It is long known that Chinese investors tend to have an appetite for Germany’s small and medium-sized companies. But the takeover of the Swabian concrete pump manufacturer Putzmeister by construction giant Sany from Changsha (长沙) in 2012 brought a new investment strategy to the public eye, a switch-over from acquiring struggling enterprises to especially seeking very successful, established and specialised companies, the so-called “hidden champions”.
These often family-owned companies are almost exclusively small and medium-sized enterprises and are categorised by their position in the top 3 on the global market, their revenue between $4 billion and a low level of public awareness. Within their niche markets, they are sometimes a single product manufacturer who work closely together with their customers to find specific solutions. This customer interaction is the key driver of innovation and allows the hidden champions’ R&D to beat that of large companies by a factor of five. Consequently, they earn their market share through performance and not price.
Now there are three reasons that make hidden champions an interesting investment opportunity for Chinese investors. First, according to the German Association of Chambers Commerce and Industry, the DIHK, an ageing population and an alternation of generation with no heirs or children who are unwilling to take over their parents’ business many of these companies are up for sale. Since owners of family enterprises are often emotionally attached to the company, they are looking for an adequate investor, who holds comparable ideas about the enterprise’s future.
This is where Chinese investors become relevant, because they often see acquisitions in Germany as long-term, strategic investments, which align with the hidden champions’ focus on long-term growth instead of short-term gains.
The third reason why hidden champions are interesting for investors from China is the opportunity to acquire know-how without the costs and time of development by buying a German high-tech enterprise and then being able to apply this knowledge to their own market at home.
The advantages are not only on the investor’s side, but also on the side of the German business because a Chinese investment allows the company to have access to a greater capital base and easier entry to the market in China. With China being a country of rapid development and high demand for services and technological know-how, it opens up possibilities of getting a foothold in a new market and consequently ensuring further long time growth.
It is not all positive, though, Foreign acquisition of companies that are strongly embedded in their environment is often met with scepticism and concern by the employees as well as the public. The fear that the enterprise’s identity and future is under threat is, as history shows, often unsubstantiated, because acquired businesses tend to retain their identity after a take-over.
The hardest part about the strategy of investing in hidden champions is in the name itself. The circumstance that they are hidden makes them hard to identify, especially for foreign investors, which require a trustful partner to help find the optimal investment opportunity.
Even 4 years after the deal between Putzmeister and Sany, the topic is still highly relevant as individuals, companies, and private equity firms compete for the famous German small and medium-sized enterprises. But it seems that Chinese – German cooperation is a general success. As the previous owner of Putzmeister Karl Schlecht stated: “What Sany is doing in China is something we can only dream of.”
Richard Hoffmann is a partner at ECOVIS Beijing China. Richard obtained an honors degree in law and worked in Germany, the United States, and China for various prestigious law firms prior to joining ECOVIS. In addition to being a member of the board of ECOVIS International, he is Supervisor for the China business of a respected German company and shares his extensive knowledge to students by teaching commercial law in China at SRH Hochschule Heidelberg. He has published more than fifty articles in international magazines, frequently speaks at high profile events in China and abroad and is often invited as a legal expert by international TV stations. Contact: firstname.lastname@example.org
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