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 .
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
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.
Wednesday, July 10, 2013
Sunday, March 10, 2013
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?
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.
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.
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.
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.