ContiTech: M&A, the way to go

Junsheng Liu
Chief Representative of ContiTech China
Shanghai Office, ContiTech AG

The Fourteenth Edition of a Series of Interviews with MNC Auto Parts Suppliers

M&A as driving force for business expansion
Stable development in China

Gasgoo: Mr. Liu, thank you for joining us at Gasgoo.com. Firstly, can you give us a brief introduction to ContiTech AG?

Liu: The ContiTech Group is an independent division of Continental AG. With more than a hundred years of experience in research and technology as well as having a modern business management, ContiTech is a very promising corporation, and has been very successful, especially in the past 10 years. In 1998, Continental Group acquired Teves, an automotive supplier of brake systems and ABS, enabling Continental to become a chassis system supplier. Continental then moved on to acquire Temic. In 2005, Phoenix AG – with revenue of 1.1 billion euros and about 10,000 staff -- was merged into ContiTech, making ContiTech the world's largest non-tire rubber producer.

Gasgoo: I understand that ContiTech posted revenue of nearly 3 billion euros last year.

Liu: Yes

Gasgoo: How much does the Chinese business account for?

Liu: It's about 70-80 million euros (700-800 million RMB), a very small amount compared with 3 billion euros.

Gasgoo: What about your plan 5 to 10 years down the road? How much is the Chinese business expected to account for?

Liu: We do have some vision for the future. We have established 7 business units in China, some as early as 1999 and some as recent as 2005, each differing in its scale of entry. Our next step is to build on this and expand our production capability, for example, some factories will expand from having just assembly lines to having a complete production line. This is what we intend to achieve in two years time.

Gasgoo: What are the challenges in turning an assembly line to a complete production line? And how will you prepare for that change?

Liu: Capital investment and the transfer of technologies and facilities are important criteria to expand our production capability. But this is not a major challenge for us since we have always been strong in these areas. As the auto industry in China gears up, competition is heating up and what is really challenging ahead is to boost sales and increase market share in such a competitive environment.

Gasgoo: Personally I believe that ContiTech produces goods of high quality. Unfortunately many foreign enterprises are skeptical about the quality of Chinese products. Do you think that the Chinese workforce has the ability to meet ContiTech's quality requirement?

Liu: It's an on-going process. It's no doubt that the Chinese companies have some catching up to do in terms of technology and technique compared with Continental Group, which has been around for more than 100 years. We need to provide them with trainings on the complete system from material purchase to production, quality control, financial management, sales and after-sale, etc. After one or two years of training, they can then meet our requirements. So I don't think this will hinder our development in China.

Gasgoo: How many percent does the automobile business account for in the 7 business units?

Liu: about 60% in China

Gasgoo: that's higher than your average

Liu: Yes, this is because our development is closely tied to the auto industry. We initially enter into the Chinese market because of our customer – Volkswagen.

Gasgoo: Will the auto industry continue to be your most important business?

Liu: Yes, it is our most important business today and will continue to be our driver in the future. At the same time, we are also expanding into other businesses.. For example, the Phoenix conveyor belt produced in our Shanxi factory is used in non-automotive business.

Gasgoo: You mentioned that the Chinese business accounts for a small percentage of ContiTech's global business. What is the expected growth rate of your business in China?

Liu: The annual growth in China is about 20% to 30%, higher than our global average, but because our revenue is relatively small; this translates to a relatively small figure.

Gasgoo: Looks like Continental's annual growth is higher than the average growth in the Chinese market.

M&A strategy: careful examination, then action

Gasgoo: ContiTech has expanded by acquiring companies like Phoenix. As you said, the scale of Chinese business is still very small. Do you have any plans to expand it through further acquisitions?

Liu: We are slowly moving towards that direction. In the past 10 years, we have focused on entering into the Chinese market, establishing our business here, gaining more experience and we have achieved some success throughout the years. In the future, we will continue to expand our production facilities, but at the same time, we will also consider suitable acquisition that has the potential to help us expand and improve our business.

Gasgoo: Acquisition can be challenging. To acquire a company, capital investment is required but this can be evaluated prior to the acquisition. What is really challenging is the post-acquisition phase, for example, the integration phase. Many acquisitions failed to integrate successfully. Can you share with us the secret to ContiTech's successful acquisitions?

Liu: So far, our acquisitions have been very successful. Thanks to the excellent management, the business units acquired have integrated smoothly and systematically into our Group. As a result, we have achieved increased sales and market share with less staff and higher efficiency. If we were to merge or make acquisition in China, we will evaluate carefully before we take any action, this is ContiTech's strategy.

Gasgoo: I think now is the right time for ContiTech to merge or make an acquisition. First of all, the exchange rate is favorable, and secondly, the Continental Group is currently very active in mergers and acquisitions. It's reported that Continental is interested in acquiring Siemens VDO. Do you have any target acquisition in China?

Liu: We have some plans, but it's too early to disclose any information. We are actively looking out for any potential acquisition. 

Gasgoo: Do you think that China has reached a stage where the M&A trend is taking over the industry? What are the main M&A targets, state-owned, private or joint venture?

Liu: I think that China has not reached that stage yet, because the Chinese economy is still booming.

Gasgoo: So there is still a chance for companies to develop?
 
Liu: Yes. Both the state-owned and private companies intend to develop independently. They are not so interested in forming joint ventures with foreign companies compared with 10 years ago. As for ContiTech, we are looking for making an acquisition, but we will only go into this after identifying a suitable opportunity.

Gasgoo: Is there any difference between acquisition in China and Europe? What should you pay more attention to when making acquisition in China?

Liu: There are mainly some legal issues to deal with. Such as there are some historical problems, some companies have very complex structure: within a group they have some subsidiaries, and these subsidiaries in turn have other subsidiaries and have different kinds of relationships with other companies, such as supplier, mutual share-holding, joint venture and even fake joint venture. It takes a lot of time to deal with things like this.

Gasgoo: So it's necessary to exercise caution and be alert about some hidden issues?

Liu: Yes

Experienced sourcing specialist in great demand
As China Sourcing becomes a must

Gasgoo: As ContiTech's business grows in China, has ContiTech been sourcing in China?

Liu: Yes, we have. The auto industry is currently being pressured by lower cost and tougher competition, so sourcing in low cost countries becomes an important, if not necessary, step. We have created a sourcing plan in 2006, with a procurement target of 30 million to 50 million euros in China..

Gasgoo: and this is only for ContiTech?

Liu: Yes.

Gasgoo: Is the procurement done by ContiTech or by the Continental Group?

Liu: by ContiTech.

Gasgoo: Are the products purchased in China only supplied to the Chinese business or are they also exported to other countries?

Liu: The China sourcing activities are connected with our German headquarters, so the products purchased will also be exported.

Gasgoo: Does that mean China has become part of ContiTech's global auto sourcing network?

Liu: Yes, but China is only a part of our global auto sourcing system.

Gasgoo: What do you think of the Chinese suppliers?

Liu: They need to be given sufficient training before their products can meet the standard.

Gasgoo: Do you think the cost of training Chinese suppliers very high? Is it a great challenge?

Liu: It can be regarded as a challenge. If we purchase in mature a market, the target products can be easily found, and they are normally of acceptable standard. But in China they still can't reach our requirements immediately, so we have to give them consultation on material selection, quality control and technique in production, etc. And this takes time.

Gasgoo: The initial problem many foreign purchasers face is how to find the right supplier from such a big pool of suppliers in China. How do you solve this problem?
 
Liu: We need to do some survey. I think one quick way is to recruit an experienced sourcing specialist or train a junior to become one. The talent can help us collect suppliers information, investigate, visit suppliers, select and evaluate samples, etc. And the target suppliers can be gradually reduced to one or two companies. This process also takes time.

Gasgoo: China sourcing seems like a rather long process which requires lot of time and effort. As sourcing becomes more popular, the competition for talents must have heated up too.

Liu: Certainly. As the economy develops, experienced purchasers are very much in demand, and their high salaries are justified by the benefits they bring to the companies.

Gasgoo: they are more efficient？.
 
Liu: Yes. They can deliver better results at a higher efficiency, bringing an overall benefit to the company.

Joint Venture must result in a win-win situation

Gasgoo: Which is a better option for foreign companies: to form joint ventures, or to set up wholly owned companies? Are there different answers for this question in different companies?

Liu: Of course. Different companies have different core businesses, target consumers, technologies and market positions. If a company is in a leading position and the competition in that particular sector is not that fierce, it might be more advantageous to form a wholly-own company. On the other hand, it might be more advisable for smaller companies to form joint ventures, to allow them to share with their partners the market resources, production facilities and technologies. Besides, it has lower risk and requires less capital investment.

Gasgoo: You mentioned Chinese companies are not so keen to form joint ventures these days.

Liu: Yes.

Gasgoo: What if the Chinese companies are not keen to form a joint venture with you?

Liu: We can't help it either. ContiTech is a well established company and we have our competitive advantages, so we don't really see the need to form a joint venture. However, if we do decide to go into a joint venture, it will depend on the terms of the partnership and whether it will result in a win-win situation.

Gasgoo: Thank you very much for your time.

Liu: Thank you.


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