Survey on Activities of Swiss Manufacturing Companies in China with special focus on M&A

Simon, Juergen; Xu, Chun Shi

Survey on Activities of Swiss Manufacturing Companies in China with special focus on M&A

von Juergen Simon (Autor:in) Chun Shi Xu (Autor:in)

Zusammenfassung

Inhaltsangabe:Summary:
Throughout the past three years, China has become the number one country for investment, attracting more foreign direct investment than the USA. New laws allow foreign companies to acquire Chinese enterprises.
Through telephone interviews the authors collected information on the current activities and future plans of 37 Swiss manufacturing companies in China. How do traditionally export-oriented manufacturing companies see this situation? What are their strategies? Do they consider Mergers & Acquistion (M&A) as a strategic option?
The paper shows the results of a survey on the China activities of Swiss manufacturing companies up to 4000 employees, conducted by two students of the University of Applied Sciences Northwestern Switzerland in 2003.

Inhaltsverzeichnis:Table of Contents:
LIST OF GRAPHSI
ACRONYMS AND ABBREVIATIONSII
ACKNOWLEDGEMENTSIII
EXECUTIVE SUMMARYIV
INTRODUCTION1
1.Goal of the survey1
2.Structure of the paper1
I.GENERAL PART3
1.Foreign Investment Forms in China3
2.FDI - New way to introduce Foreign fund in China5
3.Definition of Mergers & Acquisition (M&A)6
4.Competitiveness of Manufacturing Industry7
4.1Home base - Switzerland7
4.2Manufacturing Industry in China8
4.3Trade of the Swiss manufacturing industry with China9
II.SURVEY PART12
1.Methodology12
2.Sample Profile of Swiss Manufacturing Companies14
2.1How we defined our sample14
2.2Definition our sample companies15
2.3Profile of the interviewed companies15
SURVEY A - INDUSTRY OVERVIEW23
1.Legal forms23
2.Importance of the business in China25
3.Business activities in China25
4.Years active in China26
5.Profitability of investment in China28
6.Expansion plan in China for the coming 5 years28
7.Summary of Survey A - Industry overview31
SURVEY B - CHINA STRATEGY32
1.Consulting32
2.Market entrance34
3.China Strategy34
4.Overall corporate strategy: IR-Grids47
5.Business experiences in China53
6.Summary of Survey B - China Strategy56
M&A AS A STRATEGIC TOOL IN CHINA58
1.Attractive manufacturing industries for M&A58
2.Worldwide M&A experience59
3.Reasons against M&A in China60
4.Reasons for M&A in China62
5.Requirements for M&A in China64
6.China strategy of M&A experienced companies66
7.Recommendations for M&A in China70
8.Summary of the M&A focus part72
III.COMPARISON TO SOUTHERN GERMANY74
IV.CONCLUSION77
BIBLIOGRAPHY80
ABOUT THE AUTHORS81
APPENDIXV
1.Questionnaire sample: Survey AV
2.Questionnaire […]

Leseprobe

Inhaltsverzeichnis

ID 6951

Xu, Chun Shi/Simon, Juergen: Survey on Activities of Swiss Manufacturing Companies in

China with special focus on M&A

Hamburg: Diplomica GmbH, 2003

Zugl.: Fachhochschule Südwestfalen, Fachhochschule, Diplomarbeit, 2003

Dieses Werk ist urheberrechtlich geschützt. Die dadurch begründeten Rechte,

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Diplomica GmbH

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Printed in Germany

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NIVERSITY OF APPLIED SCIENCES NORTHWESTERN SWITZERLAND

TABLE OF CONTENT

LIST OF GRAPHS ...I

ACRONYMS AND ABBREVIATIONS... II

ACKNOWLEDGEMENTS...III

EXECUTIVE SUMMARY ...IV

INTRODUCTION... 1

Goal of the survey ... 1

Structure of the paper ... 1

GENERAL PART... 3

Foreign Investment Forms in China ... 3

FDI New way to introduce Foreign fund in China... 5

Definition of Mergers & Acquisition (M&A)... 6

Competitiveness of Manufacturing Industry ... 7

4.1

Home base Switzerland ... 7

4.2

Manufacturing Industry in China... 8

4.3

Trade of the Swiss manufacturing industry with China ... 9

II.

SURVEY PART... 12

Methodology ... 12

Sample Profile of Swiss Manufacturing Companies ... 14

2.1

How we defined our sample... 14

2.2

Definition our sample companies ... 15

2.3

Profile of the interviewed companies... 15

SURVEY A INDUSTRY OVERVIEW ... 23

Legal forms ... 23

Importance of the business in China ... 25

Business activities in China ... 25

Years active in China... 26

Profitability of investment in China ... 28

Expansion plan in China for the coming 5 years... 28

Summary of Survey A Industry overview... 31

SURVEY B CHINA STRATEGY... 32

Consulting... 32

Market entrance ... 34

China Strategy ... 34

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Overall corporate strategy: IR-Grids ... 47

Business experiences in China ... 53

Summary of Survey B China Strategy... 56

M&A AS A STRATEGIC TOOL IN CHINA ... 58

Attractive manufacturing industries for M&A... 58

Worldwide M&A experience... 59

Reasons against M&A in China ... 60

Reasons for M&A in China... 62

Requirements for M&A in China ... 64

China strategy of M&A experienced companies ... 66

Recommendations for M&A in China ... 70

Summary of the M&A focus part ... 72

III.

COMPARISON TO SOUTHERN GERMANY ... 74

IV.

CONCLUSION ... 77

BIBLIOGRAPHY ... 80

ABOUT THE AUTHORS... 81

APPENDIX ... V

Questionnaire sample: Survey A ... V

Questionnaire sample: Survey B ...VI

Aggregate Sector IR-Grids...VII

Profile of an optimal consultant for Swiss companies... X

Profile of a China manager ... X

Recommended negotiation tactics with Chinese partners ... X

Recommendations for Swiss SME when entering the Chinese market ...XII

Interviews of companies with M&A experience ... XV

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List of Graphs

Graph 1

Structure of this paper

Graph 2

Swiss manufacturing industry by Porter's Diamond theory

Graph 3

Methodology of the survey

Graph 4

Distribution of Swiss companies in China

Graph 5

Employees worldwide for Survey A (N=35)

Graph 6

Annual turnover worldwide for Survey A, m CHF (N=28)

Graph 7

Years of business experience in China for Survey A (N=37)

Graph 8

Industry distribution of Survey A (N=37)

Graph 9

Industry distribution of the whole industry list

Graph 10

Company activities of each industry in China (1), Survey A

Graph 11

Company activities of each industry in China (2), Survey A

Graph 12

Company activities of each industry in China (3), Survey A

Graph 13

Company activities of each industry in China (4), Survey A

Graph 14

Company activities of each industry in China (5), Survey A

Graph 15

Company activities of each industry in China (6), Survey A

Graph 16

Employees worldwide for Survey B (N=18)

Graph 17

Annual turnover worldwide for Survey B, m CHF (N=12)

Graph 18

Years of business experience in China for Survey B (N=18)

Graph 19

Industry distribution of Survey B (N=18)

Graph 20

Legal forms of interviewed companies (N=37)

Graph 21

Companies with single or multiple legal forms (N=37)

Graph 22

Importance of China for the interviewed companies (N=37)

Graph 23

Activities of interviewed companies in China (N=37)

Graph 24

Years of market entrance into China (N=37)

Graph 25

Years active in China (accumulated) (N=37)

Graph 26

Profitability of Swiss manufacturing companies in China (N=37) 28

Graph 27

Probability of expansion by the interviewed companies (N=37) 29

Graph 28

Profitability in combination with expansion plan (N=37)

Graph 29

Did you work together with external consultants? (N=16)

Graph 30

Do you prefer Chinese or Western consultants? (N=13)

Graph 31

Choose the same market entrance method? (N=18)

Graph 32

Do you produce your entire product line also in China? (N=18) 38

Graph 33

Do you sell your entire product lines in China? (N=18)

Graph 34

Pricing strategy in China (N=13)

Graph 35

Are your main competitors also active in China? (N=17)

Graph 36

Do you have local Chinese competitors? (N=15)

Graph 37

Is copying a major threat for your company? (N=12)

Graph 38

Changes in store for China

Graph 39

Will China be able to meet the WTO requirements? (N=18)

Graph 40

Is central/western China a valid option? (N=13)

Graph 41

Global strategy model

Graph 42

Multinational strategy model

Graph 43

International strategy model

Graph 44

Transnational strategy model

Graph 45

The IR-Grid of the Machinery and Equipment sector

Graph 46

Corporate strategy (N=18)

Graph 47

Worldwide M&A experience (N=37)

Graph 48

M&A experience in China (N=37)

Graph 49

Reasons against M&A in China (N=30)

Graph 50

Reasons for M&A in China (N=20)

Graph 51

Requirement for M&A in China (N=15)

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List of Tables

Table 1

FDI in the Chinese manufacturing industry in 2000 (100m USD) ...5

Table 2

Statistics of FDI by forms in 2000 (100m USD) ...6

Table 3

Import of Swiss manufacturing industry in 2002... 10

Table 4

Export of Swiss manufacturing industry in 2002 ... 10

Table 5

Expansion plan of the interviewed companies (23)... 30

Table 6

Individual company data from Survey A & B (N=18, 6 Biggies)... 52

Table 7

M&A experienced companies with comparison to Biggies ... 66

Acronyms and Abbreviations

Biggies

Multinational companies with more than 4000 employees

CJV

Contractual / Cooperative Joint Venture

EJV

Equity Joint Venture

Expat Expatriate

FDI Foreign

Direct

Investment

FIE Foreign

Invested

Enterprise

FOREX

Foreign Exchange balancing

LLC

Limited Liability Company

M&A Mergers

and

Acquisitions

POE

Private Owned Enterprise

Rep Office Representative Office

SCCC

Swiss Chinese Chamber of Commerce

SME

Small and Medium size Enterprises

SOE

State Owned Enterprise

WFOE

Wholly Foreign Owned Enterprise

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ACKNOWLEDGEMENTS

We would like to thank our interview partners from the Swiss manufacturing

industry for showing interest in this survey and for taking their time to support

us. Their valuable inputs are the foundation of this survey. We highly respect

their wish for confidentiality of the committed data and therefore will not

mention company names or interview partners throughout this paper. Direct

statements will be quoted anonymously.

We also thank our colleagues of the German team who conducted the same

survey for the Southern German manufacturing industry for the good team

work and for their support.

Thanks go to our project supervisor Prof. Dr. Mike Domenghino for his time

and helpful support.

We would like to greet Frank Kaiser who lives and works in Shanghai as an

assistant of our university to do field research on the spot. He provided us

with helpful insights, recommendations and feedback.

By providing us with the list of its members, the Swiss Chinese Chamber of

commerce (SCCC) also helped us a lot.

The University of Applied Sciences Solothurn Northwestern Switzerland

deserves our thanks because of the resources and infrastructure provided

during the time of this semester project.

Thank you very much.

Chunshi Xu and Juergen Simon

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EXECUTIVE SUMMARY

This paper shows the results of a survey on the China activities of Swiss

manufacturing companies up to 4000 employees, conducted by two students

of the University of Applied Sciences Northwestern Switzerland in 2003.

Throughout the past three years, China has become the number one country

for investment, attracting more FDI than the USA. How do Switzerland's

traditionally export-oriented manufacturing companies see this situation? How

do they react? Do they buy Chinese companies?

New laws allow foreign companies to acquire Chinese enterprises. Through

telephone interviews we collected information on the current activities and

future plans of 37 Swiss manufacturing companies in China. Out of this sample

we selected 18 firms to learn more about their China strategies. We found 6

companies which have experience with M&A in China.

The surveys revealed the following key findings:

The Chinese market is significantly important for Swiss exporting but also for

Swiss importing manufacturers. At the same time, it is a very challenging

market which requires profound preparations and research before entering

and careful monitoring and supervising when expanding.

Especially in the machinery and equipment field, the Swiss manufacturing

industry is a classical export-oriented industry with R&D and production done

in Switzerland, deriving out of the high tech industries which originate from

the Swiss precision watch cluster. Many companies entered Chinese market in

order to export their products or in order to source parts in China. As in many

fields of the manufacturing industry China is still 1 to 3 generations behind

Western standards, some companies developed special products for the local

low-end market which they also produce locally. High-tech products are still

produced and developed in Switzerland, partly to protect crucial corporate

know-how, but also because Switzerland offers and optimal surrounding for

this industry (ETH, EPFL, industry cluster)

For more sophisticated and established companies we saw a trend to have

highly independent business units for the local Chinese market in China while

high-end products remain in Switzerland and are exported to Chinese

customers.

Investment forms are very much influenced by the emerging characteristics of

the Chinese market. M&A does exist, but rather as an evolutionary process

than as a revolutionary boom. Until 1986, it was only possible for foreign

companies to invest in China through a Joint Venture (JV). Today's companies

seem to prefer WFOE to JV, M&A is a way to transform a JV into a WFOE. We

found no company which chose M&A as an option to enter the Chinese market.

Totally, 6 out of 37 companies conducted M&A transactions in China so far.

Most of them acquired their Chinese JV partner either because they wanted to

get full managerial control (conflict between Western and Chinese

management culture) or they had to.

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Swiss manufacturing companies are very realistic, neither enthusiastic nor

negative, mainly person driven, by people with a strong charismatic leadership

mentality.

Many local subsidiaries are managed by Chinese managers. Expats are often

only needed to set up the Chinese business because they are too expensive.

China's accession to the WTO changes a lot, however the manufacturing

industry is not very strongly concerned, as it has already been open to

foreigners for a long time.

Compared to their Southern German counterparts, Swiss companies seem to

have longer business experience in China, and there are more M&A cases in

Switzerland.

Foreign investors mainly prefer the booming east coastal area in China from

Beijing to Shanghai, the rest is not less attractive. Even though the Chinese

Government is heavily promoting its Go-West policy, for most of Swiss

manufacturing companies, the Western China is not yet an attractive region to

set up businesses, as the infrastructure is not yet in ready and transportation

is still a major problem.

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INTRODUCTION

After the accession of China to WTO in November 2001 the Chinese market

attracted foreign investors worldwide with GDP growth rates of over 8% per

year. While European countries are suffering an economic recession at the

moment, the booming Chinese east coast is realizing prestigious projects such

as the Transrapid Maglev train. Wealth is increasing and more Chinese

consumers can afford to become more demanding China is no longer just a

cheap-labor production country, but becomes more and more attractive as a

market for foreign companies. We wondered how the highly competitive Swiss

manufacturing industry sees this challenge. What do Swiss companies do in

China? Since 1986 it is possible for foreigners to have their own company in

China. Before, only JV was allowed. Also, China allows foreign investors to

acquire assets of Chinese companies Merger & Acquisition. Acquiring an

existing Chinese company can save a lot of time to set up the business, as the

Chinese networks and distribution channels, etc. already exist. Therefore we

wondered whether M&A is a topic for Swiss manufacturing companies.

1. Goal of the survey

This survey was conducted as a semester project of the third year

International Management program at the University of Applied Sciences

Solothurn Northwestern Switzerland.

The goal of this survey is to obtain an overview picture of the investment

activities of Swiss manufacturing companies in China with special focus on

Mergers and Acquisitions (M&A). First we wanted to fully concentrate on Swiss

SME (max 250 employees), but soon it became obvious that only very few of

these companies would take the risk to merge or acquire a Chinese enterprise

and through this transaction shifting a high share of their company's financial

weight from Switzerland to China. Therefore now, our target group includes

companies with up to 4000 employees.

Questions to be answered in this survey are:

Are Swiss manufacturing companies doing M&A in China?

Why are they (not) doing M&A?

How do they perceive M&A as a strategic tool in China today?

Questions that are NOT answered in this paper:

What are the specific ways of doing M&A in China?

What are the problems with due diligence?

This thesis observes and concludes rather than recommends strategies related

to M&A.

2. Structure of the paper

The paper is divided into four main parts: Introduction, general part, survey

part and conclusion part.

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Graph 1

Structure of this paper

Survey A

Industry

Overview

N=37

Survey B

China

Strategies

N=18

M&A as a

strategic

tool N=5

Big companies N=6

(M&A=4)

Switzerland

Conclusions, Recommendations

1 Short interviews

Overview

Industry analysis

2 Long interviews

Insights

Cross checking

Recommendations

3 M&A Cases

Analysis of special

cases

Lessons to learn

Comparison

Germany

Conclusions, Recommendations

Competitiveness of the manufacture industry

- in Switzerland

- in China

Foreign Investment Forms in China

Com

son

General part

Survey part

Conclusions

Survey A

Industry

Overview

N=37

Survey B

China

Strategies

N=18

M&A as a

strategic

tool N=5

Big companies N=6

(M&A=4)

Switzerland

Conclusions, Recommendations

1 Short interviews

Overview

Industry analysis

2 Long interviews

Insights

Cross checking

Recommendations

3 M&A Cases

Analysis of special

cases

Lessons to learn

Comparison

Germany

Conclusions, Recommendations

1 Short interviews

Overview

Industry analysis

2 Long interviews

Insights

Cross checking

Recommendations

3 M&A Cases

Analysis of special

cases

Lessons to learn

Comparison

Germany

Conclusions, Recommendations

Competitiveness of the manufacture industry

- in Switzerland

- in China

Foreign Investment Forms in China

Com

son

General part

Survey part

Conclusions

Source: Compiled by the authors

The general part gives an introduction to the subject: Foreign investment

forms in China, the definition of M&A and a macro analysis about the

competitiveness of the Swiss and the Chinese manufacturing industry.

The survey part reflects our methodology: Survey A is designed to get an

overview of the Swiss manufacturing industry as a whole, while survey B

focuses more detailed on the strategies of Swiss manufacturing companies in

China. For Survey A, 37 telephone interviews were conducted, while 18

companies participated in Survey B. In the next step, we focused on the

strategic role of M&A for Swiss manufacturing companies and analyzed five

M&A cases we found. These five are compared to four additionally contacted

big Swiss multinational companies with M&A experience in search for

similarities and patterns. As the last step in the Survey part, we compared our

results with the findings of a similar survey for the Southern German

manufacturing industry, conducted by our colleagues Dominique Riedl and Lin

Sitta.

The last part of this paper is dedicated to conclusions and recommendations

both from Swiss and Chinese perspectives.

Please note: In this paper we refer to China as inland China excluding Hong

Kong and Taiwan.

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I. GENERAL

PART

The goal of this part is to provide background information to understand the

context of our two surveys: After a short introduction to the different foreign

investment forms in China, chapter 2 offers facts and figures to the current

FDI situation in China. After a definition of M&A in chapter 3, chapter 4

analyzes the competitiveness of the manufacturing industry in China and

Switzerland, respectively.

1. Foreign Investment Forms in China

For foreign enterprises which want to invest in China, there are several

options relating to the choice of legal form of the engagement. We will

introduce the three legal forms for foreign investors in China in the following

part.

They are

· Representative

Office

· Joint

Venture

· Wholly Foreign Owned Enterprise

Please note: Through the whole paper, abbreviations are used for singular and

plural forms in the same way in order to make the text easier to read.

Representative Office (Rep Off)

This legal form is subject to international law as it is not a Chinese legal entity.

It is a convenient way to enter China, because it functions as a platform from

which operations and activities in the market can be conducted. A first

scanning of the country can be done while its establishment and maintenance

is relatively simple.

Drawbacks are the facts, that it incurs tax liabilities and that no direct sales

activities are permitted, as it is not a Chinese legal entity. It rather enjoys a

status comparable to a national embassy.

The Chinese authorities closely monitor the Rep Off concerning non-

compliance of national and local regulations, e.g. tax avoidance or illegal

trading.

Foreign Invested Enterprise (FIE)

The term comprises the Chinese legal entities of JV and WFOE.

Joint Venture (JV)

Two forms of JV exist in China, namely the Equity Joint Venture (EJV) and the

Contractual / Cooperative Joint Venture (CJV).

An EJV is a Limited Liability Company (LLC) formed by one or more Chinese

parties and one or more foreign parties. At least 25% of the JV's share must

The information comprised in this passage is derived from the following websites:

http://www.fiducia-china.com/Information/Library/020917_1510. ppt

http://www.chamber.org.hk/streaming/ppt/manda/sld024. htm

http://www.chamber.org.hk/streaming/ppt/manda/sld025.htm

http://www.china-consultant.com/china.html;

http://www.marin.com.cn/eng/office.asp

http://www.sinoptic.c/conseils/ro.htm

http://www.rwlawyers.com/upfile/2002813133940109.doc

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be held by a foreign investor. The board of directors must be constituted of

both sides. The JV partners are bound to split profits and losses according to

the relevant equity ratio. EJV is mainly utilized for long term and large-sized

investments.

A CJV can also be formed either as a LLC representing the majority of the

cases, or as a non-legal person. Contrary to the equity ratio as in EJV, the

sharing of profits and losses occurs according to contracts specified at the

beginning of the CVJ. Therefore, the investment risk between the partners can

be allocated freely upon agreement. The form of a CJV is mainly utilized for

rather short-term capital investments, such as larger projects in the

manufacturing industry.

For foreign investors, the benefits of JV are the market knowledge and the

connections of the Chinese JV partner. It is possible that the government

offers favorable treatment to the foreigner if a Chinese countryman is in the

boat. Furthermore, their existence is allowed in many industrial sectors,

sometimes even in ones which are normally restricted to foreigners. The

utilization of prevailing structures like a supplier network, production units and

a functioning distribution network is further plus points.

The drawbacks of JV are the potential future conflict with the local partner

because of different business goals and philosophies. This is particularly

disturbing if the Chinese partner has veto power. There is a threat of inheriting

company burden like the liabilities of the Chinese partner in form of social

responsibilities of excess workers. The likelihood of theft of knowledge and

publicizing of trade secrets is higher than in a WFOE. Some reports go in line

with these issues, namely that the Chinese partner has exploited the JV in

order to take a lead in his/her business through the know-how and customer

base of the JV.

Wholly Foreign Owned Enterprise (WFOE)

A WFOE is established either as a LLC or as a Partnership. The LLC is the

preferred form, because the liability is restricted to the amount of registered

capital in the company. WFOE has been gaining more and more importance

while currently it is the number one investment option in the market. In the

surge of China's WTO accession, Chinese legislation was streamlined according

to international standards. Foreigners are now given more independence and

can choose industries and partners largely to their own will. In former times, it

was necessary to have a Chinese JV partner in order to enter certain domestic

markets. This is still partly the case, but much less than before. And because

of WFOE benefits which will follow in the next passage, the JV loses its

function as a means to an end for market access and hence, is no longer the

favorite choice. A trend is frequently reported that WFOE is most popular for

initial set-up as well as succession of a legal form, e.g. JV and WFOE.

The advantages of a WFOE are manifold. First, full control over the

investment can be exercised by the foreign company. In that sense,

management style, organizational structures, labor policy and use of profits

are of importance. This way, disputes and resistance are minimized and a

dependency on the Chinese partner, as seen in the JV, can be avoided.

Moreover, a stronger protection of intellectual property rights is expected.

Independence allows for fairly easy termination of the business and a high

flexibility.

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A downside of a WFOE is the original shortage of personal connections

because the access to domestic networks via Chinese partners is not given.

Similarly, the use of resources, time and capital needed to build up business

structures, is relatively high. Examples are the set-up of a distribution or a

sourcing network. Additionally, WFOE are still not allowed in all industries due

to an official "black list". The official investment catalogue by the government

classifies domestic industries as restricted, prohibited and permitted. Unlike a

JV, a WFOE has no access to cheaper forms of land acquisition.

Legal background

FIE (JV, WFOE) are all Chinese legal entities and abide by the Chinese law.

They are liable to the same treatment as Chinese companies from a regulatory

and legal point of view. The legal foundations of these legal forms are the Law

on Sino-foreign Equity Joint Venture Enterprises (EJV Law) 1979, the Law on

Sino-foreign Co-operative Joint Venture Enterprises (CJV Law) 1988 and the

Law on Sino-foreign Wholly Foreign-Owned Enterprises (WFOE Law) 1986.

In these early stages of foreign investment within China, high Government

control dominated. Spurred by the WTO accession, restrictions of FIE have

relaxed in various ways. The latest of the frequent amendments took place for

WFOE, on 31.10.2000, for EJV, on 15.03.2001 and for CJV, on 31.10.2000.

Changes took place in local content provisions. Foreign exchange balancing

(FOREX) is no longer required while export commitment and technology

transfer are not mandatory any longer. Finally, a FIE is no longer required to

submit production plans and they have a higher leeway in sourcing raw

materials and equipment internationally.

2. FDI New way to introduce Foreign fund in China

Parallel to the development of the legal environment, the amount of FDI

increased exponentially (factor 19) from 1979 until today. In 2002 China has

become the biggest receiver of FDI with 52.7 billion US Dollar. It is a signal

that China has become the strategic future market for companies worldwide.

In the subsequent part, we look at the FDI situation in China from different

angles.

The manufacturing sector makes up the biggest share. The paid-in value

amounted up to 63.48% of the total paid-in value and no less than 15,988

projects have been approached within 2000 alone.

Table 1

FDI in the Chinese manufacturing industry in 2000 (100m USD)

Sector

No. of

Projects

Share of

total

Contract

FDI Value

Share of

total

Paid-in FDI

Value

Share of

total

Manufacturing

15'988

72%

442.54

71%

258.44

63%

Source: MOFTEC, FDI statistics

In which forms FDI has been allocated is shown in the following table. Please

note that Rep. Offices do not appear in a statistic of FIE. We can only get an

inside on the distribution of EJV, CJV and WFOE. In terms of realized FDI value,

the WFOE is the premier chosen form in 2000 (47%). EJV and CJV hold second

and third place with 35% and 16%, respectively.

http://www.chinatrade.dk/english/EcoTrade/stat2001/3.htm

Economic and Commercial Counsellor's Office, Chinese Embassy in Denmark.

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Table 2

Statistics of FDI by forms in 2000 (100m USD)

Form

No. of

Projects

Share of total

Contractual

FDI Value Share of total

Realized FDI

Value

Share of total

Total

22'339

100%

623.80

100%

407.15

100%

EJV

8'378

38%

196.48

31%

143.43

35%

CJV

1'757

81.17

13%

65.96

16%

WFOE

12'196

55%

343.09

55%

192.64

47%

Others

1.62

6.76

Source: MOFTEC FDI Statistics

Among the cumulated FDI projects until 2000, JV still has the largest share.

The current trend towards WFOE might alter this distribution.

Nowadays it is becoming fashionable to boost the introduction of foreign

capital through Mergers and Acquisition (M&A) in China. A clear definition of

the term M&A for the scope of this paper is necessary as a myriad of

definitions exists. The definition is given in the next section.

3. Definition of Mergers & Acquisition (M&A)

Before we start to analyze the M&A specific questions in our survey, it is

necessary to know definition of M&A.

"M&A" (in Chinese: binggou) is a combination of the terms "merger" and

"acquisition" which are in general different legal transactions involving a

minimum of two companies.

A merger (in Chinese: hebing or jianbing) is an aggregation of two or more

companies into one legal and economic entity with or without prior purchase

of equity shares.

An acquisition (in Chinese: shougou) is the process of purchasing a business

unit or an entire enterprise through another company and its integration into

the company portfolio of the buyer. Central element of such a transaction is

the transition of commercial control.

That means for the Chinese market:

· Acquisition of an enterprise (FIE, SOE, POE) or business unit through

Off-shore transaction

Direct transaction

· Buy-out of JV Partner

In this paper we focus on M&A as a strategic tool. According to Porter's theory

on competitiveness of nations, it can be a source of competitive advantage.

Three strategic objectives exist:

http://www.chinatrade.dk/english/EcoTrade/stat2001/1.htm

Economic and Commercial Counsellor's Office, Chinese Embassy in Denmark.

http://www.gabler.de

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· Horizontal integration is done through purchasing a company out of the

same branch or value chain position. The goal is to reach economies of

scale and scope. It can be used to eliminate a competitor.

· Vertical integration means buying a company out of the same branch

which is directly connected before or behind the buyer in the value chain. It

is used to reach stable supplies and distribution channels as well as

economies of integration (low communication cost).

· Lateral integration is buying a company out of a different branch.

Besides operative and strategic synergies, further reasons to engage in are

an easier market entrance or a smoothing of return on investment.

4. Competitiveness of Manufacturing Industry

In this part we are going to turn the spotlight on the specific manufacturing

industry both in Switzerland and in China.

In the Swiss manufacturing industry part, first of all we will analyze the

industry by Porter's theory. After that we will look at the import and export

situation of the Swiss manufacturing, to find out the current trade relation

between China and Switzerland.

4.1 Home base Switzerland

Manufacturing industry analysis by Porter's Diamond theory

Swiss manufacturing companies are highly competitive for the following

reasons as demonstrated in the graph below.

Graph 2

Swiss manufacturing industry by Porter's Diamond theory

Firm Strategy,

Structure,

and Rivalry

Related and

Supporting

Industries

Factor

conditions

Demand

conditions

Swiss

manufacturing

industry

Firm Strategy,

Structure,

and Rivalry

Related and

Supporting

Industries

Factor

conditions

Demand

conditions

Swiss

manufacturing

industry

Source: Compiled by the authors according to Porter's Diamond theory

Swiss factor conditions

Due to its sophisticated education system, Switzerland has highly skilled

engineers needed for the manufacturing industry (ETH, EPFL, and HTL). High

labor costs forced companies to reduce costs, optimize labor productivity and

invest into automation. Today a high level of innovation and automation is

Porter's diamond theory

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reached, productivity is high. Relatively lower capital costs support this

process.

Swiss demand conditions

The Swiss market is very demanding. "Swiss made" stands for high quality

and reliability. Manufacturing companies often work together very closely with

their customers and therefore have to be strong in customizing their products.

Related and supporting industries

Today's highly specialized Swiss manufacturing companies have their roots in

the long tradition of the high precision watch industry. It is embedded in a

strong cluster of high-tech companies, components suppliers and related

industries. The banking and insurance industries back up the financing part of

high investments.

Firm strategy, structure, Rivalry

The dynamics of the Swiss high precision cluster fostered rivalry among Swiss

manufacturing companies and pushed innovation. The domestic home market

has been very demanding but never big enough for Swiss manufacturing

industry to survive. Very soon already, they had to move out of Switzerland to

enter new markets. Germany as the biggest European market also has a

highly competitive manufacturing industry. The same is true for some French,

Austrian and Italian players. From the beginning on, founders had to think of

their business as a global one, not limited to the Swiss home market. This

challenge prepared Swiss manufacturing companies to compete on an

international level soon.

Conclusion: The Swiss manufacturing cluster has developed a strong

competitive advantage in small to medium-sized companies which have a high

degree of automation and are globally active as specialized niche-players,

providing capital-intensive high-end products.

4.2 Manufacturing Industry in China

On the 16

national congress of the Communist Party of China, in 2002, the

state of the Chinese manufacturing industry was described as follows: China's

manufacturing industry, after the reform and opening up twenty years ago,

has been developing rapidly with increased product catalogues and improved

producing technology. "Made in China" has grabbed a rather advantageous

position in international division of labor and the nation is transforming from a

processing and assembling base of transnational corporations to a center of

production. [...] Expanded quantity brings changes in quality. "Made in China"

has developed from simple to hi-tech and sophisticated products".

This statement is supported by the media which more and more refers to

China as the future "factory of the world". Almost 80% of the top500

companies in the world have invested in the country and established a vast

production network.

In the following industries, they established production

networks:

· Computers

· Electronic

products

· Telecommunication

equipment

http://www.16congress.org.cn/english/features/46819.htm

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· Petroleum chemical industry

The added value of equipment manufacturing currently takes the fourth place

in the world, next to the USA, Japan and Germany. Between 1980 and 1998,

China experienced an average GDP growth 9.94% per year, while the

manufacturing industry realized 12.65% for the same period.

In the year 2000, the figures about the Chinese manufacturing industry are as

follows: The entire output of the manufacturing industry has added up to 423

billion USD. The industry contributed 40% to the country's GDP and provided

employment to 50% of the China's workforce. Due to an export rate of 80% of

the production, 75% of the country's foreign exchange income was earned by

the manufacturing industry.

The competitive advantage of the Chinese manufacturing industry derives

from a variety of factors. In 2000, the large labor force was constituted of 820

million people who were between 15 and 59 years old. This huge size offers

unlimited supply of human resources to the factories. The labor cost in the

Chinese manufacturing industry is very low. A worker's wage is 0.6 USD per

hour on average which is 4.6% of the wage of an American worker. Then, the

education structure in China fits the needs of the manufacturing industry as

48.7% of the population has an above middle school background. Discipline

among workers is very strict and fairly easily manageable. Finally, the size of

the domestic market is very large and through high growth rates has future

potential.

Critically needs to be mentioned that the technical ability is relatively weak.

This results in a high dependency on imported know-how. The productivity in

the factories is at a fairly low level. Furthermore, the low flexibility and long

reaction time to market changes pose disadvantages towards Western

industries. Strongly hierarchical organizational structures make operational

business inefficient, especially among the many SOE. The supply with spare

parts has been not very common in China for a long time and is therefore still

behind Western standards.

4.3 Trade of the Swiss manufacturing industry with China

Switzerland is a net export country in the manufacturing industry. As our

paper is focusing on business in China, in the following part we concentrate on

the trade between Switzerland and China in manufacturing products.

In 2002, the Swiss manufacturing industry's imports from China accounted to

CHF 636.3 million, 1.2 % of their total imports in this field worldwide.

In 2002, Swiss manufacturing companies exported goods for CHF 54 billion

worldwide.

http://www.16congress.org.cn/english/features/46819.htm

http://www.jsetc.gov.cn/ShowRelationlist.jsp?Article_ID=4008

and

http://www.china.com.cn/chinese/jingji/202459.ht

. Translated by the authors.

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Table 3

Import of Swiss manufacturing industry in 2002

country

in mio CHF ± CHF% share in %

1 Germany

20'583.2

-8.3

39.2

2 France

4'266.0

-18.1

8.1

3 Italy

4'138.3

-5.8

7.9

4 U.S.A.

3'515.7

-15.9

6.7

5 Netherlands

3'046.2

-13.9

5.8

6 UK

2'595.9

-13.6

4.9

7 Austria

2'020.7

-2.7

3.8

8 Japan

1'881.8

-19.7

3.6

9 Belgium

1'502.4

-6.5

2.9

10 Ireland

1'012.9

-23.1

1.9

11 Sweden

955.0

2.2

1.8

12 Spain

732.9

-9.2

1.4

13 China

636.3

5.4

1.2

14 Finland

582.4

-8.0

1.1

15 Czechia

581.6

34.9

1.1

worldwide

52'572.8

-10.3

100.0

Imports

Source:

http://www.swissmem.ch/default.cfm

With 2.8 % of the total exports of the Swiss manufacturing industry, China is

number 8 in the top ten of the Swiss export countries. While in 2001 all the

other top ten export markets went down including the total world market,

exports to China grew by 23.4 % compared to 2000. Also among the Asian

countries, China had the highest growth by far, while exports to countries like

Japan (-14.2 %) and Taiwan (-11.8%) decreased significantly.

Table 4

Export of Swiss manufacturing industry in 2002

country

in mio CHF ± CHF% share in %

1 Germany

13'968.1

-12.2

25.8

2 U.S.A.

6'276.5

-2.9

11.6

3 France

4'263.4

-8.4

7.9

4 Italy

3'522.9

-4.0

6.5

5 Netherlands

2'422.7

-0.5

4.5

6 UK

2'322.4

-15.6

4.3

7 Austria

1'845.1

-4.2

3.4

8 China

1'533.8

23.4

2.8

9 Spain

1'301.3

-16.1

2.4

10 Japan

1'246.3

-14.2

2.3

worldwide

54'079.3

-6.6

100.0

Exports

Source:

http://www.swissmem.ch/default.cfm

If we compare the import and export figures only between Switzerland and

China, in 2002, Swiss manufacturing industry's export to China exceeded

imports by CHF 1.5 billion, which was 2.4 times higher than imports.

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Obviously, the Chinese market is significantly important for Swiss exporting

but also importing manufacturers.

Conclusion: To give the readers some overall picture, in this general part we

have already covered foreign investment situation in China and

competitiveness of manufacturing industries both in Switzerland and China. In

a word, Chinese market is becoming a significantly important market for Swiss

manufacturing industry. In the coming part we are going to analyze Survey A

and Survey B following with the M&A specific topic.

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II. SURVEY PART

1. Methodology

The survey has been conducted in three phases: preparation, interviews,

analysis.

The OSEC company database records all known Swiss FDI activities within

inland China. Our sample companies belong to the manufacturing industry and

have their heritage in Switzerland. Furthermore, they are active in China and

do not exceed 4000 employees worldwide. This definition was established to

enable a comparison between Switzerland and Germany as this study has

been simultaneously conducted in Southern Germany.

Phase 1 Preparation

In the first phase, the OSEC database was scanned to find out all companies

which belong to the manufacturing industry. The goal was to establish a

contact list for telephone interviews. We filtered the investments by

headquarter addresses of the Swiss company and deleted multiple

investments done by a single company. We ended up with a list of 96 relevant

companies.

Phase 2 Interviews

For the interviews we prepared two different questionnaires. The first survey

(Survey A Industry Overview

) had a number of quantitative questions and

was designed to capture general information and insights of the China M&A

sentiment within the target group. The second survey (Survey B China

Strategy

) was designed to get a complete overview of the companies'

strategies regarding their China business. The two questionnaires were the

optimal solution to tap the existing knowledge.

We called each company on the list to conduct an interview with the

companies' China experts. If a telephone interview was not possible, we send

our questionnaires per post or via email. After we received 37 responses to

the first quantitative survey and 18 to the second survey, a sample was

created based on the willingness of the companies to give interviews. Despite

the busy Christmas season and the downturn of the economy, most of the

interviewed partners were very friendly to assist us with this project.

Phase 3 Analysis

In the third phase we gathered the data and began to analyze it statistically.

We divided the two surveys into three parts, one part gives an industry

overview; the second part concerns the Swiss manufacturing companies'

general China strategies and the third one is a M&A specific part.

The graph below gives the reader a detailed overview of our approach.

see Appendix 1

see Appendix 2

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Graph 3

Methodology of the survey

Phase 3

Analysis

Phase 2

Interviews

Phase 1

Preparation

1 Get overview

· Analyze database

· Define target companies

4a Contact companies

· If possible, do telephone interview right away

· else, schedule interview date

5 Conduct interview

· Use questionnaire

· Take notes

6 Review interview

· Fill out questionnaire

· Send questionnaire to interview partner for review

· Ask interview partner to provide missing information

· Note interview partner`s address for free sample

4b Send information

· Project description

· Confirm interview date

7 Data analysis

· Collect data

· Consolidate data

· Show and analyze results

8 Integrate into paper

· Draw conclusions

2 Method

· Define and describe method

· Design questionnaires

3 Set up contact list

·Scan for target companies

Phase 3

Analysis

Phase 2

Interviews

Phase 1

Preparation

1 Get overview

· Analyze database

· Define target companies

4a Contact companies

· If possible, do telephone interview right away

· else, schedule interview date

5 Conduct interview

· Use questionnaire

· Take notes

6 Review interview

· Fill out questionnaire

· Send questionnaire to interview partner for review

· Ask interview partner to provide missing information

· Note interview partner`s address for free sample

4b Send information

· Project description

· Confirm interview date

7 Data analysis

· Collect data

· Consolidate data

· Show and analyze results

8 Integrate into paper

· Draw conclusions

2 Method

· Define and describe method

· Design questionnaires

3 Set up contact list

·Scan for target companies

Source: Compiled by the authors

Some remarks to our approach

Even though we were able to contact 40 % of all relevant companies, we think

from a statistical point of view, relying too much on numbers for a sample of

only 37 companies is somewhat questionable. Therefore the results of our

survey are giving an insight into the activities of Swiss manufacturing

companies in China rather than being statistically representative.

However through our approach we managed to represent quite well the true

distribution of sectors within the manufacturing industry both, in Survey A as

well as in Survey B.

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2. Sample Profile of Swiss Manufacturing Companies

2.1 How we defined our sample

Our interview partners were people from the top management like CEOs,

(senior) Vice Presidents, regional or country managers, Sales and Marketing

managers.

The Swiss-Chinese Chamber of Commerce (SCCC) provided us with a list of

their members. To identify companies of the manufacturing industry, we

checked the list with the member list of the Swiss MEM. The resulting list was

not large enough and also not significant enough to conduct a survey, as not

every company active in China automatically has to be a member of the SCCC.

Therefore we decided to define our survey sample based on the OSEC China

directory 2002

. According to OSEC, the goal of this directory is to cover all

Swiss companies with China activities. To reach this goal, except for special

ads, the entry into the directory is free for companies, which provides an

address list of 498 Chinese subsidiaries of Swiss companies and their Swiss

headquarters, categorized by the names of the China subsidiary and industries.

The directory includes 214 Swiss companies which are active in China and

which therefore have at least one subsidiary in the legal form of

· WFOE

· EJV

· CJV

· Rep Office or

· Other form*

*Other forms include agencies, partnerships with other Swiss companies.

Graph 4

Distribution of Swiss companies in China

(214 Swiss headquarters; 498 Subsidiaries in China)

EJV: 125

25%

CJV: 25

WOFE: 145

29%

Holding: 12

Rep Office: 191

39%

Source: Aggregated from OSEC China directory 2002 by the authors

China Directory 2002, OSEC, CHF 50.00

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After doing some additional research on the company size, we generated a

sample list and ended up with 96 companies which met our definition.

2.2 Definition our sample companies

In the beginning our aim was to focus on Swiss Small and Medium size

Enterprises (SME) active in China. There are various ways to classify SME.

Common criteria are the number of employees and the turnover.

According to the State Secretariat for Economic Affairs SECO

, the European

definition of "less than 250 employees" is applied for statistical purposes, as

there is no official definition for SME in Switzerland.

In this paper, we also define SME as companies with less than 250 employees.

However, soon we realized that most SME would be too small in size and

finances to be seriously interested in doing M&A in China. We therefore

extended our sample definition to companies with up to 4000 employees, as

we think from an international point of view this size can still be considered as

medium size company and real big multinationals (biggies) have significantly

more than 4000 employees, even in Switzerland.

2.3 Profile of the interviewed companies

Before we start to analyze the result of our survey, it is important to

understand the background and the characteristics of the interviewed

companies. The following histograms will help the reader to get an overall

picture.

Profile of Survey A Industry overview

Among the 35 companies which participated in Survey A, 77% (27/35) have

up to 1000 employees worldwide, the rest has between 1000 and 4000

employees.

Graph 5

Employees worldwide for Survey A (N=35)

3750

3250

2750

2250

1750

1250

750

250

Source: Data collected from Survey A

State Secretariat for Economic Affairs SECO

http://www.kmuinfo.ch/index.html?Art=SEITE1.1&SeiteID=03.00_definition

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Graph 6

Annual turnover worldwide for Survey A, m CHF (N=28)

950

850

750

650

550

450

350

250

150

Source: Data collected from Survey A

Except 9 companies which do not publish their worldwide turnover, 10 (36%)

have annual turnover of less than CHF 100 million, 3 (11%) have a turnover

between CHF 100 million to 200 million, and 6 (21%) companies between CHF

200 million to 300 million, one quarter (7 out of 28) of the companies have an

annual turnover of CHF 300 million up to CHF 1 billion.

Graph 7

Years of business experience in China for Survey A (N=37)

Source: Data collected from Survey A

Machinery and Equipment account to almost 50%, while Metal and non-

metallic products industry accounted to 22% of the sample size in Survey A.

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Graph 8

Industry distribution of Survey A (N=37)

2; 5%

4; 11%

8; 22%

3; 8%

2; 5%

18; 49%

Communication, computers and

information processing equipment: 5%

Construction, civil engineering,

environmental protection: 11%

Machinery and Equipment: 49%

Metal and non-metallic products: 22%

Other Manufacturing: 8%

Textiles, apparel, leather, furs,

footwear: 5%

Source: OSEC China directory 2001, aggregated and compiled by the authors

When compare graph 8 of the interviewed companies with graph 9 of all

relevant manufacturing companies we contacted from our OSEC list, we can

see, that we managed to represent rather well the true distribution of the six

sectors within the manufacturing industry.

Graph 9

Industry distribution of the whole industry list

12%

13%

16%

12%

40%

Communication, computers and

information processing equipment: 7%

Construction, civil engineering,

environmental protection: 12%

Machinery and Equipment: 40%

Metal and non-metallic products: 13 %

Other Manufacturing: 16%

Textiles, apparel, leather, furs,

footwear:12 %

Source: OSEC China directory 2001, aggregated and compiled by the authors

When we look at the six sub industries, we can see different distributions of

business activities in China:

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Graph 10

Company activities of each industry in China (1), Survey A

Machinery and Equipment

n=18

22%

33%

11%

100%

78%

67%

89%

50%

100%

Sourcing

Production

Export hub

Sales

Source: Data collected from Survey A

The table above reveals that 33 % of the interviewed companies of the Swiss

Machinery and Equipment industry produce in China. Among these 33% only

22% source locally and the other 11% import their raw material or the

components from other countries than China. 11% of the companies consider

China as an export hub in the Asian region, for both, the products produced in

China and the ones exported to China. Obviously, all the companies in this

sector sell their machinery and equipment in China, which proves the

importance of the Chinese market for the Swiss Machinery and Equipment

industry.

Graph 11

ompany activities of each industry in China (2), Survey A

Metal and non-metallic products

n=8

50%

13%

100%

50%

88%

50%

100%

Sourcing

Production

Export hub

Sales

Source: Data collected from Survey A

The graph shows that all of the interviewed companies which belong to the

metal and non-metallic products sector sell their products in China. Half of

them source from China, but only one of them manufactures in China. At the

moment only one company considers the Chinese market as a regional export

hub.

Details

Seiten
Erscheinungsform: Originalausgabe
Jahr: 2003
ISBN (eBook): 9783832469511
ISBN (Paperback): 9783838669519
DOI: 10.3239/9783832469511
Dateigröße: 1.5 MB
Sprache: Englisch
Institution / Hochschule: Fachhochschule Nordwestschweiz – Wirtschaft
Erscheinungsdatum: 2003 (Juni)
Note: 1,0
Schlagworte: mergers acquisition studie geschäftsstrategien