Behind Schneider China's "predatory" M&A expansion

Schneider's partners in China are among the best companies in the industry. However, its expansion in China has also sparked constant controversy by the industry about "foreign capital aggression."

In the past two months, the days of Zhu Hai, president of Schneider Electric China, are not necessarily better.

The CEO of Peking University's library management major who specializes in media public relations once signed the article and said: "In 2011, the company established a city development plan for expanding regional coverage in the next three years, focusing on the central and western regions. Our goal is to , from now covering 104 cities to cover nearly 300 cities across China.”

It is not yet known whether such a broad prospect can be reached, but the “challenge” of its “How to cooperate with Chinese local partners” seems to be a success—the NRS wave that has lasted for more than two months still shows no sign of halting. The questioning of Schneider's “handshake behind Nase” was also unresolved.

Even more noteworthy is that in its first production and sales base in southwest China, Chongqing, Schneider's "Midwest Strategy" has hit a moldy head, and it also made it a drag on the road to China's multi-year mergers and acquisitions.

The history of “predatory” development Schneider Electric has entered the Chinese market since the beginning of reform and opening up in 1979. Looking at the M&A path it has painstakingly built over the years, it is not difficult to see its ambitions and plans to control domestic high-quality enterprises. Shanghai's two electrical home appliances factory that cooperated with them earlier was defeated by Sheng Nai under the pressure of Schneider. It eventually fell into the hands of Schneider.

In 1995, Schneider came to Shanghai to find a partner, and signed a joint venture agreement with Shanghai Machine Tool Electric Factory the following year. Both parties invested in the establishment of Shanghai Schneider Industrial Control Co., Ltd. with a ratio of 6:4.

Shanghai Machine Tool Electric Factory was founded as early as 1931. In 1956, when it was a public-private partnership, it merged with two nearby machine tool electrical equipment factories and became a subsidiary company of Shanghai Electrical Equipment Co., Ltd., a subsidiary of the Shanghai Electrical and Mechanical Services Bureau.

Around 1995, Shanghai Machine Tool Electric Factory was the most beautiful scene: the annual output value was nearly 100 million, the annual gross profit rate was above 20%, and there were more than 1400 workers, and it has become the leading enterprise of machine tools in China.

As a joint venture partner, Shanghai Machine Tool Electric Factory took out the best equipment, workshops and more than 500 backbones and entered the joint venture with the latest production technology. However, it was Schneider’s demand that it no longer be able to produce and sell its core products AC contactors and intermediate relays. This almost cut off the lifeline of the factory.

In 1997, the joint venture company suffered a loss, and Schneider demanded continued capital increase. The Shanghai Machine Tool Electronics Factory, due to excessive joint-venture expenditures, deteriorating profits, has no power to increase the number of shares; so Schneider unilateral additional investment and achieve 80% of the holdings.

Schneider's cooperation with Shanghai People's Electric Factory also uses the same technique. The two sides invested 6:4 to set up Shanghai Schneider Electric Distribution Co., Ltd. The Shanghai People's Electric Factory invested to purchase land, build factory buildings and provide technical and managerial personnel. Schneider was responsible for providing soft technology and products. Similarly, according to the agreement, Shanghai People's Electrical Factory cannot produce products that compete with joint ventures, can't develop similar products, and ultimately can not escape the fate of lost customers, shrinking markets and falling profits.

In desperation, Shanghai Electric Appliance Co., Ltd. had no choice but to lose its pawn and tolerate it. In 1999, it freely transferred 20% of the shares of Shanghai Machine Tool Electric Factory to Schneider, and renewed the right to produce new products at Shanghai People’s Electrical Factory.

This move saved the Shanghai People’s Electrical Factory. However, the machine tool electrical plant was never out of the woods. In addition to selling too many rights in the joint venture process, the double squeeze of foreign-funded products and private low-end products in the market made it hard for people to breathe. Finally, in 2006, they were taken from Liuxing Town, Yueqing City, a new electrical appliance industry base. Huang Xuchun took over with 3.32 million yuan and ended the state-owned history of the old factory for half a century.

At the China Federation of Machinery Industry held in 2005, an expert analyzed several failed foreign mergers and acquisitions: "After Chinese companies sell their shares to foreign companies, the other party often turns it into a loss-making enterprise. When you can't keep going, the joint venture becomes a foreign-owned company."

This "joint venture - loss - capital increase - control" approach seems to have become the dominant method of foreign investment in the control of Chinese companies. For example, the cooperation between FAG, the largest bearing company in Germany, and Northwest China Bearing Co., Ltd., which has top technology strength and influence in China, is an example.

In 2001, the two sides jointly established Ningxia Northwest Fuanjie Railway Bearing Co., Ltd., which has a share of 49%, and provided land, factory buildings, excellent equipment, and independently designed drawings and resources granted by the Ministry of Railways, such as railway bearing production qualification; 51% of the shares, agreed to invest cash and production technology.

However, after the joint venture did not perform well, it lost more than RMB 12 million in the second year and continued to lose more than RMB 14 million in 2003. Under the loss year after year, Northwest Bearing was unable to increase its investment. FAG invested RMB 28.5 million to buy the remaining 49% of the shares, and the joint venture company became a German-owned company. Shortly thereafter, under the promotion of FAG, the company's products quickly entered the international market, production technology has also been improved, the performance is considerable.

Monopoly channels and markets Under the special circumstances of China’s initial period of reform and opening up, Schneider, who quickly accumulated family ties, gradually became more skilled in investing in China, and implicitly monopolized channels and markets, becoming its main goal.

At present, the Chinese market has become the second largest market in North America after Schneider. In May last year, Schneider moved its Asia Pacific headquarters to Beijing and set up a regional headquarters in Wuhan in July. In addition, the layout of regional markets such as Chongqing and Xi’an is also gradually expanding. This is related to the rise of central China, western development, and new energy sources. The power generation projects have entered the central and western regions and other policies in a concerted manner in order to seek benefits.

In July 2011, Schneider purchased a 9.2% stake in NVC Lighting and became the company's third largest shareholder. The two parties officially launched a cooperation strategy in Beijing on September 13th. NVC awarded Schneider and its affiliates access, sharing and use. The company's sales network, cooperation period is 10 years. This provides Schneider with great convenience in promoting and selling its products in China.

In March of this year, Schneider will also collect the Chongqing Enlin Electric Co., Ltd., which was established by Wan Changjiang and several other natural persons in Wanzhou, to build a production base in the southwest region. Analysts in the industry, Schneider through the above cooperation, opened up a shortcut to quickly enter the market, to achieve a double harvest of sales channels and production base.

Wu Changjiang once said that Schneider initiated the invitation to cooperate, mainly to look at the channel advantages of NVC lighting, and hopes to further penetrate into the domestic market through NVC's nearly 3,000 channel stores.

Wang Jie, Vice President of Schneider Electric China, once stated that he is participating in the stock exchange to quickly penetrate into the rapidly growing China's 234-class market. “China's 234-tier market has more room to expand, and in the first-tier cities We will continue to create a differentiated brand (Jade Bao, herbal tea brand, brand battle) image and product layout."

In June 2011, in the “first-tier cities” of Beijing, Schneider signed an agreement for the acquisition of Lead Huafu Electric Technology Co., Ltd. Leader Huafu is a leading company in the fast-growing medium-voltage inverter market in China. He is engaged in the development, production and sales of medium-voltage inverters, and has sales of 150 sales representatives and 100 engineers covering 30 provincial-level administrative regions. , service network, annual growth rate of more than 20%.

The research report of GF Securities pointed out that Schneider’s acquisition of Lead Huafu mainly focused on its manufacturing advantages, cost control advantages, and overseas market expansion capabilities. The acquisition will enhance Schneider's technological advantages in the medium voltage frequency converter field and establish a strong position in the Chinese market, which occupies approximately 40% of the global medium voltage frequency converter market, especially in areas such as cement, mining, metallurgy and electric power. On the terminal market.

Channels and markets are the core elements of foreign investment in China. In 2005, Legrand Group of France acquired TCL International Electricians for 1.457 billion yuan at a high price, in order to seek its channel resources covering the national market and up to 12% of the market share in domestic switch sockets.

Chinese-style problems However, GF Securities's research report is also cautious about the follow-up development of Radford in the country: Schneider will not be able to transfer its leading electronic power technology to Leadwood, and does not rule out the emergence of the original core The risk of losing the backbone to a certain extent.

This is also a common problem encountered by Chinese companies in their cooperation with foreign capital. Foreign investment is intended to take advantage of the production capacity of Chinese companies and absorb the value of their markets and channels. However, they rarely provide technical support to enterprises and have restrictions on the production of similar products. Ultimately, they seriously affect the survival and development of enterprises.

When Schneider chose to cooperate with Delixi, it was necessary to use the latter to enter Liuzhou, a production and sales base that occupies 55% of the national low-voltage electrical appliance market. On the one hand, the production cost can be greatly reduced, and on the other hand, it can be harvested. Distribution network throughout the country.

In 2006, the two parties invested in the establishment of Delixi Electric Co., Ltd. in a 1:1 ratio. Schneider promised to provide technology and R&D strength. Delixi provided factories and workers; the products were produced in the original 34 categories of Delixi Group. The highest yield of 6 products.

Although both parties agreed that the joint venture’s products enter the market and be marketed under the Delixi brand, these six categories of products are strictly restricted from export, and they are only allowed to sell through its distribution network under the authorization of Schneider. Analysis of the industry, this means that Delixi's most competitive products have lost the right to develop overseas markets.

In the cooperation agreement between the two parties, a detailed technical protection clause has been set up. Whether Delixi can use its joint venture with Schneider to increase its independent research and development strength is not optimistic.

In that year, Shanghai Electric Co., Ltd. took out two home appliance factories to cooperate with Schneider, and also hoped to have the opportunity to introduce technology and foreign exchange through exports. This is the original intention of all domestic enterprises and foreign investment. However, the repression and encroachment of foreign capital on domestic companies not only fails the good intentions of the Chinese, but also threatens the loss of the production and R&D capabilities of its own brands and even certain types of products. Such examples are common.

In April 1996, the French Saibo Group and Shanghai Electric Iron Factory invested 6:4 to establish Shanghai Saibo Electric Appliance Co., Ltd. The French side used a controlling stake to make the Shanghai Electric Iron Works into its own processing plant. At the same time, it used the Chinese sales channels accumulated for many years to make its iron brands such as “Tefford” and “Good Fortune” enter the local shopping mall at a low cost. As a result, the original "Red Heart" brand of the Shanghai Electric Iron Works was squeezed into the low-end market.

The Chinese directors had asked for the introduction or development of new products, but they were rejected by the French side. Furthermore, there were differences in the way of thinking and management between the Chinese and French parties. The board of directors experienced constant conflict and the company accumulated a loss of 30 million yuan within three years. In the end, China was forced to withdraw. France took over the joint venture in 1999. The red heart irons, which had a 47.4% market share in the country, have since disappeared.

In 2004, Bosch Germany and China's largest diesel fuel injection system manufacturer Wuxi Weifu Group Co., Ltd. jointly established Bosch Automotive Diesel Systems Co., Ltd., and Germany controlled 60% of the shares. The joint venture company mainly produces electronic control diesel injection systems with Euro III (International Exhaust Emissions Test Standard) and above, and Weifu Group can only produce products below Euro II according to the requirements of the French side, which in turn is tied into the low-end product line. on. Previously, Weifu Group had a share of nearly 50% in the domestic oil pump nozzle market and was one of the biggest competitors of Bosch in Germany.

Foreign mergers and acquisitions seem to be a game of danger. The game between the two parties still needs to be improved and complied with.

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