IMD Professor Reacts
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Dragon at the doorstep in Germany?

IMD Professor Howard Yu on ChemChina acquiring Germany’s KraussMaffei

China’s National Chemical Corporation, along with some other investors, has agreed to by the German group KraussMaffei, a rubber and plastics machine manufacturer, for USD $1 billion in what is being billed as the largest-ever takeover of a German company by a Chinese buyer.

This acquisition is interestingly similar to an earlier one by Sany, the Chinese construction equipment maker, when it bought German concrete pump maker Putzmeister, which was previously the biggest German/Chinese deal.

Getting more capabilities and going international

This is further proof of many Chinese companies’ quest to purchase ever more distinct capabilities and to establish an international presence.

It is not just traditional manufacturing firms like Sany, ChemChina, or earlier Lenovo, Internet companies from China such as Alibaba and Tencent have been embarking on similar overseas acquisitions, sometimes by taking a minority stake, or others through outright buy outs.

Not enough details are available yet about whether KraussMaffei was facing financial difficulties. But when Putzmeister was put up for sale in 2012, the company was indeed at a financial loss. Many of the German tech-driven organizations which are most likely to require additional equity (from overseas or not) are often mid-size firms that are technologically-advanced but limited in size. Their lack of scale makes them particularly susceptible to global competition. Thus the link-up between China's scale and Germany's technology is more than incidental. It's a marriage of the best of both worlds.

Success far from guaranteed

The growing size of Chinese companies is also a reflection of surging confidence and resources in the Chinese business world. However, it is worth noting that successful mergers and acquisitions have been proven through extensive research to be rare. This problem is not limited to China; it’s a worldwide business challenge. Working out a relationship is never easy after the initial honeymoon.

Many free market economists say that the country of origin among multinational corporations doesn't matter. A government should minimize its intervention and allow capital market to make its decision, they propose. In my view this is naive at best, and can be downright dangerous at worst. As has been shown around the world, companies tend to retain their most sophisticated operations in their home countries. Intel’s research and development is in California, IBM’s is in New York, Novartis’s is in Basel, even though they all have sprawling international presence. Where one works and sleeps matters a great deal.

From a policy-maker’s perspective, the origins of the companies operating in their countries makes a big difference to their territory’s economic trajectory.

Overcoming local skepticism

When emerging market firms acquire leading players overseas, they often seek to acquire new capabilities such as research and development or marketing and distribution.

But for a successful merger to take place it is particularly important that cultural integration and knowledge transfer can occur in a very deep way. Many local Germans are probably understandably skeptical about the shift of ownership for KraussMaffei. They think the dragon is at their doorstep so to speak, and that China is taking over their businesses.

To overcome this sentiment, ChemChina will need to display a strong sense of goodwill and eagerness to collaborate. A command and control mentality would surely back fire.

Howard Yu is Professor of Strategic Management and Innovation at IMD, where he teaches on the following programs: the EMBA, Advanced Management Program (AMP), Building on Talent (BOT), Breakthrough Program for Senior Executives (BPSE) and Orchestrating Winning Performance (OWP).


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