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
Wednesday, July 10, 2013
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.
Labels:
Chicago,
china,
cities,
Shenzhen,
urbanization
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
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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 Büschfeld, 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.
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