publishes an annual analysis of over 100,000 Mittlestand companies amongst its member banks' customers. There are many more unassociated SMEs. In all, Mittelstand companies employ 70 percent of German workers and contribute roughly half of the country's GDP. The very premise of their success over the past three decades is now the source of their vulnerability. China is buying many of these companies to fill the technological gaps of their state-owned and private industrial giants. In the long run, this trend may cause greater damage to the German economy than the current euro crisis.

            Mittelstand companies are primarily privately owned businesses with fewer than 500 employees and annual sales of less than 50 million euros; yet they collectively generate 2.4 trillion euros. They are export- oriented B2B machine and engineering niche companies which invest heavily in innovative research to attain and preserve their dominant global market share. They have a long-term focus and rest their productivity and innovation on a long-term, apprentice-based skilled workforce. They have been called “Hidden Champions” in management literature. But this apparently indomitable fortress is being stormed today for the very reasons they succeeded.

            In the late 1970s large U.S and European OEM manufacturers began to shift from vertical to horizontal organization. Instead of internalizing supply of parts, components, systems and equipment, big business lowered its end product cost by outsourcing supply. Horizontal organization devoted itself to the four new fundamentals of modern large business organization: 1) managing an external supply chain; 2) maintaining final assembly for brand control; 3) expanding marketing for a global revenue scale; and 4) managing finances for mergers to grow their companies.

            Specialized Mittelstand SMEs became the technical nutrients that flowed through the supply chain catheters of large OEM companies. The greater the OEMs grew on a global scale, the more volume and innovative adaptation they needed from their parts, components, systems and equipment suppliers to compete in the global marketplace. German Mittelstand companies being the most highly engineered and well managed suppliers in the world grew as well. The paradigm of German prosperity was not challenged until China arrived on the global threshold.

            China consolidated its multitudinous state-owned companies in the first decade of the millennium to gain scale for efficiency, improved management and technical training, as well a rationalization of state investments and subsidies. This coincided with a policy of joint ventures with foreign partners in selected industries to give Chinese industry “big brothers” for added quality, in order to compete on price with foreign makers in the domestic market. Added quality at lost cost production gave China a competitive foothold for machine export to emerging developing markets. The next step was added value for export to developing and developed markets. By 2004 Chinese policy was positioning its industries to compete directly with multinational OEMs. To accomplish this, Chinese machine manufacturers needed to fill niche technology gaps in their product line. Mittelstand companies were just the thing they needed – specialists in parts, components, systems and equipment to improve China’s final industrial product. The financial crisis of 2008 and global economic downturn distressed the balance sheets of Mittelstand companies, and Chinese cash was ready to move in and acquire a set of highly-leveraged Mittelstand companies.

            The very strategy of specialization that built the Mittelstand sector has become its undoing. China has no interest in purchasing horizontal multinational OEMs that have no internal supply nourishment. Her vertical business organizations have to fortify their own internal supply chain. The Mittelstand is just what the doctor ordered to build Chinese industrial brands.

            Since 2009, in the aftermath of the fiscal crisis, Chinese companies have acquired ownership many Mittelstand companies. While acquisitions are matters of public record, only the larger acquisitions have been reported in the press. China has invested in considerably more funds in for minority positions in other Mittelstand companies. These are hard to track because the companies are often family-owned.

            The Wall Street Journal ((5.12.11) reported that “the value of Chinese acquisitions, mostly of small, low-profile companies rose to $98 billion last year (2010) from $3.8 billion in 2006, according to merger research firm Dealogic. The total is already $83.4 million this year, with nearly all the deals involving engineering firms.”

            According to statistics from Germany Trade and Invest, the German Federal Republic’s economic development agency, China has overtaken the U.S. as the number one foreign investor in Germany, registering 158 industrial projects in Germany in 2011, compared to 110 by U.S. companies.

            Here is a partial list of acquisitions in the past two decades, most notably since 2009. I limit myself to only three industrial sectors and remind the readers that a lot of Chinese investment in private German SMEs is not publicly documented; and that my list is only a tip of the iceberg. 


A. Auto parts


            1. SaarGummi International GmbH provides body sealing systems and moldings. The company offers automotive profiles for body, door systems, and convertible systems; molded parts for chassis, motors, power trains, and exhaust systems; and glass encapsulation. It also provides moldings for mechanical engineering, railways, footwear, and tube industries; and sealing systems for windows, facades, flat roofs, and pond films. The company was founded in 1947 and is based in B├╝schfeld, Germany. As of June 6, 2011, following insolvency, SaarGummi International GmbH was acquired by Chongqing Light Industry & Textile Holdings (Group) Co., Ltd for 360 million Euros and currently operates as its subsidiary.


            2. Sellnor design studios which produces auto interior finishes was acquired out of bankruptcy by Ningbo Huaxiang Electronics for 30 million euros. It holds a 20 percent global market share.


            3. German auto supplier Preh is a Bavarian car parts supplier of control units and sensor systems, with $503 million in annual sales and more than 2,500 employees. Joyson Investment Holding, a privately owned automotive electronics supplier based in Ningbo, Zhejiang province, became its majority partner through acquiring a 74.9 percent stake. The agreement creates a global firm worth an estimated €500m ($721.8 million). The majority buyout follows a joint venture in which Joyson and Preh entered the Chinese market in August 2010. The move is designed to re-enforce both companies’ market potential in Europe, North America and Asia.

            4. KSM Castings Group, which includes six light-metal automotive die-casting and permanent mold foundries in Germany, the Czech Republic, and China, has been sold to China's CITIC Dicastal Manufacturing Co. Ltd. for $430 million. KSM is a supplier to automotive OEMs and Tier 1 suppliers that include Volkswagen Group, Daimler, Benteler, Bosch, ZF, and TRW. Dicastal supplies aluminum automotive wheels produced at six casting and forging operations in China.

            It should be noted that KSM, itself, was a management buyout by the British investment group Cognetas, of the onetime ThyssenKrupp Fahrzeugguss operations from ThyssenKrupp AG in 2005. Management buyout Mittelstand companies are the best targets for acquisition because they no longer have the family stubbornness to resist sale or the available credit to survive alone in the growing auto market of China, which is expected to produce 1/3 of global autos by 2020.


            5. Automotive News reported in March, 2012 that Hebei Lingyun Industrial Group of China agreed to buy German automotive lock and latch maker Kiekert AG. Lingyun plans to purchase Kiekert shares from a group of investors including BlueBay Asset Management, Silver Point Capital and Morgan Stanley, which took over after a debt-to-equity swap in 2006 which restructured the firm.

            No purchase price has been disclosed. Kiekert, which makes lock and latch systems for cars, has more than 500 million Euros in sales and 4,000 employees, according to the statement. The company sold more than 41 million locking systems in 2011, which was a record volume for the company.


B. Machine Tooling


             Mittelstand machine tooling companies were the first acquisition targets, dating back to 1999, long before the China trumped the West as a major modern industrial economy. China needed precision machine tooling technology to build its own indigenous machinery and equipment industry.


            1. At the end of 1999 the Burkhardt and Weber (Holding) GmbH, Karlsruhe, Germany (BWH) and the Shenyang Machine Tool Co. Ltd (SMTCL) equally founded a joint venture, the BW Machine Tool Co. Ltd, (BWSMT). In 2001 the BW group became insolvent and SMTCL took over 100% of the shares and has successfully developed it further.


            2. Dalian Machine Tool Group made inroads into Germany through its purchase of F.Zimmermann, Denkendorf, Germany machine tool group. In the end of 2004 the Dalian Machine Tool Group became the majority share holder. Chinese investment financially strengthened the German company through new product development and entry into new markets. The management remained in German hands and the company has grown substantially since Chinese majority ownership. The acquired technology strengthened the Dalian Tool Group in the Chinese domestic market and helped Dalian Tool Group grow its exports.


            3. In the beginning of the year 2004 talks were arranged between the SCHIESS AG, Aschersleben and the Shenyang Machine Tool Co. Ltd, (SMTCL) with the purpose of minority participation by SMTCL. The talks broke off due to the insolvency of SCHIESS. Later SMTCL took over the newly founded SCHIESS GmbH as majority share holder. The company is very successful and has expanded step by step under continued German management.


            4. In spring of 2005 the Hangzhou Machine Tool Co. Ltd. (HMTC) made a substantial investment to acquire majority control in the aba z&b Schleifmaschinen GmbH, Reutlingen, Germany. Management continued independently under the lead of the German general manager. Since then in every aspect the company has made positive improvements.


C. Construction machinery


            1. Sany Heavy Industry Co and Citic PE Advisors paid 360 million euros ($475 million) in 2012 for concrete-pump maker Putzmeister Holding GmbH to strengthen its own technology to compete more effectively in the China domestic market technology, as well as establish its foothold in Europe and other developed markets through the both the Putzmeister and Sany brands. Sany built a Greenfield manufacturing plant in Germany last year. 

            Putzmeister is a top-tier Mittelstand company and key example of the Germany’s “Hidden Champion” strategy of economic growth. Its acquisition by Sany manifests China’s transformation into a high tech economy and the vulnerability of Mittelstand strategy. According to Hermann Simon, author of Hidden Champions, “Putzmeister’s owner Karl Schlecht, age 79, sold the company that he founded through a deal, hammered out in secret, (which) has triggered a ‘state of shock’ at Putzmeister headquarters in Aichtal near Stuttgart”. According to a member of the company's works council, "Not even the supervisory board was informed." Upon public announcement, 700 Putzmeister employees gathered in front of the factory gates to protest the sale to Chinese Sany. Matters began to calm down when Sany made it clear that it would retain German management and indeed invest in the growth of the Putzmeister brand. Sany has its own Greenfield manufacturing facility in Germany and the merger of these companies has to be worked out by Sany.

            Hermann Simon reported his direct 2012 communication with Karl Schlect about the sale. Schlecht said, as reported by Simon, “In the late 1990s Putzmeister and Schwing (#2 in concrete pumps) held two-thirds of China’s concrete pump market. China was by far the largest consumer of concrete in the world. But by 2004 the combined market share of the two German companies dropped to less than 5 percent, while China accounts for 60 percent of worldwide concrete consumption today. There is no way that a company which loses in the world’s most important battlefield can win the global competition.”

            In Simon’s view, Chinese companies are the most dangerous competitors to Germany, because they are by far the most effective in the core sectors of German industry, such as machinery, engineering and technology.


            2. Less than three months after the Sany transaction, China’s XCMG Group, a maker of construction machinery, agreed to buy Putzmeister’s main domestic competitor, Schwing.


C. Energy


            1. LDK Solar (LDK), China’s second largest solar panel maker, agreed to buy Germany’s Sunways, one of the domestic panel makers struggling to cope with competition from Asia.


            2. The Chinese energy group Hanergy Holding Group Ltd agreed in 2012 to acquire all of the shares that Q-Cells SE, a German maker of solar panels, and its subsidiary Solibro, a maker of thin-film solar panels. Nedim Cen, CEO of Q-Cells, said Solibro's can take full advantage of its thin-film technology and existing production capacity. The purchase comes as the latest evidence of Chinese energy companies' interest in the European market during the current debt crisis. China is the world's largest maker of solar panels, mainly producing what are known as polysilicon panels. Manufacturers that want to make thin-film panels are faced with technical obstacles. Hanergy Group is solving this problem.


Conclusion


            Adaptive strategies can become maladaptive as external circumstances change. This has happened over eons in human genetics and over a few generations in Mittelstand business strategy.

             Over 3 million of years, humans ate as much sucrose-rich plant life as they could during growing seasons, in order to store fat for hard winters of poor food supply. Fat was adapted for living in hard times of food shortage and human being craved sugar. For the past hundred years food preservation technologies and regional trade between seasonal zones have made food available year long. Yet the genetic longing for sugar persists and is glutinously available in all year long fresh fruit, prepared foods and candies. The result today is a maladaptive epidemic of obesity. What was once a selective trait has now become a curse.

            As the Western industrial and service OEMs grew globally over the past several decades and changed from vertical organizations to horizontal organization with outsourced supply chains, German Mittelstand specialized manufacturers needed greater capacity to supply them with specialized parts, components, systems and equipment. These companies, like Putzmeister, borrowed heavily to build new production capacity.

             The global economic meltdown, beginning in the 2009 aftermath of the fiscal crisis and continuing to this day, has reduced demand and placed extraordinary debt pressure on Mittelstand companies. By 2010, revenues were cut by half in many cases. Companies could have weathered this storm, were it only a cycle. But another external element came into play that permanently damaged the Mittelstand strategy.

             The largest buyer of Mittelstand products was China. Domestic Chinese equipment was not competitive. Mittelstand companies first exported and then brought their product to China to lower production cost. They tried to survive in China through solo or joint ventures with Chinese companies. That was like a robin building its nest in a warren of rabbits. First, Chinese partners and other companies simply copied their products and improved the quality of their own product line. Mittelstand companies lost China share, which was the greatest part of global demand. Next, Chinese partners rescued Mittelstand failing finances by becoming majority shareholders and outright owners of Mittelstand subsidiaries; and shortly afterward owners of the parent companies.

            Unforeseen by Western machine and equipment companies at the dawn of their export to China, China had accumulated the means to do this and the will to do it. As economic dusk settled upon the Mittelstand companies, China’s state-owned and private large scale vertical industrial organizations had sufficient capital, state policy support and a vast market for which to acquire a leap in quality. It went on a technology asset buying spree and gobbled up Putzmeister, along with others. Companies, like Sany, are now able to produce and market domestically and internationally machinery and equipment that are competitive in certain sectors with Mittelstand quality at a much lower price.

            The next phase will be further acquisitions as the Chinese add technology value to their product line for both the domestic and foreign export markets. Chinese industrial policy aims for global expansion in developed and developing markets. For these goals the Mittelstand companies have served transitional strategic brand value and management skill until Chinese OEMs have time to incorporate their technology and establish sufficient Chinese management and innovative engineering talent to establish their independent brand trust to domestic and global customers.

            After that, it is anyone’s guess. My only forecast is that once Chinese industrial brands are accepted by global customers, these state-owned organizations will flatten their management and spin off specialized, internal products to Chinese SMEs. In decades to come, China may have its own Mittelstand.