Ulrich Lehner, Henkel
Release Date: 2010-05-17
In the context of the economic crisis and government support and business ambition to shift towards a greener economy, what are the top issues on the agenda of Germany’s business leaders?It is important to take a long term view, looking into the basic trends, rather than focusing too much on today’s situation. German business leaders need to ask themselves what makes their business sustainable. One of the most important issues today is the demographic trend in global population growth, which will increase from six to nine billion people by 2050. This is destined to result in at least a 50% increase in resource needs, energy needs, and is of course causing climate issues. Therefore a key focus today is the sustainable use of resources to avoid waste and make the best use of energy through increased efficiency. I am very proud as President of the German Chemical Industry Association that our industry has increased its production in the last years by more than 50%, while energy consumption went down by the same amount and CO2 emissions decreased even further. These are key issues for the chemical industry, and companies like Henkel, forcing them to look at the reasonable use of resources and energy efficiency. To be successful you have to understand your markets and know what drives your success, and this all happens in an environment that is driven by demographic trends and scarce resources.
Another trend of growing importance is the accelerating shift of global economic power from the west to the east. How is that affecting the German business community?
Germany is one of the world’s leading exporters, but that is only one side of the coin. What is even more important today is foreign direct investment (FDI). Germany is strong in exports, but we are also good at doing business in other countries based on local production. The chemical industry has strong exports to countries such as China, but local production in the Chinese market is by far bigger. So it’s not only exports, it is FDI. Germany is one of the world’s export leaders and if other parts of the world develop there is a big potential for German industry. Therefore, I think it’s not as much a shift from A to B or from West to East. A strong whole business is even further enlarged by export opportunities and opportunities for FDI.
How different is the approach that German businesses take when entering a country like China compared to the approach that French or Americans companies take?
First I would like to stress the fact that there are businesses that have to be run on a global basis and others which are local businesses for which you don’t need a global presence. For example, if you are a supplier of the automotive industry there is a high probability that you are only allowed to supply an automotive producer in China, even when you supply other parts of the world. In many industrial applications the case is that you are approved as a supplier and then you are asked to be wherever this customer is. In the consumer goods business it’s nice to be big but there is no negative impact on say your French business, if you are not selling cosmetics in Australia. In the industrial business, on the other hand, if you don’t support your customer everywhere, you endanger the rest of the business. So there is another aspect, when we simply globalize to follow our customer, who needs a global presence to run their business. The difference with Germans is, and I consider to be key for expansion in foreign markets, a focus on a deeper understanding of the culture of the other country. It is a factor which is fundamental to our success: to be sensitive to cultural differences; to acquire sufficient knowledge of history of the country; to be modest; to respect the fact that this country is hosting you. Instead of being a ‘colonial’ approach, it asks instead, “how can I get the best for the customer in this perspective environment?”
What are the main lessons you have learnt from your experiences in China? Was there a moment in your tour when you were shaping yourself as a business leader?
I have learnt the importance of being modest, rather than self-confident, to show respect, and to try to understand, and when you don’t understand, to not be afraid to ask again.
If we look at the way that Germany engages with China, at first sight we were a bit surprised that you were involved with Henkel – a large multinational – that you were not active within the APA branch which seems to represent more the larger companies, but that you were playing with the SMEs.
I should stress that I am also a member of the steering committee of the China committee within APA. When I came back from China I was interested in promoting knowledge about China here in Germany. There was a great need for it, not only with the big companies which already had a presence there, but also with the medium sized companies. The German business association includes medium and small companies too, and this is where there was the greatest need for teaching about China: that was my motivation.
In many countries there is a very coherent China policy coordinated between one major China association and the government. How does that work here in Germany? Can we speak of a unified policy?
In an ideal situation, enterprises would support politics and politics would support enterprises. However, there are many instances where this is not the case, such as the visit of the Dalai Lama and the issue of human rights for example. Therefore, it is important to have dialogue between the parties, open communication to address the issues and simply respect the fact that from time to time there will be differences in opinions. But I should stress that in Germany the links between politics and economics are not as strong as in other countries. It is not a competition between nations; it is a competition between companies.
Well, not for Germany at least. If we look at your neighbors in France, it is a different story.
That is exactly the point.
We conducted an interview with Christine Lagarde in France, a few months back, and we discussed how France really champions its business community when it deals with countries like China. In the end we came to the conclusion that until the day that we invite German companies to French trade missions and French trade companies to German trade missions there is not really a unified Europe. Do you see that happening in the future that when Chancellor Merkel goes to China she brings Illeav and Areva
I do believe that will Europe only reach its full potential if we align our interests and try to find common voice, until we manage that, we will be merely the sum of member states. I would strongly support the idea of having a joint mission to Asia, China, and the United States, since it would help us to align policies and representation allowing Europe to reach its full potential.
If we look at the German economy, of course Germany is very much a champion of family-owned businesses as a niche. They make up a vast part of the economy here, along with trade with China there is a strong focus on the multinationals. What does it take for them to take a larger part of the Sino-German trade in the future?
I don’t know whether you are right with the statistics between the volume of business between the big and the small companies. Taking once again the example of chemical industries: 95% of the companies are small and medium sized companies but the 5%, the big ones by number make 75% of sales. So I think I should look into figures for the whole Germany industry. By number there are of course a higher number of small and medium sized firms
By volume it’s the large companies. So how can we make these smaller companies get a larger piece of the pie?
They have to check whether they have a unique selling position in the foreign market, especially in China; if they are confident that they do, they should take on board all the knowledge and advice they can in order to get into the market. Without the fundamental local knowledge – building relationships, getting into contact with potential customers – I would say it is too high a risk for smaller companies to take to enter the market. So if a company is confident in its USP to offer a local market then they should go for it, but if they are not convinced, they would be better off staying in their home market.
It seems based on all the people we have interviewed so far that many German companies have this competitive edge that enables them to succeed there. It is also because of their competitive edge that they are afraid to go because they have made their technological development to perfection – everything in Germany is about technological perfection, better than anywhere in the world – and most CEOs seem afraid to go to China and lose their competitive edge. What do you propose should be done about that?
That is a very difficult and touchy issue.
I want to add one thing to that, because people are always going to get into taking care of intellectual property protection but we also have to work in the minds of German people.
I do believe that law enforcements are getting better in China. I am also convinced that only the highest level of technology will work, it makes no sense to produce the second best. Theirs is always a risk in business because you have to rely on others. Maybe there are systems in place to protect your product and you should look into these, but in the end there will be some kind of risk.
You were talking before that it is not just about trade but it’s also about foreign direct investment. For the past decade all the focus has been on foreign companies investing in China. For the coming decade we can expect Chinese investment to come to Germany. What do you expect when that wave arrives here and how will German businesses respond to that?
I think that’s true. For a very long time the question was always what to do in China, then all of a sudden there were more questions: do we produce in China for cost reasons and then export to other parts of the world – in our home markets? Or do we produce locally for the local markets? Or do we export for local needs? Today, as you say, the question concerns China’s impact on the world. It was just yesterday that China announced that it is once again buying raw materials in Australia. We have a lot of Chinese companies in Germany, they are participants in the business as other foreigners or as other local participants. There is a hearty welcome to all our Chinese friends doing business here in Germany, and since they participate as competitors like all participants in the markets do, it will only benefit of our customers.
If we look at the chemical industry, of course we can safely say that China is the most promising market for the chemical industry at the moment – very high growth and a very bright future. What is the contribution that German companies which are very strong in the field can make to the development of the chemical industry? Not just for their own bottom line but for the development of the industry in China?
We describe the chemical industry as a nascent industry. In our daily lives, you don’t think of many of the objects you come across as being chemical products, but chemicals are involved in nearly every product – in the car industry, textiles, in fact they are involved in each and every industry. Therefore, I am convinced that highly developed chemical products can contribute to the development of all products in the Chinese markets. It’s no accident that the German chemical industry is doing quite well in China, both in terms of exports and FDI. It is unlikely that the German chemical industry exports more to China than China exports to Germany.
So if the development of the chemical industry usually follows more or less the economic growth of the country then we can say that your exports to China are likely to grown than China’s exports to Germany?
Yes.
How do you think that German companies should deal with that situation? Rather than exporting more and more from Germany to China do you think there will be more FDI into China in order to produce locally?
Yes, the major German chemical companies, especially BSF and Henkel, have already made major investments there. We have invested and it very much depends on what the freight costs are involved and how close we have to be to the local markets. It is probably better, in general, to be in the local markets because the local markets have a better understanding of the needs of local customers. However, as I described the issue of globalisation, often we follow the industries that we supply. If our partners go global we have to follow, or better yet, already be there.
What do you think will be the role that China will play within the growth and development strategies of the major companies? If you take a company like Henkel or BSF where is China positioned within their growth ambitions?
China is of course very much on top of the list. German companies are increasingly trying to educate their people to have a better understanding of the country. You may have already noticed China’s merger’s with high-level German companies. There is necessary level of mutual understanding based on the exchange of people. Therefore, the majority of companies sends people to China and in exchange get staff from China in order that they gain better mutual understanding of the respective countries. China represents a huge number of people, one fifth of the world population. However, China is not only big, it is also heterogeneous: there is more than one market, you need to have a very good grasp on the differences between markets and as well as between the local leaders.
Of course the chemical industry is also a point of attention in China, especially in terms of its environmental performance. What is the contribution that German companies can make there because of course they are bringing very high environmental standards and energy efficiency standards to China. How can this be disseminated there?
As I said before, there is a commitment from us, forcing ourselves to apply certain high standards which go beyond legal requirements. Historically the major concerns were to focus on energy efficiency and CO2 emissions in the production arena, however, nowadays, if you look at the life cycle of various products, the impacts on CO2 and energy are not only on the production side, but also affect usage. So the chemical industry itself saw it as providing a lot of solutions to save energy. Taking the example of Henkel again, years ago it was washing at high temperatures, which resulted in a long washing cycle, with high energy and water consumption levels; today it is done at lower temperature and in shorter time, so by developing more suitable products we save energy and water. If you look instead at the life cycle of products used to insulate houses, the energy needed to produce the products is paid back in six months; in automotives, we lower energy and fuel consumption by supplying products which reduce the weight of the car. Today the focus of the chemical industry is to develop products which allow a more efficient use of energy; thus in the past the focus was on the production arena, whereas today it is more product development.
What are the flagship products that the chemical industry can support developing? I can imagine they play an important role in electric cars, for example, are there other fields that you identify that will really capture the attention of a large audience?
In terms of technology, the flagship products are in bio technology, which allows for more efficient products and more efficient processes; in detergents it’s enzymes based on bio technology gene manipulation and nanotechnology. There’s a broad field of applications and processes, with stronger, more efficient materials. A high arena of interest is catalysts which run processes more efficiently, that is with a lower consumption of energy. The chemical industry is ultimately an enabling industry.
What would be the position of the German Chemical Industry Association when a large Chinese company wants to acquire one of the larger players here in Germany? Would that be welcomed?
Yes, Chinese investors are as welcome as any other investor, in fact even more so because we like the Chinese mentality, the Chinese way of addressing basic issues.
In addition to your long career here at Henkel, you are active on the board of many other companies across different industries. Where do you see the greatest complementarities between China and Germany and where do you see the greatest opportunities to enhance trade and cooperation in the coming years?
For the time being the impact is greater on the Chinese sites, where German companies need to adapt their products for the Chinese market, based on exports of FDI, and they need to get sufficient knowledge of the Chinese markets from highly educated Chinese employees. As time passes, it will be possible to build on these Chinese companies. Also, German or European run or owned Chinese companies will be able to use their Chinese production as an export base for other parts of the world. Haier is an excellent example of how Chinese technology and Chinese products are able to address needs of customers outside China. I think China is on the way not only to becoming a low cost producer based on foreign technology, but also to developing its own technology and products, and thus to being a full entrepreneur in supplying foreign markets.
Who do you believe are the most promising young business leaders in this country who really have an understanding of how China can work for their business?
I don’t know, what I do know is that many players have a clear knowledge of the Chinese markets.
I see. Is there something else you would like to discuss? Something you would like to share either on behalf of the chemical industry or on behalf of Germany?
What I would like to express is my high admiration for the Chinese government to really be able to control and stabilise the process of economic development. I remember that during the Asian crisis, China was a huge stabilizing factor, they even gave loans to Indonesia to overcome the crisis. It is a very difficult task to keep such development under control, with so many people and in a country which is so diverse. There are always different ways to address changes, there is the Indian way or the Russian way, but the Chinese way should be the model other countries use. It is a country with so many interesting characteristics, for many reasons I have a great deal of admiration for the Chinese leader, Mr. Hu.
Do you think we should model the United Nations a bit more like the Chinese model?
Yeah, I think that the relationship between politics and economics is a very important issue to be addressed. China has its own national identity, both in economic and politics terms, whereas in the rest of the world, in democracies and market economies, companies compete. China as a state has a capability to act and there is a high leveraging of the economic power of individuals and companies which has a huge amount of potential. No German company alone would be able to buy a major raw material base in Africa or Australia, because it is too much for one company, and it would be very difficult to combine companies to form a kind of consortium in order to do so. However, in China, it would be the government who would buy it; now that’s a very interesting approach which really leverages companies.
| Company: | Henkel |
| Position: | president |
| Country: | Germany |