China's industrial champions are potential world-beaters

Sany Heavy Industry’s €500 million ($660 million) acquisition of Putzmeister, announced at the end of January, could be a sign of things to come.

It was unthinkable just a few years ago that one of Germany’s traditional industrial champions could end up in Chinese hands, but the crisis in the eurozone is hurting German exporters and creating buying opportunities for China’s manufacturers.

Putzmeister is a truly world-class company. Founded by Karl Schlect in 1958, it has spent the past five decades focusing on just one thing: making the best concrete pumps in the world. And it has succeeded. When it comes to shifting concrete, Putzmeister (which means “plaster master” in German) is the go-to firm. It pumped the stuff to a record height of 700 metres during the construction of Dubai’s Burj Khalifa, the world’s tallest building, and several of its long-boom pumps were called to duty during the nuclear accident at Fukushima, when they pumped seawater to cool the failing reactors and eventually encased them in concrete — a repeat of the role the company played at Chernobyl 25 years earlier.

Many Germans were shocked that the Chinese could buy such a company. “I was absolutely speechless,” wrote Hermann Simon, an industry consultant at Simon-Kucher & Partners, in a recent commentary piece co-authored with his colleague Jochen Krauss.

Speechless but not completely surprised. Simon knows Schlecht personally and has been researching Germany’s hidden industrial champions for more than a quarter of a century, but he was amazed by his first trip to Sany’s concrete pump factory in Changsha province two years ago.

“The first surprise, and a sign of what else I could expect, was that I was picked up in a Maybach,” he wrote. “At the factory I was surprised to see Mercedes and Volvo truck chassis lined up throughout the site. I was told: ‘We install our concrete pumps only in the best trucks in the world.’ Continuing the tour, I saw diesel motors from Deutz, hydraulics from Bosch Rexroth and controllers from Siemens. Once again, I was told: ‘We only use the best components in the world.’”

Chinese companies are sometimes perceived in the West to be much of a muchness: either state-owned monoliths or low-cost manufacturers that specialise in cheap, low-quality products built by armies of underpaid workers.

But Simon draws a distinction between China’s industrial manufacturers and its consumer goods makers. Firms such as Haier in domestic appliances and TCL in consumer electronics certainly make inferior products to their global rivals, but Sany and its main domestic rival, Zoomlion, are successfully competing with the best manufacturers in the world.

Huawei and ZTE, two Shenzhen-based telecoms firms, are also rising stars in the industrial goods sector. Indeed, Huawei overtook Siemens as the world’s most prolific patent applicant in 2009 — a position the German firm had held for decades.

Liang Wengen, who is now China’s richest man according to Forbes, founded Sany in 1989 as a small welding materials factory. After the Putmeister acquisition, it will be the undisputed world leader in concrete pumps.

Few people are in a better position to explain Sany’s rise than Deng Di, who was appointed the first manager of Sany’s international marketing department back in 1998.

“In the late 1990s Putzmeister and Schwing [Putzmeister’s main rival] held two-thirds of China’s concrete pump market,” Simon quoted him as saying in an email around the time the deal was announced. “China was by far the largest consumer of concrete in the world. But by 2004 the combined market share of the two German companies had dropped to less than 5%. According to Putzmeister’s annual report for 2004, its revenue in East Asia fell by one-third. China accounts for 60% of worldwide concrete consumption today. There is no way that a company which loses in the world’s most important battlefield can win the global competition.”

Putzmeister did not see that coming. When asked by Simon about a possible acquisition or IPO a year ago, Schlecht said: “That won’t happen to us. We’re going to continue on our own path, and we’ll do it alone.”

It is a common sentiment in Germany’s industrial heartland, but the truth is that China is now a major industrial manufacturer and a genuine rival. Deng argued that the Sany-Putzmeister deal makes more sense and carries more symbolism than Lenovo’s acquisition of IBM’s personal computer business, which is still the poster child for China outbound M&A. “This was no longer a core business for IBM,” he said. “Putzmeister, however, is a typical German hidden champion focused on one product, namely concrete pumps, and remains the global technology leader.”

As the crisis in Germany’s main export market continues to drag on, it is likely that more of Germany’s prestigious Mittelstand companies will become vulnerable to Chinese companies. The winners will be those that embrace the change. After all, firms like Sany and Putzmeister are a very good match for each other and have a similar approach to quality — something few would have believed possible even five years ago.

Indeed, more than two-thirds of China’s total export volume comes from companies with fewer than 2,000 employees. “Doesn’t this remind us of Germany,” asked Simon, “where the hidden champions of a similar size are the true spearheads of the country’s export prowess?”