Wolf Richter: A CEO Explains Why He Sold A German Soul To The Chinese

Yves here. I find this story of a Chinese acquisition gone pear shaped interesting for several reasons. Since academic research consistently finds that the majority of acquisitions are losers for the buyers, it’s not a surprise that the deal did not work out. But this one looks to be a particularly extreme fail. Having worked a bit on international deals, and for companies operating in foreign markets, cross border transactions have an even lower success rate than domestic ones. The big reason is the one mentioned here, which is marked cultural incompatibility between the seller and buyer. Here the Chinese did less badly than they could have (they could have tried forcing Chinese practices on the German operation, which would have destroyed the value of the asset). But the logic of the transaction was unclear. Was it technology transfer? Consolidation? It appears both might have been goals, and neither happened very much.

But I find it intriguing that as lousy as the Japanese were at doing deals (they found it hard to understand that the contract was the deal, and were too inclined to overpay), they were good at managing workers in manufacturing operations (service businesses were another kettle of fish, there they tended to drive Americans crazy). This is a skill the Chinese will have to master, since they desperately need to re-invest their surpluses, and they are trying to acquire more real-economy assets.

By Wolf Richter, San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Cross posted from Testosterone Pit.

Putzmeister was a paragon of the German Mittelstand—family-owned companies with innovative technologies and high-quality manufacturing that become worldwide players in niche markets that they dominate. They’re at the core of the German export economy. But in early 2012, like so many other Mittelstand companies, it was acquired by a Chinese giant. And now, a year later, Putzmeister CEO Norbert Scheuch reveals just how impossible integration is, and how pessimistic he has become not only about Europe, but the rest of the world, particularly China.

The company was founded by Karl Schlecht in 1958. First product: an automated mortar machine, ideal for the post-World War II construction boom. Soon Putzmeister expanded into concrete pumps—truck-mounted equipment with articulated masts that can pump liquid concrete. Over time, it developed larger pumps with unique technologies and record setting performances. In the 1970s, it expanded into the rest of Europe; in the 1980s, into the US; in the 1990s, into Japan, China, Russia…. It had become a worldwide player. In 2012, it had about 3,000 employees, but only 1,100 in Germany.

Yet the company had been losing ground to a scrappy Chinese upstart, Sany, that grew in leaps and bounds during the construction boom in China to end up with 70,000 employees worldwide. Then Putzmeister slammed into the financial crisis: sales plummeted from €1 billion in 2008 to €440 million in 2009.

“I rarely experienced a business screeching to a halt in quite the same way,” said CEO Norbert Scheuch. Survival had become an issue. While sales picked up in 2010, it had trouble competing with Sany. So Scheuch quietly began shopping for a buyer, and found… Sany, which forked over €525 million. And Karl Schlecht, at 79, had found his exit.

When the deal was announced—shock! 700 employees gathered in front of the factory to protest the sale… to the Chinese, of all people. But Schlecht saw it differently. “We must come down from our arrogance,” he said. Meanwhile back at the Putzmeister plant in Shanghai, when employees found out that the company had been sold to the Chinese, they organized a general strike and shut the place down for 10 days.

CEO Scheuch, the only German board member of a Chinese company, admitted in an interview with Manager Magazin that the concrete pumps were “completely overlapping products.” So they separated them regionally, except in China, where they had a “two-brand policy.” They were vague hopes for synergies in product development and components. But there was “minimal” personnel exchange. “We tolerate only a very limited number of Chinese engineers, because we only have 180 engineers ourselves,” he said. And none of the German engineers were sent to China.

Sany had bought Putzmeister for three reasons: internationalization, brand reputation, and technology transfer, he said. The latter was about quality. The goal was to raise the quality of Sany components to Putzmeister standards so that Putzmeister could use them, while benefiting from lower manufacturing costs in China. To make that happen, Putzmeister was recruiting experts in Germany. “We know where we can find good people,” he said. And as Germans, they had easier access. They’d be sent to China “to advance processes and technologies there.”

What did Putzmeister learn from the Chinese? Scheuch dodged the question. “I don’t think such a discussion about similarities and learning from each other is appropriate.” Why? Because “there are huge differences in management, problem solving, and social structures” that could not be transferred. “We will never be able to turn a German company into a Chinese company, and vice versa. Nobody wants that anyway.” And integration would not be possible, he said. The differences were too large. So they’d limited themselves to a “strategic cooperation,” he said—and at the factory, nothing has changed.

But the industry was in trouble, even in China. In 2011, about 10,000 concrete pumps were sold worldwide, he said, of which 8,000 went to China—80%! In 2012, the rest of the world was recovering a little, and about 3,000 pumps were sold. But sales in China fell from 8,000 to 5,000—a 37% plunge.

To explain why the business was better in developing countries, he listed three parameters: growth of the population, growth of per-capita GDP, and growth of government indebtedness. If all three are lined up just right, the country becomes “an excellent breeding ground for our products.”

Europe had none of the parameters, and he saw “no good prospects.” The Americas were progressing, he said, but he didn’t “dare” give a forecast for the US. India was in a recession; though the population was growing, the other two parameters were not. And China had just gone through a 37% plunge.

So he did not have a scintilla of optimism for 2013. Growth? “I cannot say if it’s going to be 0% or 3%,” he said. The company would reduce temporary work and fixed-term employment in Germany this year, he said. “Globalization is carrying us away from Germany and Europe to other regions.”

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  1. monday1929

    Yves, “The Japanese found it hard to understand that the contract was the deal”- could you explain a bit? Thanks.

  2. John F. Opie

    The title is misleading: he didn’t sell his soul to the Chinese. If anything, the reverse: the Chinese want to have German quality and design, but aren’t willing to do things the German way, yet did not demand that the Germans, basically, all move to China and sell their souls to the company.

    If anything, Sana possibly overpaid (hard to tell with the numbers above) and then found that while they had the brand and the reputation, it didn’t help when demand fell more or less flat on its face. But that’s not selling a German soul to the Chinese.

    The problems the company is facing are the problems of their customers, not the result of the Chinese acquisition. Meh.

  3. Claudius

    It’s an interesting story and conveys much of what is true about acquisitioning or being acquisitioned in China. Yes, language, culture, corporate synergies etc. are all important, but they are not insurmountable, even in a relative short period.

    But, I sense there are some more practical, if not mundane, matters that the German Director didn’t, or couldn’t allude to in his vague ““I don’t think such a discussion about similarities and learning from each other is appropriate”.

    The real challenges are operational implementation of standard operations and procedure – the common denominators of an industry whether it is in Germany, China or both simultaneously.

    As with so many M&A, one of the greatest realizations is that once the M&A Deal team have walked away (with their completion bonus), Legal Day 1 has been reached; all assets and liabilities, control, compliance, legal, regulatory and statutory reporting are now the responsibility of the new management team and its brand new company: ‘Der Golden Dragon Balls’….AG.

    That’s when they login and realize that the Chinese database (written in triple-byte character sets) text doesn’t merge with the double byte character sets of the Western European databases. So that grand idea of dual language fields suddenly evaporates. Not to worry though, the data conversion, server and database will take only 8 months and only cost a further Euro 1000,000.

    Well, so much for language, but numbers are universal, so is math and, therefore, so is accounting. However, the Chief financial officer is perplexed when he’s told that the it’s not possible to roll-up the financial data into the new corporate entity because each company has its own separate Chart of Accounts (COA), and the segment values (the segments that break down what each part of the alphanumerical account value is by business entity,purchase, transfer and asset values) is a different structure. It’s all too technical for the CFO.

    Additionally, the reporting standard for Germany is GAAP (Generally Accepted Accounting Principles), but for the local company it’s…..something else. But, not to worry, that will only take a year to understand and fix. Meanwhile, we can expand the respective finance reporting group, split them in to two and manage it bilaterally; and go from there.

    Go from there with multiple-ledgers and COA that is – because while numbers are universal accounting principles are not: ranging from withholding tax, capital asset thresholds, asset categorization, expense management, treasury, local regulatory reporting, etc. So the ‘locals work on the local reporting, the Laowai (mainland)/Gweilo (HK) work on the overseas reporting.

    And for the next year hardly any business is developed, but tons of hard work and lots of investment are made in IT systems and integration; HR Management systems and payroll integration; Financial reporting systems and Accounting standards integration. Risk management and compliance are reviewed and mitigated, Corporate Real Estate is reviewed and brought up to code to meet fire, security and insurance standards. Purchase Orders and Invoice management are integrated and vendor management optimized.

    Chinese and German workers live, breath and party together. After all this is finished everyone knows they can ease-down and focus on what really drives the business: product and market share.

    It’s only a financial year later (right after a vacation home for Christmas hols) that the CEO learn that, as a minority partner, he and the CFO were not privy to ‘the’ ledgers; the one that shows a massive transfer of liabilities from a local subsidiary company (Shining Balls PRC – which happens to be owned by the brother, sister, uncles, aunt and cousin of the Chinese partner; and someone called ‘local judge’) and transfer of assets to it.

    Alarmingly (and surprisingly quick) the auditor come in, find the parent company insolvent and the local subsidiary unwilling to bail it out. The subsidiary is hived off. Bankruptcy follows for Der Golden Dragon Balls.AG.

    The foreigners go home and lick their wounds, pick up a copy of the Financial Times and read about a rising star of the Chinese economy ‘Shining Balls PRC’; which has just acquired a bankrupt, modern, hi-tech company for five Jiao on the Deutschmark and is exporting its product to Europe.

    1. H. Alexander Ivey

      Quite agree, and your point is what I want to emphasize.

      Your entire argument is really about looking at making cement pumps from a money-flow point of view, not from a “making a cement pump that a customer wants to buy” point of view.

      Where the H*ll is that POV in Wolf’s blog?

      DITH! It’s not “globalization” that has ruined many a country’s workforce and industry, it is the over preoccupation with the country’s and company’s finances that have ruined things.

      Until the arguments quit being over who made how much money in a M&A and go back to being who will make what thing after a M&A, we will remain in the Great Recession (aka GFC).

  4. okie farmer

    I’m assuming a typo at

    ” the rest of the world was recovering a little, and about 3,000 pumps were sold. But sales in China fell from 8,000 to 5,000—a 37% plunge.”

    Maybe “13,000 pumps”?

    I loved that he admitted that “growth of govt indebtedness” is one of their “parameters” for judging chances for business growth. I listened to one of the Dallas Hunt brothers make the same statement over 25 years ago.

  5. Jesper

    The physicist joke about having a solution (to the problem of hens not laying enough eggs) that works for ‘spherical hens living in vacuum’ comes to mind. If some simplifying (possibly unrealistic) assumptions are made by some hotshot-MBA then this deal probably makes a lot of sense.

    Another theory: Deals happen for a variety of reasons. Some times the biggest reason might be that the intermediaries (there must have been some outside advisors involved?) would get more money if the deal goes through.

    1. Student loan debtor

      Deal makers make deals because that’s what they do. If they’re not making deals then they have no reason to come into the office.

  6. Susan the other

    Cement is one of the most polluting and energy intensive industries on the planet. Regardless of Chinese business practices, pollution happens. It makes good sense that Putzmeister saw the Chinese as the only viable buyer of their technnology, sold and got out. What doesn’t make sense is that the Chinese were still buying into that kind of a growth model. They didn’t get a deal; all they got was an articulated cement pump. It will probably be popular in future for putting meltdowns out. If the Chinese can continue to maintain equipment standards.

    1. different clue

      Cement is polluting to make. But if it is made into concrete very well and made into something designed to last for several centuries without being torn back down in the meantime, that pollution becomes spread out over several centuries . . . meaning very little pollution per year.

      The Pantheon has lasted for 2,000 years so far. Roman concrete.
      I read somewhere that if concrete is vibrated properly just after poured, it sets up harder and lasts longer. Now I can’t find the link. And I read something about “Ultra High Performance Concrete” which should last good and strong for a good long time. I read somewhere that the Iranians are armoring some of their underground nuke-research facilities with UHPC.

      Supposedly concrete made from mixed calcium and magnesium carbonate can be as much a carbon “sink” as source. Maybe that’s true . . . http://www.nytimes.com/2010/03/22/business/energy-environment/22cement.html?_r=0

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