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

by Juergen Simon (Author) Chun Shi Xu (Author)

Term Paper (Advanced seminar) 2003 121 Pages

Business economics - Business Management, Corporate Governance

Excerpt

TABLE OF CONTENT

LIST OF GRAPHS

ACRONYMS AND ABBREVIATIONS

ACKNOWLEDGEMENTS

EXECUTIVE SUMMARY

INTRODUCTION
1. Goal of the survey
2. Structure of the paper

I. GENERAL PART
1. Foreign Investment Forms in China
2. FDI – New way to introduce Foreign fund in China
3. Definition of Mergers & Acquisition (M&A)
4. Competitiveness of Manufacturing Industry
4.1 Home base – Switzerland
4.2 Manufacturing Industry in China
4.3 Trade of the Swiss manufacturing industry with China

II. SURVEY PART
1. Methodology
2. Sample Profile of Swiss Manufacturing Companies
2.1 How we defined our sample
2.2 Definition our sample companies
2.3 Profile of the interviewed companies

SURVEY A – INDUSTRY OVERVIEW
1. Legal forms
2. Importance of the business in China
3. Business activities in China
4. Years active in China
5. Profitability of investment in China
6. Expansion plan in China for the coming 5 years.
7. Summary of Survey A – Industry overview.

SURVEY B – CHINA STRATEGY
1. Consulting
2. Market entrance
3. China Strategy
4. Overall corporate strategy: IR-Grids
5. Business experiences in China
6. Summary of Survey B – China Strategy

M&A AS A STRATEGIC TOOL IN CHINA
1. Attractive manufacturing industries for M&A
2. Worldwide M&A experience
3. Reasons against M&A in China
4. Reasons for M&A in China
5. Requirements for M&A in China
6. China strategy of M&A experienced companies
7. Recommendations for M&A in China
8. Summary of the M&A focus part

III. COMPARISON TO SOUTHERN GERMANY

IV. CONCLUSION

BIBLIOGRAPHY

ABOUT THE AUTHORS

APPENDIX V
1. Questionnaire sample: Survey A
2. Questionnaire sample: Survey B
3. Aggregate Sector IR-Grids
4. Profile of an optimal consultant for Swiss companies
5. Profile of a China manager
6. Recommended negotiation tactics with Chinese partners
7. Recommendations for Swiss SME when entering the Chinese market
8. Interviews of companies with M&A experience

List of Graphs

Graph 1 Graphs 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)

Graph 27 Probability of expansion by the interviewed companies (N=37)

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)

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)

List of Tables

Table 1 FDI in the Chinese manufacturing industry in 2000 (100m USD)

Table 2 Statistics of FDI by forms in 2000 (100m USD)

Table 3 Import of Swiss manufacturing industry in 2002

Table 4 Export of Swiss manufacturing industry in 2002

Table 5 Expansion plan of the interviewed companies (23)

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

Table 7 M&A experienced companies with comparison to Biggies

Acronyms and Abbreviations

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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

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.

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.

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.

Graph 1 Structure of this paper

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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.

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.1

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 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.

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.

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Table 1 FDI in the Chinese manufacturing industry in 2000 (100m USD)

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Source: MOFTEC, FDI statistics2

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.

Table 2 Statistics of FDI by forms in 2000 (100m USD)

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Source: MOFTEC FDI Statistics3

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.4

“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:

- 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 5 Swiss manufacturing companies are highly competitive for the following reasons as demonstrated in the graph below.

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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 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 16thnational 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”.6

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.7 In the following industries, they established production networks:

- Computers
- Electronic products
- Telecommunication equipment
- 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.8

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.9

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.

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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.

illustration not visible in this excerpt

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.

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.

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 Overview10) 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 Strategy11) 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.

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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.

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 200212. 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.

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Graph 4 Distribution of Swiss companies in China

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Source: Aggregated from OSEC China directory 2002 by the authors

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 SECO13, 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)

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Source: Data collected from Survey A

Graph 6 Annual turnover worldwide for Survey A, m CHF (N=28)

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)

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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.

Graph 8 Industry distribution of Survey A (N=37)

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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.

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Graph 9 Industry distribution of the whole industry list

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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:

Graph 10 Company activities of each industry in China (1), Survey A

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

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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.

Graph 12 Company activities of each industry in China (3), Survey A

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Sourcing Production Export hub Sales

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Source: Data collected from Survey A

Similarly to the first two sectors, within the Construction, Civil Engineering, Environmental Protection sector, all the interviewed companies consider China as an important sales market and except for one company all the others do not manufacture in China. For one of these four companies China is considered as a regional export hub.

Graph 13 Company activities of each industry in China (4), Survey A

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Sourcing Production Export hub Sales

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Source: Data collected from Survey A

We interviewed three companies which belong to the “Other Manufacturing” industry. They produce transducers, actuators or provide motion test and simulation systems for aerospace, defense and automotive markets. None of these three companies regards China as an export hub, but for all of them China is an important sales market. One company just sources the raw material from China and produces outside of China then sells to the Chinese market. The second one just exports its products to China. The third company sources, manufactures and sells its products in China.

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Graph 14 Company activities of each industry in China (5), Survey A

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Source: Data collected from Survey A

In the sector of Communication, Computers and Information Processing Equipment, both of the interviewed companies obtain their raw material or components from the local market and manufacture in China. Furthermore they sell their products in the Chinese market. One of them exports its products to other neighbor countries. Although our interview sample size is representative, somehow it could reflect the strong competitive advantage of the Chinese IT market which makes sourcing and production in China very attractive.

Graph 15 Company activities of each industry in China (6), Survey A

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Source: Data collected from Survey A

We interviewed two companies which belong to the Textiles, Apparel, Leather, Furs and Footwear industry. Both of them source from China but they outsourced their production to Chinese textile companies. One of them sells their products in Chinese market. For the other one, textiles are entirely produced by an independent third-party Chinese textile manufactory coordinated by the company’s WFOE in China. This company considers their textile business production as sourcing.

- Profile of Survey B – China strategies

Among the 18 sample companies 78% (14/18) have up to 1000 employees worldwide; the rest have between 1000 and 3200 employees.

Graph 16 Employees worldwide for Survey B (N=18)

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Source: Data collected from Survey B

Except 6 companies which did not provide their worldwide turnover to the public, 3(25%) have annual turnover less than CHF 100 million, 5(42%) have turnover between CHF 100 million to 300 million, and one quarter (3 out of

12) of the companies have turnover between CHF 300 million to 400 million. There is one extreme case whose annual turnover is CHF 1 billion.

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Graph 17 Annual turnover worldwide for Survey B, m CHF (N=12)

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Source: Data collected from Survey B

Except one sample which started up their China business 44 years ago, the rest are all relatively young companies.

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

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Source: Data collected from Survey B

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Graph 19 Industry distribution of Survey B (N=18)

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

44% of sample companies in Survey B engage in Machinery and Equipment industry.

Conclusion: Clearly, the distributions of the Survey B sample are more or less the same as the Survey A. Again, it has the concentration of smaller companies and some extreme values. Now, we will analyze the two Surveys separately in the coming parts and get to know more about the activities of Swiss manufacturing industry in China.

SURVEY A – INDUSTRY OVERVIEW

In this Survey A part we will illustrate the Swiss manufacturing industry through our 37 sample companies. First of all we will take a glance at some general aspects to know the structure of the whole manufacturing industry.

We will start with looking at the following aspects from our sample companies.

- legal forms utilized by the Swiss manufacturing companies in China
- importance of business in China
- their business activities in China
- their business experience in China (Years)
- the profitability of investment in China
- their expansion plans in China for the coming five years

1. Legal forms

To determine the right legal form which fits to the corporate strategy is one of the most important steps. From the interviewed Swiss companies we could see that currently JV is not a common and favorite legal form for Swiss companies in China anymore. As some experienced China experts mentioned, probably it is really realistic that the form of JV has certain difficulties with controlling, organizing and managing the whole business in a completely different environment.

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Graph 20 L egal forms of interviewed companies (N=37)

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Source: Data collected from Survey A

Out of 37 companies, only four have JV – two EJV and two CJV. These companies are either pure EJV or pure CJV, not a combination. a) EJV

Two EJV produce and sell in the Chinese market. They both have experience with M&A worldwide and plan to expand their business in China within the next five years.

One company, having an EJV with a Chinese partner, said that it increased their share continuously to gain control over the JV. Today, it holds 58 %, while the Chinese partner owns 42 % of the EJV. The company’s expansion strategy includes acquisition of real estate, new production capacities and personnel for distribution and services.

[...]


1 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.hthttp://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

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

3 http://www.chinatrade.dk/english/EcoTrade/stat2001/1.htm Economic and C ommercial C ounsellor’s Office, Chinese Embassy in Denmark.

4 http://www.gabler.de

5 Porter’s diamond theory

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

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

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

9 http://www.jsetc.gov.cn/ShowRelationlist.jsp?Article_ID=4008 and http://www.china.com.cn/chinese/jingji/202459.ht. Translated by the authors.

10 see Appendix 1

11 see Appendix 2

12 China Directory 2002, OSEC, CHF 50.00

13 State Secretariat for Economic Affairs SECO http://www.kmuinfo.ch/index.html?Art=SEITE1.1&SeiteID=03.00_definition

Details

Pages
121
Year
2003
ISBN (eBook)
9783638196222
File size
1.6 MB
Language
English
Catalog Number
v14138
Institution / College
University of Applied Sciences Northwestern Switzerland – International Management
Grade
very good
Tags
Survey Activities Swiss Manufacturing Companies China Seminar Final

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