Thomas Wu, MSM - Mandarin Strategy Management Consulting
Release Date: 2009-12-09
China’s renewable energy and environmental targets, and government investment driven by the economic stimulus package, are creating a lot of the opportunities in China. What needs to be done in order to ensure that the Germany’s more conservative companies are not going to miss this opportunity to apply their technologies in this fast growing market?Most of the time, German companies are quite conservative and their knowledge base is limited; when we do our quarterly reports on microeconomic development in China most of them are surprised to see how quickly the Chinese economy is recovering and there is scepticism from some German business leaders. There is also a lack of knowledge on the green technology movement in China; some top managers who do not get involved in day to day China business do not realize the country already is a frontrunner in introducing new standards and environmental protection measures. Most of Germany’s green technology companies are noticing that China is paying attention to green solutions which was not the case years ago either but maintaining the environmental health is integral to maintaining the political stability of the nation as well.
If you look at the stimulus packages the Chinese government has wisely constructed theirs while the German package was not as efficiently made. At the end of the day we can see that China has done things right in terms of financial policy and regulations; they have the most their funds available as well. We can see the power not only financially but politically shifting towards China away from the US and you can see this in all the commissions and the rise of relations in China with the BRIC states as pushed it to the forefront; we will see in Copenhagen that China will push things forward as well.
I think that Germany is in a position to benefit now from all the activities in the past 20 years focussed on transferring German environmental standards to China. It is time for German industry to encourage more installations and upgrades of this equipment in China and for both governments to work closer together in order to promote technology. We are seeing the first signs that big German companies are not only thinking about producing in China but forming joint R&D centres because they realize that there are a lot of funds available from the Chinese stimulus package and that technologies are promoted well in the region.
German companies are looking to make strategic alliances either through anchor investments or merge operations with secondary offerings in Asia to finance growth in the region. Additionally, through the crisis German companies are beginning to consider Chinese shareholders and form global strategic alliances; this will take time but it is a new trend we are seeing. Two years ago, German companies were mostly afraid of losing their technology; today they’re afraid of not catching the market in Asia. It should also be noted that while the Germans may be conservative the Chinese are insecure because they have very limited experience in managing truly global operations: both sides have to learn.
What could the German government learn from China to accelerate the development of the German green economy and strengthen the country’s international position in this field?
One of the advantages of the global crisis is that countries like Germany, France and Great Britain are starting to understand more and more that they are part of a global economy. Germany could learn from the Chinese government how to optimize the development and introduction of new initiatives in this field, as China invites top experts from all over the world and forms international advisory boards which communicate directly on new policy development with the State Counsel. China will spend the time to receive truly global insight on an issue and this has never been the case in Germany; when the German government wants to develop an initiative it invites German experts with a German vision and opinion without consulting anyone from the US, Japan, Great Britain or other countries. My hope is that based on the G20 meetings Germans start to think on a global level but this mind change is just taking place.
How different are the approaches of the US and Germany towards China at a business level?
At the end of the day the Germans are doing a good job in China but there is always room for improvement. When I worked in the US there was an American way of doing business and they tried to apply this American way to the rest of the world. The intercultural adaptation capabilities were very limited among US companies and in the 1990s you could see many fail in China because of these cultural differences. Nowadays, the performance of American companies in China is getting better but it has been a long improvement process for them too. Intercultural issues exist for German companies as well in the business environment, in particular large companies have difficulties adapting to the Chinese culture. One of the challenges is making the market and region look attractive for their employees so that they get the best people on the ground. Only a few large companies such as Siemens and ABB truly prepare their people for their job in China and make sure that moving to China is a career opportunity rather than a career stop. Many major companies do a poor job on this and are not prepared to make a true effort in China. This situation is starting to improve here in Germany. For example, we conducted a leadership sensitivity study for Airbus managers and based on the results we chose the expatriates that best fit the requirements for working in China and closed potential skill and experience gaps through training: we are proud that of the 120 new expatriates Airbus sent to China none have come back. It should also be promoted from within the company that China is important for the overall development of the company, otherwise you create a situation where your managers who leave for China are physically thousands of miles away and mentally even further away.
In which segments of the green economy do you see the greatest complementarities between German technology and experience and Chinese development ambition?
Certainly in wind power as China will become the largest wind power market as well as one of the most important production locations to serve the North American market. There are a lot of synergies as the rest of the world looks for wind turbines that are efficient, affordable and reliable, so this should be a great field for growth.
European companies in this sector are increasingly concerned about the Chinese domestic market slowly closing itself to foreign companies; what is your perspective on this?
You have to look for synergies. At the end of the day, as in all technology fields, the Chinese are very good in money for value products: the middle segment. While the Chinese wind industry no longer faces problems in making 1.5 MW wind turbines, the experience and technology required for manufacturing a 2.5 MW model for series production is not there yet as Chinese manufacturers are having difficulties meeting standards for quality and reliability at this size. Therefore most of the Chinese companies, who would never officially admit it, know they are still quite far behind on technology issues. For example, gearboxes meeting international quality standards generally last 3 to 5 years but the Chinese equivalents are breaking down after a year. As a result, high maintenance costs make it overall very difficult for utility companies and manufacturers alike. If you want to develop standalone solutions as a European manufacturer in China you will have a tough time, especially if you want to gain funds from the stimulus package. Companies will face the same questions as here in Europe for infrastructure projects and it seems that foreign bidders will rarely win the contract.
From our perspective, forming a truly strategic alliance with a Chinese wind power company offers the only chance to get a piece of that cake. European companies have either underestimated or waited too long to enter into strategic alliances, because now firms like Goldwind are strong and have started conducting business outside of China. You have to look at the bigger picture as well; it is not only the Chinese market, Chinese companies will export their technologies sooner or later. Quality and technology in China has been improving every day, while at the same time European companies have consistently focused on the premium segment. What we see is that they have not truly targeted the Chinese market but rather their key accounts. The moment a European company sets up a European facility in China it is already too expensive for the local market. This is why we have been promoting European companies to take over Chinese competitors or form alliances to expand in the middle segment of the market based on cost competitive technology not only because it is suitable for China but also for markets in other countries.
German companies and their CEOs generally take great pride in their engineering heritage and world leading technology; is Germany’s drive for technological excellence the biggest threat for the Germans companies operating markets such as China where capturing a large market share requires opening at a lower cost/quality level?
Certainly, Germany is a country of engineers. The biggest advantage for China is its planned economy heritage. For example, when in China a certain machine would be available in five configurations, it would not be offered in a sixth configuration upon request. On the other hand, if German company that offers the same machine in 97 configurations and a customer asked for a 98th configuration then they will engineer the 98th. The Chinese introduced platform management in the early 1980s and this gives them a big advantage over their German counterparts as Chinese companies are able to manufacture at a large cost and economy of scale advantage. Taking over a Chinese company with the specialized skill of Chinese platform management offers important opportunities for German companies which can then benefit by improving the technology within the system to produce medium quality level products for other emerging countries. German companies should also be aware of the activities of the Chinese government as they form political and financial alliances with other countries. For example, the Chinese Central Bank is providing funds to the central bank of Argentina on RMB basis which locks in future exports from China to Argentina. The focus must not only be to grow in China but to grow with China in other emerging countries.
Which role does MSM Consulting aspire to play in enhancing the trade and investment between Germany and China in the coming years?
MSM is very well positioned to serve as a bridge between both nations. I compare the Chinese knowledge about Germany to the knowledge of German companies in the 1980s about China. At that time, companies such as Volkswagen and Siemens were among the early entrants in China through joint ventures, but these companies had a limited understanding of culture, habits and markets. The Chinese are in a similar situation these days; big companies are making their first moves into Germany but the broad industrial base has not yet focused on Europe, but we are very optimistic that the Chinese will make their move with in the next five years. Our big advantage is that we have worked with Germans for many years in China; we know both Chinese and German companies and business cultures so we are a bridge between both regions. Additionally, we have a deep understanding of the German economy and industrial network which is important because the Germans work in networks. For a Chinese company this is usually difficult to understand. For these reasons I think we can add value to Chinese companies if they make their move into Germany.
On the other side, we are continuously enhancing our position in the German market among larger German companies because we think outside of the box. When others look at greenfield approaches or joint ventures we think outside the box and think about equity swaps and anchor investors in order to form truly global alliances to create global champions. We focus on creating synergies by bringing together premium engineering manufacturers and middle-market producers with a broad understanding of emerging opportunities in China. By bringing these two together you can form global champions. It is our vision as MSM to play an important part in bringing these two regions together through innovative structures and approaches which are outside conventional thinking.
MSM has traditionally been focussed on supporting German companies entering China; what is your perspective on the opportunities that will emerge in the coming five year in supporting Chinese companies in entering Europe?
We have recently formed MSM Capital alongside MSM Consulting. While MSM Consulting focusses on providing strategic advice to multi-national companies from Europe and particularly Germany, which are our main clients, MSM Capital’s main activities are M&A and corporate finance. In this field 80% of our activities involve Chinese companies trying to make investments in Europe while only 20% if focussed on European companies trying to acquire companies in China. We clearly see the impact of the economic crisis as the majority of the cross-boarder M&A is nowadays coming from China. We have done several strategic projects but the Chinese are still in the process of recognizing the value of good advice. As a result, we are still facing a situation where most of Chinese companies are entrepreneurially driven and hesitant to use third-party strategic advice. At the end of the day the Chinese are only beginning to transform their thinking from a purely optimistic mindset to a strategic approach and this is of course driven by the capital markets in Shanghai and Hong Kong where companies have to provide truly mid to long-term strategies.
If you could be involved in one major project, investment or acquisition in the coming years, what would it be?
Unfortunately I cannot tell you about most of the mergers we are working on, but I can tell you we are working on 11 cross-border transactions coming from China to Europe all of which have a transaction value of more than €500 million. We are seeing large opportunities for Chinese companies and most of these projects are in the process of evaluation, due diligence and negotiations; therefore I think we are at the beginning of a big wave of Chinese investment and forming global strategic alliances but it is much too early to discuss any of these transactions.
To be honest, when I was involved in the first IPO of a Chinese company on the NYSE at the beginning of my career in 10993 occurred I would have never believed that Chinese company would be such proactive players in the global economy in terms of acquisitions and operations as they are today. In the last eight years, since China’s entrance into the WTO, China has made a tremendous move forward and today the country is also benefiting from the financial crisis. Here at MSM Consulting we are happy about our current positioning in the market and when we look at our competitors we are all growing through the roof; it’s more difficult for us to find capable employees than to find customers: at the moment some of our customers are effectively on a waitlist. This is different from the bigger consulting companies which are having difficulties due to the crisis because they are not focused on cross-boarder opportunities.
What is the main message that you would like to send to Chinese companies with ambitions to come to Europe?
The message we want to send is that it is a great time for Chinese companies to be an active partner in Europe; there could not be a better time to enter. We have never seen such openness by Europeans towards true global partnerships with Chinese companies; it is not only the financial valuation which is attractive. In this time of crisis no one knows where the growth should come from other than China and other BRIC states and this effect is opening up the minds of Europe’s business leaders. This opportunity needs to be considered in China but it is a soft factor which is difficult to communicate. MSM Consulting is close to the market and has a large client base in Europe; we know not only the financial figures but also understand the thinking in Europe, so we can be of extensive help to Chinese companies. At the end of the day we are structured like a Chinese company: we have a core team of top consultants as well as a huge network of freelance senior advisors who maintain our relationships throughout Germany and the rest of Europe. This is our greatest asset. We like to say we have the culture of a Chinese company because we value these former executives who help us tremendously and give us a deep understanding of the German economy which adds value for our customers. It is simple to form a GmbH or buy a little company in Germany but if you want to make a major move you need to understand both the hard factors and the soft factors, and this is where I believe we can bring the most value to Chinese companies.
There has never been a better time for the Chinese to be active in Europe.
| Company: | MSM - Mandarin Strategy Management Consulting |
| Position: | Partner |
| Country: | Germany |