Heinrich Weiss, SMS Group
Release Date: 2010-08-19
You have been visiting China frequently since the early 1970s, and have a wealth of first hand experience of the development of the relationship between Germany and China. How did you get involved in China? And did Germany make the most of its relationship with China over the past decades?I think so. It is not only our company that was an early entrant in China; there were also companies like Siemens. When we had the five year anniversary of the CITIC Investment Group in 1982, four Germans were invited to the big event: myself, Mr. Kasker of Siemens, the predecessor of Mr. von Pierer, Mr. Apps who was Chairman of Deutsche Bank for several decades and one of the biggest business leaders in Germany in the 1950s and 1960s, and Otto Wolf who headed the East-West Trade Committee of the German industry. I then took over the China focus and Otto Wolf concentrated on Russia. He was the first to sign a trade contract with the Chinese in 1955. Our company started its business in China in the 1970s, and because I had so many contacts within government I was offered the chairmanship of the China-German Business Council Trade Committee in 1982, a position I held from 1982-1997.
Where did your interest for China come from originally?
It came from business. It was not my initiative to start with: a Chinese delegation sent by the Ministry of Metallurgy visited us in January 1971, in their search for someone who could build models of continuous casting of machinery and cold rolling. At the time China did not have this technology and wanted to buy it so they came to Germany. They talked to several people and ultimately invited our company, which at the time was called Siemag, together with Demag, which was a competitor who we later absorbed, to make an offer for the continuous casting and cold rolling machinery. Today we do such projects two or three times a month, but at that time we were a much smaller company and considered it too risky to go to China by ourselves so we founded the consortium of Demag and Siemag.
After we made an offer together with Demag in 1971, political relations began opening up between China and the West, through “ping-pong” diplomacy and the visits of President Nixon and Secretary of State Kissinger to China. Germany was one of the first western countries to establish diplomatic relations with China. We were very grateful for this because most big projects were handled by the government, so it helped us tremendously that diplomatic relationships were opened between Germany and China early on. At the end of 1973, the Demag and Siemag consortium received an order. It was not my initiative, it was an initiative of China’s metallurgy industry. Following this order a delegation of the top management of Demag and Siemag visited China in early 1974. It was very rare at the time for business delegations to go to China, since even members of foreign governments hardly ever travelled there. The great opening of China by Deng Xiaoping didn’t happen until 1978. In preparation for what we thought was a normal business visit, we gave a dinner with the newly appointed Chinese ambassador in Bonn. He made a speech stating: “You might be wondering why we, as a purely communist state, approached you with this project. But there is an old saying in China that it is important to be a good friend of your neighbour’s neighbour. Since our next-door-neighbour, Russia, is our foe, we think we should have relations with you, in order to keep our foe under control.”
We then asked why they didn’t team up with the SPD since they veer more towards socialism. However, China thought the SPD to be too unreliable because they still fraternised with Moscow. When we talk to the more conservative Germans we know that there is no danger of leaking information to the Russians. He ended by stressing the need to team up with Germany because we have a common problem with Russia, stating that “the only difference is that whereas on our border there are one million tanks, but on your border there are three million tanks!” We went to China, intending to stay in Beijing for two days since the contract was already signed and the there was nothing to negotiate anymore, but the Chinese insisted that we needed at least two weeks to see the cultural sights such as the Great Wall and the Ming Graves despite the Cultural Revolution that took place before. They planned two weeks of activities for us, but as businessmen it was impossible for us to take two weeks off. We negotiated this down to a week and it ended up being very interesting, since it was the only time I had time for Chinese culture during my many visits. At the time, we were the only guests in the Beijing Hotel and when you looked out the windows from our hotel rooms the only vehicles we could see on the road were bikes, no cars, which is unimaginable for anybody seeing China today. We travelled through the country enjoying official lunches and dinners every day. It was really a wonderful occasion.
The history of SMS Group follows a sequence of joint ventures, acquisitions and ownership changes; what has been the basic philosophy behind the success of the company?
We are the leading player in the world today. I cannot speak for earlier generations; I took over from my father in 1971 when there were only five sizeable builders of rolling mills for steel industry in Germany. Some of these companies were part of large conglomerates like Demag, and we were only number three or four in Germany at the time. From early on, my ambition was to gain a leading market share. In the early 1970s we already realized that our personnel costs and other associated costs were rising and we were projecting even higher costs in the future. I decided that the only strategy would be to specialise in certain areas and establish a leading market share in our areas of focus. We started with rolling mills, and to become the market leader in this area we merged with one of our five competitors in Germany, a subsidiary of the larger MAN group. This 50/50 merger lasted for thirty years with both companies cooperating as equal partners. I was the CEO throughout the joint venture, and was able to keep the character of a family-owned company. I chose to specialise in a market niche, which at the time was rolling mills, with the intention to become number one in the world and then combined this with the management style of a family company. That means an un-bureaucratic style, driven by high motivation of the people, and leaving more or less all of the profits in the company in order to have equity to grow. These were the main elements which bred success. Since we were also good sales people we started our Chinese and Soviet Union businesses, both of which received very large orders. In the mid-1980s we reached our first objective by becoming the largest builder of rolling mills in the world. Further consolidation took place afterwards; we took over other companies and our remaining competitors also acquired companies. The whole industry became extremely consolidated and we emerged as number one, not just in rolling mills but also in steel plant equipment in general and also for aluminium and other metals. The biggest step after that was the takeover of Mannesmann Demag Metallurgy in 1999, which positioned us as the number one builders of pipe mills, which is an interesting market supplying the oil and gas industry pipes. This brought our rounded-out portfolio to what it is today as opposed to being dependant on steel.
How has the financial crisis and economic slowdown impacted your business, and what are your growth expectations in the medium to long term?
We are used to business cycles. I have been in this business for nearly forty years and have lived through five or six recessions. The pattern is always the same: there are four or five strong years followed by three or four weak years. The last weak period was at the beginning of this decade. We are used to this, and therefore don’t build up so much capacity during the boom periods. We work a lot with subcontractors and engineering partners in order to keep our engineers and top people during the recession phase. The financial crisis was not such a big change; in fact, the recession was due as of early 2008. We had such a long expansion phase, such a boom, that we were practically waiting for a recession. The financial crisis increased the speed of the downturn but did not change its character; we will therefore have three to four years with only a few orders. In 2007 and 2008 we had more than €5 billion in orders, this year I expect about €2 billion. The company has to be structured in a way that allows it to breathe with these differences. The main concept is to retain our experts during the recession phase; this is only possible with big financial reserves, which we have. We have never really depended on banks; as I said, we left all of the profit with the company so the equity rose. We are very liquid, have no loans, and have a lot of money in the bank. SMS Group can survive a recession like this even if it means our profits are down for the next few years. At the moment we are still very profitable; I just saw the forecasts and for this year and we are expecting a big increase in profit this year despite no new orders. We are servicing the backlog of orders that came in during the boom phase. I believe we will have two years of no orders but we will still manage still big profits. Then in 2012-2013 I predict we will have lower profits and possible problems with loading our capacities before the next boom starts again in 2014-2015. This is what I expect to happen extrapolating from my forty year history with this company.
Every other time there has been a recession it was the US or the European economy that pulled the global economy back on track. This time around the Chinese economy was the first to bounce back and other emerging economies are also reporting positive growth rates. Do you think this time it might be different?
The big difference is that now we have a global business cycle. In the 1970s and 1980s there were always continents which invested in capital goods. In the 1970s it was South America and Eastern Europe (before they over-borrowed and couldn’t access any more capital). Then the oil countries invested heavily as the price of oil shot up in the 1970s. They were followed by big orders placed by the Soviet Union at the end of the 1970s, and then China in the 1980s. We always had a new part of the world where we were active and therefore recessions were never too deep nor were the booms too high. Now with economic globalization, it is the first time that the whole world is not investing, whereas from 2004-2007 the whole world was investing. That is a big difference; we don’t have risk spread across continents which we normally have when working worldwide when there are always some countries doing well and others are performing poorly.
How do I see the next few years unfolding? We are mainly in two different markets: developing countries and markets with established steel companies such as ThyssenKrupp here in Germany. I believe the developing countries will come back. We are still active in India at the moment; they continue to build because they need steel capacity with their large population. China will come back as well. They have a large stimulus package, but there is a nuance of our industry, since China’s steel capacity is so big now, representing half of the world’s capacity, that their government has imposed a three year moratorium for investment in steel I don’t think the moratorium will be followed completely, but it means that recovery in China for us will not be as quick as it could be. Russia, our largest customer over the past few years, has over-borrowed and will have many problems financing new projects. Brazil, as you said, is still active. We have some smaller orders from them and I expect that some of the smaller developing countries will invest in their own steel industry such as Thailand, Malaysia and Vietnam. These countries will now come but won’t undertake projects as large as there were in Russia or China. This is one market which will recover not too far away. The market with the established steel industry will be very slow for the next four to five years. As Mr. Schultz from ThyssenKrupp just said, there won’t be a recovery in these established markets before 2014. These markets will be nothing, but now have to modernise their equipment. When we had prospective customers for the new equipment twenty years ago we showed them equipment used in established markets. Now prospective customers who want to see the latest equipment go to China, India, or Russia. The equipment in established steel industries is now 20 to 30 years old. To keep product quality up to the standards of the new equipment of developing countries, they will have to modernise their capacity. This is a smaller market than expected, so there will be a mixed picture. This year will be quite low with only a little more than €2 billion in sales, next year I hope for €2.5 to €3 billion. Our own capacities can be filled by €3 to €3.5 billion, which I hope we can at least reach by 2011.
What are your expectations for the role that China will play in the development of the global steel industry? And what is the role that you see SMS Group playing in the development of the Chinese market?
I see big chances for us in China when the three year moratorium ends because the money is there. This brings us to the ecological and pollution question; the government wants to close the old, dirty steel plants, but it cannot because they are in the small provinces. Instead they privatise small steel plants and continue to produce. A year ago one of the top planners in China told me about the need to shut down these small plants because of their harmful, polluting effects; but they are privatised now and can’t close them, he was saying that if all else fails, they would cut off their electricity and water!
I think there will be some capital investment in China soon, but the main problem now is all the competition entering China. All of the machine-building companies, who have manufactured our machines since the early 1980s, have since learned how to enter the market. They are starting now on smaller projects in China. Equipment builders are active and are starting to export to developing countries already. We expect competition from China to be very tough even outside of China over the next five to ten years.
These Chinese companies have similar ambitions as SMS Group 20 to 30 years ago, being as smaller companies that want to become number one in the world. Which steps are you taking to stay ahead of these competitors?
I still hope that we will have a development similar to what we had in Japan twenty to thirty years ago. In the 1950s and 1960s, the Japanese copied everything without asking questions about intellectual property. Today, with the World Trade Organization (WTO) it is not so easy. Nonetheless this is what the Japanese did. The Japanese became competitors in the 1970s because they were able to build similar equipment at 20-30% of the price. For about 10 year we have a very difficult time. The Japanese are still very tough competitors but their costs have risen since the mid 1980s so their equipment is not nearly as cheap as it was before. They are now regular competitors who restrict themselves to the Asian market so the threat of them isn’t that grave anymore. I think the Chinese will be a lot smarter, by trying to capture more world market share. The only thing we can do is invest a lot in R&D and be a high technology leader. There are also soft factors such as contracting big orders or coordinating consortium partners, however these activities are not that big yet in China. I think we can keep an advantage for a while until ten years from now when costs in China are as high as they are here and they no longer have a cost advantage. Then they will have experienced the same thing as Japan. Otherwise, we will probably concentrate on the premium sector of the market and build the most economical equipment, but only for the companies such as BMW or Mercedes who have a little bit more money to invest. This is the direction in which we are heading, although we may lose some world market share, our priority is to be and stay number one in the premium sector and we have good chance to do just that.
The steel industry has not been one of the traditional frontrunners in addressing climate change, but a meaningful climate deal in Copenhagen is destined to provide incentives to reduce CO2 emissions and enhance energy efficiency. To which extend is SMS Group anticipate these potential developments?
This is a big chance for us. While the Chinese are rapidly catching up on the engineering of metallurgical equipment they are still behind in all the ecological sides, the Germans have a good market position both domestically and internationally in pollution-avoiding equipment. This is therefore something that we can export, as we are still very much ahead of global competition. However I am quite sure that Chinese engineers will be able to do the same thing sooner or later. We have very strict regulations in Europe and are used to building cleaner plants, so we should be able to keep our market share in China for a while because we can offer this equipment.
As a family company you said that you cannot speak for other generations, but what do you expect to be the main theme that will define the business environment in which the next generation will run this company?
I am quite sure that in this market we are number one worldwide and very well respected for our technology. Barring any big mistakes, we should at least be able to keep the premium market segment. However this won’t give us as much volume as we have today, so we will have to find new business areas. Over the past few years we have bought smaller companies who supply equipment so that we can focus more on being complete systems producers. For example, we will have to enlarge our activities by building up electric automation capabilities since Siemens has become our competitor. This is generating a lot of business volume which we did not have before. Even if our world market share reduces to only the premium sector, we must develop other business areas that are close to the business we have now. These wouldn’t have to be completely new business lines, just enough to be able to fill our capacities so that we do not shrink. I see a lot of chances there. The next generation will hopefully still be number one in steel plant equipment, but probably only in one segment, such as German car building. But we will have additional activities such as in the automation field and services, which we are building up quite dynamically. We might buy some other companies which do similar things to us, but we don’t want to be a conglomerate. When we acquire companies there must be a synergy – a technology synergy for example – or have the same customers to us so that we can utilise our worldwide sales network. These synergies must exist when we buy companies, otherwise we will not invest: same customers, similar products, a similar form of contracting large orders. When we buy a company here must be an added value by way of a certain expertise.
As about 50% of the market is in China, will you be acquiring Chinese companies in the future?
I don’t think so; however, I won’t rule out the possibility. We are very present in China on our own. We have an engineering office which employs about 500-600 people mainly working in electric automation. We have smaller plants but we don’t build in machine building plants in China. Our smaller plants are for service and spare parts. But the larger equipment we still buy from subcontractors and other big machine building companies in China. I don’t want to invest in building large plants in China because we haven’t done that in other continents. Our business is so cyclical and if we have a big fixed cost blocked in China which we cannot load with work then we will see losses very quickly. Our software and engineering is mainly under one roof today in Germany with some satellites in China and North America. Although the central know-how is here in Germany, we also try to subcontract as much as possible.
It will really be technology made in Germany?
Yes, I think so. I think we can really keep our position. Take the car industry for example, where the Japanese and Koreans have become successful mass producers in the global market. In our business, the Japanese are competitors, but on a much smaller scale since they restrict themselves to local markets, they do not expand to Russia or other countries. We want to stay the only real global supplier in this area and hope that the Chinese themselves will stick to just Asian market. It is likely, however, that the Chinese will be smarter than the Japanese by expanding into foreign markets and bringing on fully-fledged competition over the next 10 to 20 years. But we will see. My pension is guaranteed so I am not too worried.
Is there anything else that you would like to share with your Chinese colleagues and friends who you worked with for so long that we have not discussed already?
You asked in the beginning why I was so active in China; I stress again that it was not my initiative. As a young man I did not feel the need to explore China, but we were invited, took on our first project, eventually met the top Chinese personalities in business and government, and I became increasingly amazed by their mentality. I like being in China and I enjoy doing business with the Chinese, they are trustworthy, clever, and very intelligent. My experience with Chinese politicians has been extremely positive. A western politician spends 80% of his time on public relations and only 20% on actual work; a Chinese politician works 80% of the time and uses the other 20% for social get-togethers and drinks. That is to say they spend most of their time shaping policy. They don’t talk too much; instead, they listen, formulate a masterplan, and then execute without interference from media. An autocratic governance was the only possible way of making a grand success of rebuilding a mixed socialistic and free market system. Now we see Mr. Putin using the autocratic model as an excuse to build up Russia’s economy.
It is always very interesting when I discuss political reforms with the Chinese government. Since the late 1980s I have been talking to Li Peng and Zhu Rongji asking why they don’t introduce more political reforms. They have said that it is impossible because they saw the failure of Gorbachev who introduced glasnost and perestroika. Perestroika was not a success because the Soviets were so happy about free media that it distracted people from working. Li Peng told me that if he had asked his people to choose between a new TV set, washing machine, car, and thirty independent papers, they would opt for the new TV and washer. This was the excuse the Chinese government used in order to look at the economy first and political freedoms second. The Chinese used the Russian experience to delay political reforms; now it is the other way around. Putin looks at China and sees their model of economy first, political rights second, and uses it as an excuse to curb personal freedoms. They have both learned from each other. The macroeconomic trajectory has to be central if you want to convert a country from a planned economy to a market economy. The Chinese were much quicker and smarter than the Russians for which there are clear historical explanations. When Deng Xiaoping opened China in 1979 the elder Chinese still knew how to work freely since they had only been ruled by communism for thirty years. The ministers I talked to from 1979-1981 were young men working as entrepreneurs in a free economy. If you go to Russia, no one for several generations has been a free entrepreneur. They have to learn how to work in a market economy anew. The Russian mentality in general is not as clever as the Asians’ in terms of trade and industry. This is why Russia has developed more slowly than China, including in the development of democracy. Demographics also play a large part in the disparities between the development of the two countries. The age pyramid in Russia resembles a mushroom cloud while the Chinese have more than enough young people. You barely find any young people to work for you if you invest in Russia. This will shape the development of China over the next 10 to 20 years as it grows much faster than Russia. Russia had a similar plan, but they had clever oligarchs who were able to obtain majority shares of state firms during the Yeltsin era, whilst in China there were many small companies who developed out of their own spirit.
The most important historical lesson that I have taken with me is that China today is already where Deng Xiaoping envisioned it to be when he introduced his reforms. Everything I have observed in the build up of the Chinese economy has followed a masterplan. This masterplan was in the back of Deng’s mind back in 1978. The best examples are the special economic zones which began in the early 1980s to try out market economies. The fantastic idea was to place these zones directly across rival democracies – Taiwan, Hong Kong, and Macau. They had an ideological buffer zone which dictated that if China wanted to reunite with Taiwan, it would be necessary to have people on the mainland coast who were already used to entrepreneurship and market economies. Then of course there was Shenzhen which was opposite Hong Kong, another masterful plan. The direction of the plan didn’t change after the early 1980s, except for the speed at which it worked. After June 1989 it slowed down a bit, but the direction never changed. the most amazing thing to me is that the idea behind the experiment was in Chinese leaders’ minds as far back at 1979. When I went to China in the early 1990s I asked the Vice Premier in charge of the economy why they did not accelerate political reforms, his answer was that there is an old Chinese proverb which says that the bird who flies too far ahead of the flock gets shot. He wanted to lead the flock, but did not want to get shot down. All in all it was so masterfully executed; something which fascinates me to this day and excites me about working in China. They have a great deal of respect for their history and for the importance of memory, so when I go to China they remember me and my role there despite not being active in the market for most of the past ten years.
The free economic zone in Shannon, Ireland, served as an inspiration for the development of free economic zones in China. Have the Chinese copied anything from the Germans that has contributed to their success?
Nothing politically. When we discussed political reforms in the 1980s and 1990s the topic of how much political reform to introduce without disturbing the economy always came up. They said that sooner or later there would be some form of democracy, but that they would never allow Chinese media to be as free as the West. What they hate is the degree to which media affects politics and how Germans and the West follow opinion polls. They definitely do not want to copy that, they think that we are good engineers, but we do not necessarily have a system which they aim to emulate. To give a quick example, when I visited China in the 1980s the Chinese were full of respect for Germany: they saw us as a strong democracy with wonderful engineers. However this changed towards the end of the 1980s when they eventually began comparing themselves to the Americans: in the 1990s as they saw themselves as an emerging superpower. You can see this in the planning of many Chinese cities; they do not emulate Frankfurt or Hamburg, instead, LA and San Francisco. In the 1990s they still saw us as a country of successful engineers who excelled in our special fields, but not one whose government they wanted to model theirs on.
Earlier this decade during the economic downturn of 2001-2003 the Chinese looked at the West smirking about when we would get our economic mess back in order. There was nothing about the economic situation of the West during that time for the Chinese to admire. The high cost, low productivity and short working times of the West are seen by the Chinese as unsustainable in keeping a world leading position. What we did in our company was introduce our own political reforms with our employees. We started flexible working times and more performance based salaries which allowed for the export boom of the past few years to take off since we were competitive again. This is our plan for the future in order that we continue to be competitive. Our workforce understands that. One out of every three employees in our company has been to China and knows how it works there; if we don’t work in this way we will lose our position. Our government doesn’t understand it very well, but we instil it in our employees. We are a microcosm in a way: we are convinced, committed, and determined to be a world leader in our special fields for a long time.
| Company: | SMS Group |
| Position: | Chairman and CEO |
| Country: | Germany |