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" "Toyota (TM) Focusing on Emerging Markets for Boosting Sales," www.sharewellnewswire.com. May 28, 2012.

"The IMV Project," WWW.loyotageorgclown.com. December 9,2004. "Developing Localized Products Thai Are "Made by Toyota"," www.toyota.global.com.May2011. Makikc Kitamura and Masatsugu Hone. "Toyota Said to Aim for Emerging Markets Growth in Plan,"

w\\'W.bloomberg.com, March 7, 2011. "ToYOIII'S New Plant Makes Indonesia Production Hub," www.chinadaily.com.cn. March 18,2013.

"The [MV Project," WWW.loYOIageorgclown.c011l. December 9, 2004. "Toyota (TM) Focusing on Emerging Markets for Boosting Sales," www.sharewellnewswire.com. May 28, 2012.

Berte! Schmitt, "Toyota Launches All-Out Assault on Emerging Markets, Meets "Fierce Competition't-Not from Detroit," www.thetruthaboulcars.com.May25.2012. "Toyota Focuses on Emerging Markets," www.zacks.com, May 29, 2012. Hajime Yamagishi, "Toyota Centres Strategy on Hybrids," www.asianewsnct.net. September 26,2012.

"Toyota Says To Release 2\ New Hybrid Models By End: 2015," www.reuters.com, September 24, 2012.

Chang-Ran Kim, "Toyota to Focus on Emerging Markets," www.theglobeandmail.com. March 9, 2011. Morgan Stanley is a multinational banking and financial services corporation. "The Toyota Global Vision," www.toyota_g1obal.com/company/messageJrom_presidentlspeechl\0309.pdf

"Toyota Eyes 50% of Global Sales from Emerging Markets," www.indianexpress.com. March 9, 2011. "Toyota to bring in premium brand Lexus to India in 2013," hrtp:lleconomictimes,indiatimes.com, November 28,

2011. Nandagopal J. Nair, "GM is about to Overtake Toyota as the World's Largest Automaker," httpJ/qz,com, July 26,2013 Mn Jie and Masatsugu Horie, "Toyota Boosted with Yen at 100 Faces Stronger Competitors: Cars," www.bloombcrg.com, May 10,2013, "Triggerpoints: The World's Emerging Car Markets," https:!!www.eiu.com/publicJtopical_report.aspx?campaignid....lriggerpoints

"VW Conquers the World," www.econoruist.com, July 7,2012. "Toyota President Seeks End to Tunnoil With Management Revamp," www.autonews.com.March Lzul S. "Emerging Markets Help Honda Motors Reach $42," http://seekingalpha.com,August23,2013.

"Honda to Double Brazilian Output in Emerging Market Sales Push," www.japantimes.co.jp.August 8, 2013.

Ma Jie and Masarsugu Hone, "Toyota Boosted with Yen at 100 Faces Stronger Competitors: Cars," www.bloomberg.com, May 10,2013. Kenneth Rogoff, "Emerging Market Slowdown: Can a Crisis be Averted?" www.iheguerdian.corn September 3 2013. ' ,

AJ Sull, "Investors Seeing the Other Face of Emerging Markets," hllp:l/business,financialpost.com September 13 2013. ' ,

Alanna Petroff, "Emerging Market Woes: Contained or Contagion?" http://money.cnn,com, August 30, 2013.

"Emerging Markel Slowdown Adds 10 Global Economy Pains," www.imf.org,July 9, 2013. "JMF Sees Heightened Risks Sapping Slower Global Recovery," www.imf.org,October9,2012.

Leigh Thomas, "DECO Sees Europe Joining lf.S. Recovery, Emerging Markets Sluggish," www.reuters.com September 3, 2013. '

'The Great Deceleration," The Economist, July 27, 2013

"Toyota Set to Target Rising Stars," www.bangkokpost.corn.July zo, 2013. Nandagopal J. Nair, "OM is about 10Overtake Toyota as the World's Largest Automaker." http;1 J I 262013. ' qz.com, uy ,

Chang-Ran Kim. "Toyota to Focus on Emerging Markets," www.theglobeandrnail.com, April 27, 2011.

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Mabe: learning to be a Multinational 14~

Richard Ivey School of Business The Unlverslry of Western Ontario IVEy

9B13M042

MABE: LEARNING TO BE A MULTINATIONAL

Jose Luis Rivas and Luis Arciniega wrote this case solely to provide material for class discussion. The authors do not Intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality.

Richard ivey School of Business Foundation prohibits any form of reproduction, storage" or transmission without Its written permission, Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact tvey Publishing, Richard Ivey School of Business Foundation, The University of Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail [email protected],

Copyright © 2013, Richard Ivey School of BusIness Found"a"'ti"'on'- V"e"'rs"io"n"-: =.20"-1"3",-0",4,,,-0,,,-9

It was a sunny afternoon in March 2012, and Ramiro Perez, Mabe's international vice-president, was wondering what to do about Mabe's joint venture (JY) in Russia. It had been the firm's most difficult market entry in terms of return on time invested. The timing had certainly not helped, as the JV had occurred just before Lehman Brothers' fall in the summer of2008. Mabe had chosen Russia based on the premise that it was the "last frontier," much like a Wild West gold-hunting opportunity in 19th century America. Backed by optimistic predictions of Russia's future, investment bankers and industry players contributed to fuelling this "wild frontier vision" of a vast territory boasting one of the world's largest populations, a highly educated workforce, an unlimited supply of energy and natural resources. and a political regime favourable to business. It had all seemed like a great idea - until the financial crises hit and the foundations of this last frontier started falling apart. Expanding Mabe to other Latin American countries and to Canada had been, to some extent, so natural and easy that Perez had a difficult time understanding how he could have done things differently when the company had entered Russia. Should Mabe have taken a more aggressive approach? Had Mabe become arrogant as a result of its past success?

HISTORY

Mabe was founded in 1946 by the Mabardi and Berrondo families. Although initially dedicated to building kitchen cabinets, in 1950, the company expanded to manufacture its first appliance, a stove. By 1968, the company had expanded its involvement in appliances and it began exporting fridges and stoves to Central America and the Caribbean. The first industrial plant for manufacturing refrigerators was built in Queretaro, Mexico, in 1976, the same year the company began exporting to the United States. By 1980, Mabe was the market leader of stoves and refrigerators in Mexico. General Electric (GE) acquired 48 per cent of Mabe in a JV in 1987. As part of the JY deal, Mabe retained full management responsibility and would build gas stoves for the U.S. market, in exchange for receiving U.S. technology and technical advice. By virtue of this deal, GE had become Mabe's main business partner and its largest customer.

In 1989, Mabe acquired Easy, one of the industry's key players, In 1990, Mabe opened a new stove plant spanning 1.5 million square feet in San Luis Potosi, Mexico. The production at this new plant would be mostly devoted to the U.S. market.

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In 1994, the company decided to embark on an expansion to Latin America, and Mabe's missio~ was redefined to include the label "Leaders in Latin America" with a focus in the Andean Pact countnes - Venezuela, Colombia, Peru and Ecuador. Mabe acquired appliances plants in Ecuador, Argentina and Colombia. In Venezuela, Mabe decided to compete using a GE plant and through a joint venture with Ceteco, a Dutch firm that already had a presence in the Latin American market. The purchased plant in Colombia was bought from Phillips. In Ecuador, Mabe established a IV with the Orrantia family through their Durex brand. In Peru, a representation office was opened to import appliances.

In 1998, Mabe acquired the Spanish manufacturer Pager's operations in Argentina. In 1999-2000 the U.S. Energy Department issued a regulation requiring energy consumption to be decreased by 30 per cent. When GE considered the investment required to shift its U.S. production plant, it decided instead to source from a new plant to be built in Celaya, Mexico. Thus, in 2000, a high-end refrigerator plant began its operations there. The output from this plant would cover demand from both the domestic and international markets under the Mabe and GE brands. In 1994, a research and development (R&D) centre opened in the city of Queretaro, Mexico. The centre's main purpose was to decrease reliance on GE for R&D and to develop higher and more sophisticated technical skills to support GE's technology team in its R&D and product development efforts. Another goal was the development of proprietary technology. Also in 2000, the San Luis Potosi plant was enlarged to accommodate the production of electric stoves for GE's u.s. market. In 2002, Mabe entered Latin America's main market through two acquisitions: Dako (GE's operation in Brazil) and CCE appliances.

By early 2003, more than a third of all gas and electric ranges and refrigerators sold in the United States had been manufactured in Mabe plants. Its side-by-side refrigerators could also be found in one of every four American homes, 1

In 200S, Mabe's entered the only North American market where it did not yet have a presence. Cannco Canada was acquired, and with this acquisition, Mabe started exporting dishwashing machines and clothes dryers to the U.S. market.

As part of Mabe's internationalization strategy, a brand portfolio was established with the GE brand in the upper segment, Mabe in the middle and some regional brands, such as Easy, Dako, Patrick and Durex, in the middle and lower segments.

In 2008, Mabe ~cquired ATLAS Costa Rica, a manufacturer of refrigerators and stoves. That same year, two repres~ntatlon offices ~ere opened,: one in Chile and one. in Russia. The main purpose of a representation office was to Import appliances from other producing countries. In the case of Russia because of the market's importance and cultural distance, Mabe decided to open the representation office in a S(}-SO deal with Spain's Fagor.

Due to the financial crisis, in 2008, GE considered selling its appliance business worldwide. Several bidders expressed interest, including Mabe. In the end, however, GE's board decided to keep the appliance business.

In 2009, Mabe became Brazil's second industry player by acquiring Bosch's B '1' ti W' hthi . . . h B .. razt Ian opera IOns. It IS acquismon, t e razilian market also became Mabe's number two wo Id id k ft h

U '1 d St t Th M' k hat ti - r WI e mar et, a er t e nJ e a es. e eXlcan mar et at t at tune was approximately $6S0 million,' while the Brazilian

1 J. David Hunger, ·U:S. Major Home Appliance Industry in 2002: Competifion Bacorn •. ~unger(eds.), Strategic Management ~nd8usiness Policv Prentice Hall, Upper Saddle Rf:erG~Ja~~nT. Whee/en and J. All currency amounts are expressed In U.S. dollars unless otherwise indicated. ' , 3.

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market was at almost $1 billion. Brazil had become Mabe's most complex experience, due to the following factors:

• GE's large operation with Brazilian-American executives • Mabe arrived with Mexican-Americans • Bosch mostly had German-Brazilian executives

The challenge in Brazil was the result of different cultures having to come together. Thus, Mabe's chief executive officer (CEO) in Brazil was the former corporate head of human resources.

In 2012, Mabe was the largest appliance manufacturer in Latin America and held an important share of demand for the U.S. market. Mabe manufactured all the stoves that OE sold in the United States plus high-end side-by-side and bottom-freezer refrigerators and all of OE's clothes dryers. Mabe was also in charge of R&D for those products alongside OE's Canadian operations, where OE held 17per cent of the market and was present in every Latin American country. Exhibits 1 and 2 contain a summary of Mabe's history and revenues.

One of the lessons Mabe learned through this expansion was that the best people to operate businesses are the locals who know the industry. Corporate managers needed to visit the foreign operations only to solve specific problems. Another lesson was the importance of instilling the finn's culture into the acquired firms. Perez was conscious of the value of cultural integration and knew it would be a complex issue to work through. A final lesson was that, in terms of culture, an internationalization process needed be taken very seriously, which meant a long-term commitment to the task and the involvement of the CEO, top managers and board members in all stages of the process.

THE ALLIANCE WITH GE

ln 1987 GE acquired 48 per cent ofMabe. GE's main interest was to decrease its production costs. At the time, GE was using Electrolux as its main provider of stoves for the U.S. market. Mabe, on the other hand, wanted both to learn from a giant such as OE and to be able to penetrate new markets. One of the first decisions of the joint venture was to build a plant to manufacture stoves for the new markets. As it turned out, the new San Luis Potosi facility became the largest manufacturer of its kind in the world. Mabe and OE faced the challenge of training U.S. suppliers that were not accustomed to exporting components to a developing country such as Mexico.

As part of tbis joint venture, a new breed of executives joined Mabe, where graduate degrees were still rare. 'For many years, the norm had been for employees to work their way through the ranks. After the Jv, all the new incoming cadre of hires were engineering graduates and, following the catchphrase "all students, all teachers," they were first assigned to teams headed by seasoned Mabe and GE executives, who were initially suspicious of the experiment. Five of these new executives were selected as the pilot group to receive training in Kentucky's GE facilities, while the rest of the group stayed in Mexico to continue working with their U.S. counterparts. Finally, as part of this process, Mabe would also manage GE's Canadian operations; the research and development activities of GE's stoves, refrigerators and dryers; and the global procurement of strategic components for both OE and Mabe. Exhibit 3 provides a breakdown of Mabe's regional sources of income.

At the beginning of the 1990s, Mabe convinced OE that Latin America was a natural market for expansion: The language, culture and the degree of economic development were similar among the region's large economies. To rapidly consolidate the markets, Mabe used GE's methodology of "action learning," whereby multidisciplinary teams of executives collaborated to recommend ways to enter new

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markets. Each team travelled to the target market for a six- to eight-week stay. At the e.nd of this time period, each team formulated its recommendations, and top ~anagemen~decided ~h1Ch markets ~o pursue. Since the late 1980s, GE had used this methodology at Its Crotonville leadership centre to tram and select executive talent.

Mabe and GE were to apply this methodology, using one team to recommend entry strategies to the board and top management team.

Throughout the expansion process in Latin America, Mabe and GE also worked closely on. strategic programs for the North American markets, such as the new side-by-side bott~m freezers, refrigerators, electric stoves and - with the acquisition of Cameo in Canada - the production and supply of clothes dryers. Exhibits 4 and 5 provide balance sheets and income statements for 2006 through 2008. Additionally, sales for global appliance players can be seen in Exhibit 6.

THE BRIC COUNTRIES

Early in the 2000s, observers predicted that Brazil, Russia, India and China (i.e., the BRIC countries) would overtake the largest industrialized countries in size by 2050. Some predictions had subsequently shortened the timeline to 2018. In 2011, China surpassed Japan as the second world economy in terms of size. Exhibits 7 and 8 show the sizes and profitability of selected BRIC countries.

Russia had the largest land mass in the world and a gross domestic product (GOP) of almost $1.5 trillion in 20 I0, compared with India's $1.4 trillion, Brazil's $2.2 trillion and China's $5.7 trillion. Russia's 20 I0 per capita income was slightly higher than Brazil's, double that of Chiua and approximately nine times India's. Russia had the world's largest gas reserves and second largest oil reserves, Russia's discretionary income was 30 per cent higher than Brazil's, 10 times that oflndia and four times that of China.' Moscow and other major Russian cities were experiencing a consumer boom, spurred on by rising incomes of the middle class.

The Russian government established in 20 II a $10 billion fund to be used to attract foreign investment. Russia's outward foreign direct investment was almost $50 billion between 2007 and 2009, and Russian multinational corporations (MNCs) owned $203 billion in assets outside of Russia, more than that of any other BRIC country. Additionally, Russia had recently introduced an innovation program that included a centre for innovation - Skolkovo - and several techno parks and economic zones throughout the country.

During the past two decades, Russia had faced struggles on two fronts: a decreasing population and the deterioration of human capital. According to Rosstat, the Russian agency of statistics, since 1992, Russia had 12.5 million more deaths than births, the equivalent of three funerals per each birth for the past 20 years. Worldwide, in the period after the Second World War, only one population decrease had been more alarming: in China, between 1959 and 1961, as a result of Mao Tse-Tung's "big jump-ahead program." Thus, between 1993 and 2010, Russia's population decreased from 148.6 million to 141.9 million.

Several. industrializ~d countries w~re also experiencing population decreases: Germany, Italy and Japan ",:ere either bordermg on popu.latlOn decre~ses or were beginning to show signs of a decrease. The difference between these countnes and RUSSia was that the former countries faced this crisis at a time of unprecedented levels of public health, whereas Russia was experiencing an extraordinary crisis of

J Sheila M. PUff~r ~ Daniel McCarthy, two Decades of Russian Business and Management eeseercn: An Institutional Theory PerspectIVe, Academv of Management Perspectives 2011, pp. 21-35. .

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mortality. According to the Human Mortality Database', life expectancy in Russia was lower in 2009 than in 1961. In 2009, the life expectancy in Russia at age 15was lower than in Bangladesh or Madagascar. The main causes of Russian deaths were cardiovascular diseases, fatal injuries, accidents and suicides. Cardiovascular diseases in Russia were almost three times the levels in Western Europe, and deaths due to injuries and violence were similar to those experienced by some African societies, such as Liberia and Sierra Leone.

The second front of problems for Russia was its deterioration of human capital. Globally, higher levels of education typically correlate with increased levels of public health. Russia's adult population was 30 percentage points above the DECD average but with a life expectancy similar to that in Senegal. Part of the problem might been the quality of Russian education; international standardized tests have revealed that Russian elementary and high-school education is below the levels in Turkey, which has among the lowest ratings for education among the DECD's's list of countries. In 2008, Russian authors published fewer scientific articles than authors from Brazil, China or lndia. Indeed, Russia represented a new and curious reality in today's globalized world: a society characterized by high levels of education but low levels of health and knowledge. Beyond affecting individual levels of wellbeing, this triple problem could also have serious economic implications. Even despite Russia's vast natural resources, in today's globalized economy, a country's wealth is represented by its human capital. Natural resources can increase the level of wealth in an already rich human capital society, such as Norway or Canada; but, natural resources cannot on their own replace the value of human capital, nor is there a single example of a super world power that has developed solely on the basis of its natural resources. Each year, Russia earns less than Belgium for its exports. To complicate things further, in Russia, the state's share of the economy is 56 per cent, a high rate that is seen only in China, where state-owned companies also account for more than halfofthe total value of the stock market.'

Today, many multinationals consider an entry into Russia to be of strategic importance in their efforts to truly achieve global competitiveness. However, a survey of 158 corporate investors and non-investors in Russia indicated that respondents viewed doing business in Russia to be more risky and less profitable than doing business in China, India or South East Asia." The respondents' main concerns were weak legislative and enforcement regimes and the incidents of corruption and bribery at all levels of state bureaucracy. Indeed, Russia was ranked 147th out of 180countries in Transparency International's 2008 Corruption Perception Index.' A 2009 survey by the Foreign Investment Advisory Council (FlAC) of 50 executives from large companies" reported concern about Russia's political interference in business, arbitrariness in the application of laws, complexity of the tax system and lack of skilled staff. Over the past decade, the Russian state had exerted a far stronger influence over business activity than the previous Yeltsin administration. The lack of clear direction and instability had created a volatile environment for managers, as had the corrupt law enforcement and judicial systems, weak capital market institutions and poor protection of private property rights." Russia's flawed privatization process of the early 1990s was seen as having caused the problems that persisted in the country's business environment, including the low credibility of formal institutions.

An in-depth field study found that Russians' low trust of outsiders inhibited communication with the foreign managers of Western subsidiaries and undermined organizational initiatives.lO As a consequence

4 www.mortalityorglcgi-binlhmdlcountryphp?cntr=RUS&level=1, a?ce~sed Apri/3, 2013. 5 Ruchir Sharma, Breakout Nations: In Pursuit of the Next Economic Miracles VVWNorton & Co. Ltd., New York, 2012. 6 N. Buckley, "Huge gains but also a lot of pain, " Financial Tim~s, October 11, 2005. 7 www.transparency.orglresearchlcpilcPL2009, accessed Apn/3, 2013. 8 www.fiac.rulsurveys-200B.php. accessed Apri/3, 2013. . . . . g SheNa M. Puffer and Daniel J. McCarthy, "Two Decades of RUSSian BUSiness and Management Research: An Institutional Theory Perspective,· Academy of Management Perspective~ Ma~ 2011, pp. 21-36: . 10 Angela Ayios, Trust and Western-Russian BusIness Relationships, Ashgate Publishing ua; Farnham, UK. 2004.

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of the low levels of trust, outsiders needed to spend considerable time and effort building particularized

trust.

Russians continued to be heavily influenced by their history and to manifest many cultural influences from their Soviet and Czarist past, including collectivism, paternalism, admiration of strong leaders, f~ar of responsibility, mistrust of outsiders and reliance on one's own networks. Indeed, compared with managers from the four major developed economies, Russian managers have been faun? to be. more oriented to the short term and to place little emphasis on competitive strategy, formal strategic planning or financial planning."

A study that compared the informal institutions of Brazil, Russia, India and China l2

concluded that, of the four countries, Russia was in the worst position. Russian formal institutions and governance codes were, on paper, comparable with those in DECO countries; however, in practice, their informal institutions of networks (known as blat) between leading shareholders, the business groups and the state competed with the formal arrangements.

Russia had 110 middle ground. The proportion of small and medium-sized enterprises in relation to all enterprises was lower in Russia than in any other major emerging market. Compared with Europe, Russia had no truly modern banks. The country's financial system was dominated by one big bank, and very few Russians invested at home, so loans of any kind were difficult to acquire. The mortgage market was virtually nonexistent, representing only three per cent of GDP, the lowest of any emerging market. The financial market resembled that of frontier markets, such as Nigeria, rather than the financial market of a major developing country, Money flowed into Russia from 2004 to 200S, but then reversed in 2009, leading to a net foreign direct investment of negative $9.5 billion in 2010, Russia was probably the only emerging market that had suffered a large and accelerating outflow of private capital: based on Russian central bank estimates, the outflow hit $SO billion in 2011, up from $42 billion in 2006,, Vladimir Putin was probably the man in the best position to save Russia from chaos in 1999, when the economy was in crisis and the war with Chechnya was raging, but it was not clear whether he had the appropriate vision to take Russia to the next level of economic development. Putin had moved from the presidency to being the prime minister, and was again president. He could hold that office for two terms, until 2024, which would extend his reign to a quarter century, Putin's disapproval rating had doubled since 200S, to 40 per cent at the end of 20 11. Of all the major emerging markets, Russia was the last to recoup the output lost during the recession of 2008, with the economy returning to its pre-crisis peak by the end of 20 11.1J

MABE AND RUSSIA

Around 2004, Mabe started to explore new regions of the world for expansion, Economies of scale were a key success driver in the appliance industry and virtually all global players had a multi regional presence,

Mabe considered several p~ssibilities, They already had a procurement office in China but Mabe's management tho~ght the Chinese market was too big and complex to enter. India and Eastern Europe were strong candidates, While Mabe pursued market research in Eastern Europe several industry players had referred to Russia as the "last frontier" market, which had caught the attention of Ramiro Perez,

11 Chris Carr, 'Russian Strategic Investment Decision Practices Compared to Those of Great B 't. G h U ·ted ~tafes and ~apan, "Intemational Studi?s of Management and Oroanization vo; 36, no. 4, pp. 82-~ ~~' ermany, t e nJ

Saul Estnn and Martha Prevezer, The Role of Informal Institutions in Co orat G . . . . Shina C?mpared, " Asia Pacific ~ournal of Management vot. 28, pp. 41-67. rp e ovemance. BraZil, Russia, India and

Ruch" Sharma, Breakout Nations: In Pursuit of the Next Economic Miracles WvV N n & C Lo on o. td., New York, 2012 .

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Mabe's international VP, To decrease the risk of foreignness and to leverage its competitor capabilities, Mabe invited Spain's Fagor to fonn ajoint venture, Mabe would source stoves and fridges from Mexico and Brazil and microwave ovens from China. Fagor would contribute with its frontline washing machines that were made in its Polish plant. Initially, only a representative office would be established, and all appliances would be imported, which would provide the new joint venture with an opportunity to learn about the Russian market. One of the venture's first decisions was to have two expatriates, one Brazilian, the other Spanish, as the JV's CEO and chief financial officer (CFO), respectively. As was customary, Mabe introduced an "action learning" team to determine the type of products that the new JV would import to Russia. The team determined that a broad line of products strategy would serve the Russian market well.

One of the main challenges faced by global firms starting operations in Russia was understanding the vastness of the country. With a population of ]42 million, the minorities were of "country size." For example, although Russia was usually considered to be predominantly Orthodox, it also had more than 20 million Muslims. This vast country had more than 20,000 linear kilometres of borders with 14 country neighbours, 83 regions and diverse religions. Russia shared borders with such diverse countries as China, Pakistan, Afghanistan and North Korea. Due to the misconception of the size and diversity of Russia, foreign companies tended to enter Moscow and Saint Petersburg first, the two most crowded markets in Russia. These two cities concentrated a large proportion of the population, whose consumrtion patterns and styles differed from those of the average Russian citizen, according to Nicolay Shkolyar " head of the Commercial Office of the Russian embassy in Mexico City. On another hand, the country was also one of the 20 least densely populated countries in the world and had only five cities with the critical mass of people and income necessary to draw in global brands."

Russia could be a hostile environment for foreign investors. For example, to obtain a work visa, an AIDS test was required. Nonetheless, the appliance market was attractive due to its size (i.e., US$3 billion) and profitability (i.e., two times the average operating margin). The downside was that manufacturing locally was necessary to achieve cost advantages over the other industry players. The main local producers were Indesit (Italy), Bosch-Siemens (Germany) and LG (South Korea). Samsung (South Korea) and Mabe- Fagor both had a local office and imported appliances from several of their manufacturing facilities worldwide.

Business Culture

Until the early nineties, one of the rituals of trust among Russian executives was the sealing of deals by toasting with vodka in a banya (i.e., a sauna).The rationale was that if you were naked and drunk, you could not hide anything from your partners. A young Russian entrepreneur added:

In Latin countries, people use charm to gain trust, but as a citizen of a country where 1110st foreigners are considered suspicious, you don't really know what is behind an apparent friendly smile. Russians could be considered rude, cold and unfriendly, but one thing you can be sure is that what you see is what you get with them. Any foreigner coming to Russia for business needs to adapt to our cultural cues to be considered trustworthy."

Russia's low unemployment rate acted to demotivate finn loyalty. The Communist culture continued to prevail among Russians for more than 40 years. As a resul~, ~ strong sense of, distrust for private enterprises dominated the business environment and was more significant toward foreign firms.

14 Nicolay Shkolyar, head of the commercial office, Russian em~assyMexico, June 2011. 15 Ruchir Sharma, Breakout Nations: In Pursuit oft~e Next Economic Miracles VVWNorton & Co. Ltd., New Yorl<, 2012. 16G/eb Kouznetsov, Russian entrepreneur, MeXICO, July 2011.

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Russians in their late twenties were a generation dissimilar to their predecessors, They te~ded to be money-oriented, with strong aspirations to accumulate wealth and to escape from the modest life that had characterized their socialist-style childhoods. Their top aspirations include escaping from their small apartments in huge blocks of grey, cold concrete and driving a German-made car. The sec?nd cluster, of their lists included dining in fancy restaurants and vacationing in the Mediterranean, essentially ~ehavm~ like other "European yuppies." One additional way of standing out among the crowd and showmg their achievements was through the Russian version of the social-media site Facebook (www.odnoklassniki.ru). In their spirit of feeling European, many young Russians rotated jobs, selling themselves to the highest bidder. Contrary to their preceding generations, they openly criticized norms and avoided environments where discipline was heavily enforced.

Compensation did not mean everything in this high power distance country, remarked Glev Kuznetzov,

I've heard from my elementary school classmates, talk about friends that moved to another company because of job titles. It was cooler to show a business card that said you are a VP, than a simple Manager, even when the latter was a position in a multinational and the former in a local small firm.

Young Russian professionals, with their high aspirations, acquired European style and anti~statlls quo spirit, collided against the more disciplined and submissive "older" Russians. Tn fact, Russians in their mid-thirties and forties tended to speak only Russian and had mostly been educated under a different mindset. Thus, when younger Russians led an organizational structure, they tended to be more selective when recruiting new talent. That is, they felt more comfortable working among Russians like themselves, not Russians like their parents.

In the process of recruiting and selection, these younger Russians paid more attention to candidates' family origins even when the candidates themselves were young and had a college degree. According to a common rule of thumb, if the potential hire came from a family of the intellectual elite ~ i.e., musicians, artists, scientists or academics ~ they would easily fit with the new generation, but if they came from a family of workers from the Soviet era, the potential of conflict still existed, notwithstanding the age or educational level of the candidate.

GLOBAL TRENDS IN MAJOR APPLIANCES

Due to the contraction of GOP in major industrialized countries during 2008/09, emerging markets, led by China, Brazil and India, overtook the developed countries in terms of volume sales. This trend was exp~cted .to continue until.2015. Some emerging markets, such as Russia, experienced important volume declines III 2009. Even with a recovery after 20 I 0, the ageing demographics would probably not allow Russia to recover from its pre-crisis levels until 2014. Growth in the consumption of fresh food and ready-to-eat meals would likely lead to a decrease in freezer sales. Even with reduced disposable incomes, the market for ready-to-eat meals increased in Russia.

The emerging markets that offered the best growth potential were those with strong mid-term fundamentals, III terms of demograp~1Cs, lo~ percentages of appliance ownership and an ability to resist exogenous shocks. For example, Latin America, Turkey, Egypt, China and lndia were expected to grow 7 to 10 per cent between 20 I0 and 2015. Sales in many emerging markets would be influenced by the entrance of more affordable products that addressed market-specific needs. Government stimulus packages could also act as boosters In these markets.

Some of the key success factors for the future of the appliances sector ( ) d. ... were a ener an water efficiency and technological mnovation and (b) location For example c: gy.. , manuracturers such as Haler and

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______---------------------------------M::ab:e':-: ,:,Le,:,arningto be a MUI::tin:.:a::t:.:lo::na::I_--J._"111.d.J;~~......

Page 9 9813M042

Midea, which were based close to the Asia Pacific markets, would probably increase their market share. Another important change to consider was Sarnsung's push in Eastern Europe following the construction of its first non-Korean appliance factory.

MABE AND RUSSIA IN 2012

In 2012, the only foreign employee in Mabe's Russian JV was the CEO. After four years of working to understand the culture and nature of the Russian business people, a solid management team seemed to be in place. The product line offering was trimmed to only those products that truly offered a competitive advantage over other competitors' offers, and commercial best practices were implemented with key distributors. A lesson for Rarniro Perez was that when an Action Learning team analysed a new market, they should not do it with a "linear mindset," whereby they attempted to place a large set of the JV's offerings. In other words, the team needed to take an incremental approach, starting from scratch and delving deeper into what the market really needed. Thus, the JV started with a broad line of product offerings that needed to be trimmed down to products that truly offered the Mahe JV a competitive advantage. In Russia, being competitive in 2012 meant having access to local manufacturing. In 201 l,the IV's sales in Russia were close to US$70 million and were expected to reach US$SOmillion in 2012. The products offered included stoves, which had a four per cent market share, and refrigerators and washing machines, which each had a market share of two per cent. Altogether, the lV's market share increased from 0.9 per cent in 200S to 4.9 per cent at the end of 2012. A selection of images from the different offerings can be seen in Exhibit 9. Exhibit 10 shows the main appliance players in Russia during 200S.

A current advantage of the JV was its workforce. Mahe and Fagor had recognized early the potential problems in personnel recruitment and decided to have only two types of salespeople: a senior position requiring 8 to 10 years of experience and a junior position requiring one to three years of experience. For both positions, the average age was less than 42 years; candidates over that age were more likely to exhibit Soviet-era mentalities.

Because of the financial crisis of 2008, market demand in developed markets had decreased. In Western Europe, for example, demand had decreased 30 per cent in Spain and IS per cent in Italy. This decrease had forced many of the industry's players to accelerate their international diversification to the most promising global markets: Malaysia, Philippines, Egypt, China, India, Russia, Brazil, Peru, Mexico and Argentina. As a consequence, the Russian market had expanded capacity, and the seemingly attractive profit margins of 200S had dropped substantially.

Mabe's marketing strategy in Russia had been geared toward distributors and not toward the end consumers. In 2012, Mabe changed its strategy from using wholesalers to using regional distributors (while maintaining its presence in national and regional chains). Mabe's product offering catered to the high-end market segments in 200S and gradually changed to the medium-end segments with such brands as De Dietrich and Brandt that were part of Fagor's product portfolio. Mabe's entry and positioning strategy in 200S and in 2012 are compared listed in Exhibit I J.

Vladimir Putin won the presidential election in 2012, and many foreign investors preferred to wait until the new government was in power before making any significant investment decisions. Mabe's lV was expected to finally tum in a small profit for 20 12.

As Perez reclined his chair and glanced over Mabe's Mexico City skyline, sundown started. What should he do about this Russian JV? Was Fagor the right partner? Should the JV lower its prices to increase market share faster? Was it time to manufacture some products locally? What lessons had he learned for choosing future markets? Could another emerging market have been a better investment than Russia?

L_.:'.:5:.4":"_J.-_lnternationa, BusinessStrategy

9B13M042 Page 10

EXHIBIT 1: MABE'S COMPANY HISTORY, 1946 TO 2009

mabe COMPANY HISTORY

mabe.. FOlIndll<l 1946

Acqulsiton of Cameo In t'..illnad4 2005

Acquisition of Bosch In

arillZH 2009

1965 PrMfloce In C.ntral

"'""..Carlblwftn fl SoulhameriCG

2001 OAKO

E.o.pan,lon Mereosur G£o.v.o e

ceE .....pllm<li5

1987 J<llnt

Venture GE

2008 Acqulsltlon of Atl.~ In COSlll

Ric ..

••Commerd<ll O~tionsln Ru",;I."nd

ChUe

Source: COmpany files.

EXHIBIT 2: MABE'S HISTORICAL REVENUES, 1987 TO 2010

mabe US $6

'0' '06 '08

Source: Company files,

az _ -

Mabe: Learning to be aMultinational 155

Page 11 9B13M042

EXHIBIT 3: MABE INCOME BY REGION, 1990 TO 2011

mabe HISTORIC REVENUE SALES PERFORMANCE (BILLIONS USD)

$3.9 $3.6

$0.1

$1.3

$0.6

"0 -sa '", -se '9S '00 '0' ."" '06 '0' '10 '11 Source: Company files.

I 156 9B13M042

Page 12

EXHIBIT 4: MABE'S BALANCE SHEET 2006·2008 (OOO'S USDj

Balance Sheet December 31st (USD) 2006 2007

2008

ASSETS Cash And Equivalents 149,100 211,055

204,883

Total Cash & ST Investments 149,100 211,055 204,883

Accounts Receivable 890,903 989,319 912,774

Other Receivables - - 22,789

Total Receivables 890,903 989,319 935,562

Inventory 412,894 492,095 539,670

Prepaid Exp. 12,764 14,931 7,189

Total Current Assets 1,465,662 1,707,399 1,687,304

Net Property, Plant & 674,744 715,333 704,727

Eauioment Goodwill 197,382 208,398

163,547

Other Long-Term Assets 208,759 365,315 363,830

Total Assets 2546547 2919408

LIABILITIES Accounts Payable 904,777 1082,663 989,910

Accrued Exp. 4,625 3,939 3,235

Short-term Borrowings 54,294 186,322 637,870

Curro Income Taxes Payable 34,130 49,649 49,028

Other Current Liabilities 12,487 14,473 13,587

Total Current liabilities 1,010,313 1,337,046 1,693,630

Long-Term Debt 733,663 692,065 429,249 Pension & Other Post-Retire. 142,163 142,352 109,127 Benefits Oef. Tax Liability, Non-Curr. 27,656 32,244 39,826 Other Non-Current Liabilities 78,990 128,703 95,684 Total Liabilities 1,992,785 2,332,411 2,367,517 Common Stock 553,762 616,950 534,782 Total Common Equity 553,762 616,859 534,782

Minority Interest - 47,176 17,110 Total Equity 553,762 664,035 551,891 Total liabilities And Equity 2546547 2996445 2919408

Note: Exp. = expenses; Inc. = Income; EBT = Earnings before taxes; Excl. = Excluding' Incl = Including; Cont. Ops. Continuing operations ' . Source: www.capitaliq.comlhome.aspx. accessed November 21,2012 .

.........:.-_------------

Mabe: Learningto bea Multinational 157

Page 13 9B13M042

EXHIBIT 5: MABE'S INCOME STATEMENT 2006-2008 (0005 USD)

Income Statement December 31st (ODDsUSD) 2006 2007 2008 Total Revenue 3,156,260 3788,084 3404,803 Cost Of Goods Sold 2,441,751 2.940.567 2,499.649 Gross Profit 714,511 847,517 905,153 Selling General & Admin Exp. 492.716 592,034 683.088 Other Operating Exp., Total 492,716 592,034 683,088 Operating Income 221,801 255,482 222,065 Interest Expense -81.700 -88,800 -86.800 Interest and invest. Income 12.394 13,649 11,646 Net Interest Exp. -69,300 -75,100 -15,200 Currency Exchange Gains -5,500 9.344 -101,400 Loss Other Non-Operating Inc. (Exp.) -30,900 -16,900 -6,800 EST Excl. Unusual Items 116,173 172,856 38,604 EST Incl. Unusual Items 116,173 172,856 38,604 Income Tax Expense 34.685 46,168 27,174 Earnings from Cant. Ops. 81,487 126,688 11,430 Net Income to Company 81,487 126,688 11,430

Note: ST = ShofMerm; Exp. = expenses; Post-Retire. = Post-Retirement Source: w.NW.capitaliq.comihome.aspx.Accsssed Nov 21st, 2012

Com an

EXHIBIT 6: GLOBAL APPLIANCE PLAYERS, 2011

Head uarters Sales 1. Whirl 001

Sweden 11 000,000 United States 14,000,000

2. Electrolux 3. BSHI German 10,000,000

China 8000,000 4. Samsun South Korea 9,000,000 5. Midea 6. LG South Korea 7,000,000

4,000,000 7. Haler China 6,000,000 6. GE US

EXHIBIT 7: APPLIANCES MARKET SIZE IN CHINA, INDIA AND RUSSIA 2005 TO 2010

Country 2005 2006 2007 2008 200ge 20lOe

9. Mabe

Source: Annual reports and press releases.

China India

Russia

63,687,000 5,930,900 11,043,300

4,000.000Mexico

71,381,700 6,725,300 12,368,300

79,654,800 7,756,200 13,408,400

86,378,000 9,377,200 11,369,000

93,421,300 104,157,600 11,467,300 13,404,200 11,706,400 12.597,600

Source: Euromonitor International, Maior Appliances: Recovery and the Future for Core Categon'ss D April 2011.

158 Intematlonal BusinessStrategy

Page 14 9B13M042

EXHIBIT 8 : MARGINAL CONTRIBUTION PER APPLIANCE IN CHINA, INDIA AND RUSSIA 2008 (PER CENT)

India 6-8 Russia 10-12

China 16-18

Source: Company files.

EXHIBIT 9: MABE'S PRODUCT LINE IN RUSSIA

• o o

,

Source: Company files.

D

159Mabe: learning to be a Multinational--r-.......,=- ...

Page 15 9B13M042

EXHIBIT 10: MAIN APPLIANCE PLAYERS IN RUSSIA

Source: www.gfk.comllndustriesiconsumer-goodslhome-spplianceslPagesidefault.aspx, accessed November 25, 2012,

EXHIBIT 11: MABE'S ENTRY STRATEGY AND POSITIONING, 2008 AND 2012

2008 2012 PRODUCT Cooking: Butlt-ln: Wall Ovens, Cooktops, Ranges, Cooker Wall Ovens & Ranges

Hoods & Dishwashers Refrigerators: 2 Door, Top Mount Refrigerators: 2 Door, Top

Mount Laundry: Top-Load Washers & Washer/Dryers Top-Load Washer

DISTRIBUTION National & Regional Chains National & Regional Chains CHANNEL Wholesalers Regional Distributors

Chefs Distribution Channel

MARKET SHARE 0.90% 4.90% (at year's end)

PRICE High Medium POSITIONING

VALUE Products for market niches Positioned with DeDielrich PROPOSITION brand

Complementary products from Mabe/Fagor fines Post-sales service expertise Experience in international markets Integration with external

IOQisticsoperator DeDietrich and GE brands for luxury segments Focused to medium market

seoments Access to low cost resources Product quality Post-sales service expertise Niche market (high-end, built-in, comfort products) Excellent image of an European product (GE) Integration with an external logistics operator Distributor willingness to introduce new products and brands Product quality

Source: Company files.

, .... i

160 International Business Strategy

HARVARDI BUSINESS SCHOOL

9-513-058 REV, JANUARY 2, 2013

RAJIV LAL

STEFAN LIPPERT

NANCY HUA PAl

Dl DENG

SANY: Going Global

April 17, 2012, was a special day for SANY Group and for its founder Liang Wengen. Headquartered in Changsha, SANY Group had transformed itself in two decades from a small welding material factory in 1989 to a leading global construction equipment manufacturer with 5 industrial parks in China; 5 R&D and manufacturing bases in America, Germany, India, Brazil, and Indonesia; and 21 sales companies worldwide (see Exhibit 1a for SANY Group's subsidiaries, Exhibit 1b for locations worldwide, and Exhibit 2 for its product Iines). SANY Heavy Industry Co., Ltd. (SANY),SANY Group's major subsidiary, engaged in the construction equipment business and was number six on lnternational Constmction's 2012 Yellow Table, a ranking of the world's largest construction equipment manufacturers (see Exhibit 3 for the Yellow Table list).

On this significant day, SANY completed the acquisition of Putzmeister Holding GmbH (Putzmeister), the world's leading concrete machinery manufacturer, based in Germany. Putzmeister founder Karl Schlecht pointed out that it was the first time a Chinese enterprise acquired a famous, medium-sized German industrial company. He described the merger as "a model transaction between China and Germany" that received the positive acknowledgment of the industry.' Most of the Chinese media applauded the deal, though a few expressed concerns about merging with a foreign company, because in the past, few Chinese companies had been successful in doing so. The coverage in the German media was neutral, objective, and balanced. Germany had been a leader in exports until 2009, when it was overtaken by China. China saw the active global integration of its economy as advantageous for the country. Accordingly, the leading news magazine, Der Spiegel, pointed out that "the acquisition could be the start of a new strategy as China tries to transform itself into a high-tech economy,'? and added that lithe Germans might even benefit toO."3The mainstream media emphasized the strategic fit of the acquisition and highlighted the fact that, compared with the $25 billion of German investments in China, the Chinese investments in Germany were modest.

After the acquisition, Putzmeister would maintain an independent operation. SANY made a commitment that no Putzmeister employee would be laid off because of the acquisition. Norbert Scheuch, Putzmeister CEO, would continue to run Putzmeister. Together with his German team he would be responsible for merging SANY's concrete machinery business with SANY operations in

Professor.Rajiv ~l, r~ofessor Stefan ~Ipperl of Temple University, HBS-APRC Senior Researcher Nancy Hua Dill, and Assistant Professor Di Deng of jinan University, prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not Intended to serve as endorsements, sources of primary data, or lliustrarlons of effective or ineffective management.

Copyright 0 2012, 2013 President and Fellows of Harvard College To order co res or . . 7685, write Harvard Business School Publtshlns Boston MA 02163 P request pemussion to reproduce materials, call1..soo·545--

0' ' , or go 10 www.hbspharvardedu/educators This bll ti l be digitized, photocopied, or otherwtse reproduced, posted, or transmitted without th :. " .':" pu rca Ion may no, e permIssion 0 Harvard BUSinessSchool.

a,, _

SANY:Going Global 1

513-058 SANY: Going Clobal

China and overseas. Schlecht would join SANY Group as a consultant; Afchtal, Germany, would become the new overseas headquarters forSANYconcrete machinery products.

Liang was very happy about this acquisition and the media response. Meanwhile, he was thinking about the following issues: How should SANY use Putzmeister to implement the goals of the international division? And how should Putzmeister be merged into SANY?

The Construction Equipment Industry

The Global Market

The construction equipment industry Included equipment for earthmoving, road construction and maintenance, concrete, and other construction. Globally, the industry experienced strong growth over the past decade, driven by infrastructure investment. It suffered a decline in 2008and 2009due to the global financial crisis, but rebounded in 2010 due, in particular, to demand in China because of its government's economic stimulus package. According to International Construction, the sales of the world's 50 largest construction equipment manufacturers increased from US$55.5billion in 20024 to a record high of US$182 billion in 20115

Globally, the U.S.company, Caterpillar, and the Japanese company, Komatsu, had ranked number one and two, respectively, for over a decade. In 2011, they recorded US$35.3 billion and US$21.8 billion, respectively, in sales of construction equipment, accounting for 19.4% and 12% of the total sales of the top-50 manufacturers. One noticeable change i.nthe top-50 list over the years was the rise of the Chinese manufacturers, which began to take shares from European and North American manufacturers. In the 2003 Yellow Table, 4 Chinese manufacturers were on the top~SOlist, with US$841 million of combined sales, accounting for only 1.6%of the top 50's total sales.v In the 2012 ranking, 10Chinese manufacturers were listed among the top 50 and claimed a 16.9%share of the top 50's sales, with combined sales of US$30.6 billion in 2011 (see Exhibit 4 for equipment top~50 percentage share by country and by region). These Chinese manufacturers first ventured into the overseas markets by exporting their products. Later, they set up their sales, manufacturing, and R&D facilities in foreign countries. More recently, they accelerated growth by acquiring foreign firms that were leading players in their product segments. In 2008, Zoomlion acquired the Italian concrete pump manufacturer Cifa, made Cifa's ItaHanheadquarters its new European, Middle East, and North African concrete machinery center, and set up a European spare-parts center in Milan with a joint European and Chinese marketing and service team.

Demand for construction machinery in developed countries was driven by the need to maintain and improve existing infrastructure, while the demand in developing countries was driven by new construction and govemment spending on infrastructure? Demand in industrialized nations in North America and Europe was expected to improve, but the BRIC countries (Brazil, Russia, India, and China) represented the most attractive growth opportunities, with Africa and the Middle East becoming more appealing, according to a Roland Berger market survey based on interviews with 50 industry experts in key markets in 20118 (see Exhibit 5 for the most attractive regions for the construction equipment industry). Survey participants identified engines and transmissions as the most differentiating key components because of their role in fuel efficiency and emission reduction. Quality, price, and availability of replacement parts were the most important distinguishing factors in the market despite regional differences in ranking (see Exhibit 6 for regional rankings of product characteristics). In addition to differentiated equipment, leasing and aftermarket services were also important to customers. Leasing was most important in countries like Brazil, Russia, Chine, and Gennany. The survey identified availability of replacement parts, professional key account

2

162 International Business Strategy

513-058 SANY: Going Global

management, and round-the-clock services as the three most important aftermark~t services. Emissions regulations, import duties and restrictions, and pres~ure frOl,n . eme.r~g market competitors stood out as the top-three key market challenges, ~ith reglol~l variations m u,nportance: regulations were most important in Europe and the U.s., while competition from emerging market competitors was the key challenge in the BRlC countries.?

The China Market Driven by China's strong economic growth and government spending on infrastructure, the

construction equipment industry in China had experienced a golden age since the 20005. The industry also benefited from a number of policies the government had announced since 2008 that promoted the development of large-scale construction machinery and allowed exemption from the value-added tax that some imported spare parts and components for technologically advanced products were subject to. Sales of construction machinery in China accounted for 9% of global sales in 2005, but rose to about 40% i.n2010, while the global share of sales in North America and Europe dropped from 36% and 30% to 20% and 18%, respectively, during the same period." Total revenue of the Chinese construction machinery industry increased by almost 10 times from 2001 to 2011 (see Exhibit 7 for revenue numbers).

Major foreign construction equipment manufacturers entered China after it joined the World Trade Organization (WTO) in 2001. With their advanced technology and strong brands, they got a head start over Chinese manufacturers. However, Chinese manufacturers learned quickly and caught up with the foreign players. From 2010, Chinese manufacturers seized about 90% market share in concrete machinery, earthmoving mach.inery, and pavement construction and piling machinery." SANY and Zoomlion had nearly a 90% market share in concrete machinery. XCMG, Zoomlion, and SANY had an almost 90% market share in cranes. Among all segments, the excavator market was the most fragmented and competitive segment in the industry. Foreign companies, especially Korean and Japanese firms, had dominated the excavator market in China for the past two decades, but domestic companies had entered this segment in recent years. SANY overtook Komatsu to become the number-one player in China in 2011, with a 12.7% market share. In a China Association for Quality (CAQ) user-satisfaction survey, based on users' perceptions of product and service quality and price, domestic brands outperformed foreign brands in all product categories, except in cranes and rollers (see Exhibit 8 for scores of Top-Two Chinese brands and major foreign brands). Chinese manufacturers achieved higher user satisfaction due to a number of factors: basic product functions of the Chinese brands no in.ferior to those of foreign products; high operation efficiency and good performance of major systems, such as the engine and electrical systems; excellent service; and a good price-performance ratio (Chinese brands were priced about 40% lower than foreign brands)." However, the survey also showed that Chinese brands needed to learn from foreign brands to imp.rove the quality of design, product controllability, and comfort level of U1e operation envtrorunen t.

Despite the global financial crisis in 2008, the construction equipment market in China maintained strong growth due to the Chinese government's Urillion renminbi (RMB)(US$586 billion) stimulus ~acka~e. However, th~ .co~str~ction ~qulpmel1t Industry in China faced a series of challenges- including wea.k capability m mnovatton, lack of differentiation, and lack of technology for core components-m order to get to the next level.

When the Chinese.govern~le~t started to tighten monetary policies and restricted investment in the real estate mar~et tn 2011, It SIgnaled that the construction equipment industry in China would go from a stage of lugh growth to a stage of stable growth. Chinese manufacturers began to look

3

SANY; Going Global

513-058 SAN\': Going Global

overseas for more growth opportunities. In 2011, export of Chinese construction equipment rose by over 50% and reached US$15 billion, 13 For most major Chinese construction equipment manufacturers, the percentage of overseas revenue to company revenue was likely to increase from 10% in 2011 to about 30% in the next three to four years."

From 2011 to 2015, China was estimated to maintain a 20% growth rate of fixed asset investment in major projects such as affordable housing construction, water conservancy projects, railways, roads, urban transportation and infrastructure projects, and development of the western regions. Based on the demand in the domestic and overseas markets, it was estimated that the revenue of the Chinese construction machinery industry would maintain an average annual growth rate of 17% from 2011 to 2015 and reach RMB900 billion (US$l42 billion) in201515 (see Exhibit 9 for 2015 targeted sales volumes of Chinese manufacturers' construction equipment).

SANY in China

Company History

In 1989, Liang wengen, together with Tang Xiuguo, Mao Zhongwu, and Yuan [inhua, his three colleagues from the Hongyuan Machinery Plant, founded a small welding material factory in Lianyuan, Hunan Province. They wanted to create an experimental area in which to explore modem management for the benefit of China's national industry and to build a world-class brand from China. Liang, chairman of SANY Group, thought that China's industries needed management more than technology, and devoted most of his time at the university studying management instead of material science. Tang Xiuguo, President of SANY Group, and Liang were classmates who had studied material science in the Central South Institute of Mining and Metallurgy (now the Central South University). Together with Xiang Wenbo, CEO of SANY; Yi Xiaogang, executive president and chief technology officer of SANY; and several other senior executives, they formed a passionate, complementary, and stable management team.

The factory produced special welding materials and artificial diamonds. Tang recalled, "The market for special welding materials was only RMB3 million. Big companies did not manufacture these products because the scale was too small and small companies could not manufacture them because the quality requirement was high." When they faced technological difficulties, they sought help from the Central South University. Because China suffered from product shortages, their products were easy to sell. The factory became the market leader in special welding materials in two years. The founders then set their vision on building a first-class enterprise, fostering first-class employees, and making first-class contributions to society. SANY's Chinese name = (pronounced "san yi"), meaning "three first," came from this vision.

In 1994, they set up SANY Heavy Industry Co., Ltd., and entered the construction equipment sector. Tang explained the rationale for this move:

The market for special welding materials was too small to allow us to realize our vision. The construction equipment industry was a very important industry closely related to China's economic development. China's development needed construction and, therefore, needed construction equipment. This industry can create big companies. With years of GDP growth over 10%, urbanization, and industrialization, it is common for construction equipment manufacturers to grow at 1.5 to 2 times that of GDP growth, and great companies can even grow at 3 to 5 times that of GDP growth. We did not enter industries such as health care or

4

International Business Strategy164

513-058 SANY: Going Global

cosmetics, nor did we choose hot industries like real estate, because anyone can do that, but the capability of the construction equipment industry represented the strength of a country.

SANY entered the construction equipment industry during its downturn and started. with concrete machinery, a special-purpose, niche product category with a small market that did not interest the big players like Caterpillar and Komatsu. Scheuch gave an example, "In 2004,about 6,000 truck-mounted concrete pumps were produced and sold globally, including 4,000 units sold to the Ll.S. and Europe and 2,000 units sold to China. Today, about 12,000 units were sold globally, with 10,000 units sold to China." Tang observed. "Even today big companies do not carry concrete machinery. They did not believe it would be a big segment in China. Today this segment is big enough in terms of sales, second only to excavators. U the big players had entered this segment, SANYwould not have grown to the scale it is today."

With a bank loan of RMB20million (US$2.4million), SANY set up the plant to produce concrete pumps. It hired many talented people from traditional military factories, because the factories had little work and had to adapt to the transformation from a planned economy to a market economy. Every day, the management team began with a 7:30 a.m. meeting to discuss various issues, such as how to develop a product, how to improve product quality, and how to sell its products. The team ran into many problems. Component sourcing posed one challenge. From the beginning, SANY used first-class components from Bosch Rexroth, Cummings, and Mitsubishi Electric. For core products like concrete pumps, SANY used Mercedes or Isuzu truck chassis to ensure the quality, but for other products it would produce the chassis itself. Tang explained, "We knew very clearly that we may have a very good design due to our innovation, but we could not guarantee product quality without very good components. We did not lag behind the good companies in manufacturing and quality." However, even the simplest product had over 500 components, so SANY could not use imported components for all of them. Tang noted, "It is not enough to get core components such as hydraulic systems from Bosch Rexroth and engines from Cummings. There are many other components that require high reliability and we want tile quality of these components to be higher than the quality of "made-in-Chine" components." SANY helped suppliers to improve the quality of their components; if it failed to find good suppliers, it produced some components itself.

Making sales was challenging, too. (Liang, who trained the first group of sales managers, initially had to show customers his card as a representative of the National People's Congress to win their trust.) At that time the average price of a concrete pump in the market was RMB400,000(US$47,360), but SANY decided to sell the pump at an average price of RMB600,000(US$71,040),20% lower than imported pumps. T~ng recalled, "Peopl.e within .our ~o~pany had different opinions. Some thought we could sell more If we lowered the price, but LIang insisted that we should price our products at 85% of the price of Putzmeister products, and in the future our products should be sold at the same price as them because price represents the quality and value of a product."

. W~than annual ca~acity of 50 units, SA.NYwas already the largest concrete pump manufacturer in China; the market size was about 150 uruts. When SANY became number one in market share in a product or p~oduct c~tegory,.it would d.iversify into other related products or product categories in the construction eqULp~,ent Industry. Since 1995, SANY had expanded its product portfolio to 25 categones of construction equlp~ent,. ~lth products as diverse as Concrete machinery, excavators, truck cranes,. crawler cranes: pile-drrvmg machinery, and road construction machinery. It was number.one III market share m China in truck-mounted concrete pumps, concrete pumps, and full hydra~lic compactors and number one globally in its output of pump trucks. Since its foundin , SANY s output had grown at an annual rate of 50%.In 2011, it recorded revenues and net profits ~f

5

SANY: Going G-.:.lo-.:.b.-.:.'_+o.....!1':l6=.:S'-...I

513-058 SANY: Going Global

RM1l50.8 billion (US$8 bilJion) and RMB8.6 billion (US$1.4 billion), respectively, with an increase of 50% and 54 % during 2010. (see Exhibit 10 for SANY's revenue from 2004 to 2011)

During this period, SANY Group ventured into a few other businesses, such as vertical parking lots, the optoelectronic business, and buses, but exited these after realizing they were a strategic misfit. However, it applied the capabilities it developed in these industries in its construction equipment business. For example, it learned the characteristics of the electronic components from the optoelectronic business and applied the knowledge to produce controllers, displays, and sensors in CPS terminals for construction equipment.

Two subsidiaries of SANY Group were listed on stock exchanges. SANY was listed on the Shanghai Stock Exchange in 2003 (stock ticker: 600031). SANYHE International Holdings Co., Ltd., which was set up in 2004 with coal-mining machinery as its main business, was listed on the Hong Kong Stock Exchange in 2009 (stock ticker: 0631). In 2011, SANY Group achieved revenue of RMB80.2 billion (US$12.6 billion) and net profit ofUS$1.37 biUion and employed over 50,000 staff globaUy.

Key Success Factors

Besides its good timing and being in the right industry, SANY's success carne from its innovation in technology and management. SANY Group's mission was "Quality Changes the World." Every year, it invested 5% to 7% of its group revenue in R&D to develop world-class products for customers. It had a well-developed R&D process, and attracted and developed a team of experts ill different product categories. To motivate R&D staff, SANY rewarded them with bonuses, development opportunities, and company shares, if they came up with breakthrough ideas. For example, Vi, who had worked for the Beijing Research Institute of Automation for Machinery Industry, started to work for SANY on a project basis in 1995 when SANY encountered difficulties in developing concrete machinery; he later joined SANY. Under his leadership, SANY developed a series of innovative new products, such as the 66m, 72m, and 86m concrete pump trucks that, according to the Guinness World Records in 2007,2009 and 2011 respectively, were the concrete pumps with the longest arms. It also made the 62m concrete pump that it provided free to the Tokyo Electric Power Company to support the water-spraying operation in the nuclear plant after the Fukushima Daitchi nuclear disaster. Because of Vi's contribution, he became director of SANY Group and executive president of SANY, holding 2% ofSANY Group shares.

Another success factor was that SANY ranked number one in user satisfaction in eight product categories and number two in four categories in the 2011 CAQ user-satisfaction survey. High customer satisfaction not only resulted from SANY's high quality products, but also from its high standard service. Zhao Xiangzhang, director and senior vice president ofSANY Group, noted:

We have two standards for excellent service: one is to exceed the industry standard and the other is to exceed customers' expectation. The purpose is to create value for customers. Our products will exceed the basic industry tech.nology requirement. Our company standard is higher than the national standard. And besides basic services such as providing components or repair, we provide services to customers faster. If customers have large gasoline consumption every day, we will try to provide them with gasoline-saving products and services. We also provide total solutions to customers, including visual identity design, helping them to improve management, providing them with technical support to get orders, or leveraging SANY's huge network in China to help them find customers.

SANY established a strict process for providing service before, during, and after sales. After a customer placed an order, the customer service department of a SANY saJes subsidiary conducted a

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comprehensive inspection of the equipment on behalf of the customer, before the formal delivery. Staff people turned on the equipment. ran an onsite trial, and made adjustments. They would formally approve the equipment for the customer only after the equipment ran smoothly for seven days. SANY also provided customers with inspection and repair service every month, a compuls~ry service and the most important measure for reducing sudden breakdowns. In the construction equipment industry, only one major competitor of SANY followed SANY's example and set similar standards regarding this service. For after-sales service, SANY offered on-call service with specific requirements.. When a customer's equipment broke down on a work site, the customer could call the 4DO-nllmbercustomer service line at SANY's headquarters. Whenever SANY received a customer's service request, the service engineer had to leave for the site in 15 minutes, arrive there in 2 hours, and solve the problem in 24 hours. SANY's service engineers had to have their mobile phones turned on 24 hours a day and provide service for their customers whenever needed. SANY was able to deliver these services in China, but it was difficult to replicate them globally.

Foreign manufacturers had initially dominated the market in China because of their advanced technology and strong brands. For example, Putzmeister, the market leader in concrete machinery in the rest of the world, introduced concrete machinery into China. In the late 199Os,Putzmeister and Schwing dominated two-thirds of the concrete pump market in China, the world's largest consumer of concrete, but their combined market share slipped to less than 5% by 2004. SANY eventually won the competition for three reasons. Tang explained:

First, our products and service fit the needs of the China market better. The quality requirement for concrete in China was not as high as that in Europe. We call satisfy customers' needs and transport any kind of concrete, but European companies blamed Chinese customers for using poor quality concrete and argued that their equipment had no problem. They had good technology and good product, but they were too ahead of the market. They did not have in-depth understanding of China's situation. Therefore, customers thought our products were better than European ones and our products were also cheaper. And customers have high service requirements today. Besides basic services, we equip our machinery with a highly intelligent system to help customers monitor the operation status of the machinery and provide warning to them whether the machinery needs repair or maintenance. Putzmeister can't provide this kind of service in China. Second, customers evaluate suppliers based on the val.ue ~f their products and services. We create more value to customers than competitors. Third, m any country, people have loyalty to their national brands.

. Thrau.gh its Enterprise Control Center (ECC),SANYcould monitor the status of all its equipment m operation globa~ly;customers could also access the information via the Internet. They could see the equipment's working hours, workload, potential problem, the service vehicles within a lOO-kilometer radius of the equipment, and the closest warehouse to a customer's site. When a machine broke down SANY could send an engineer and components from the nearest warehouse in a vehicle close to the' customer's site. To ensure fast delivery. of co~p~nents to customers, SANY established 15 logistics cente.rs ~I ~'6sS~~re-p~rtswarehouses WIth logistics and service systems worldwide. It also had 13 prcvtncta service centers and about 400 service stations in China. It based what it called 6S service ce.nterson the sales, spare parts, service, and survey concept (the 45 concept) learned from the commercial truck sector and passenger vehicle sector with two added 50' I' Id. for new equi ,rvlCes: exc langmg 0 equipment or new equipment and staff training,

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Cnallenge and Latest Move in China

As the technology gap between foreign and domestic manufacturers narrowed, some ma~ufacturers competed on price to win deals. Customers were used to paying full price for equtpment p~rcha~es, but now they demanded more financing options. This was a major challenge SANY faced U\ Chma. Zhu Dan, vice general manager of SANY and executive vice general manager in charge of marketing, observed:

In a rational situation, Chinese customers will first consider brand, quality, service, and then price. However, when the price gap among manufacturers is as large as 20% to 30%, customers will consider sacrificing brand and quality to get the short-term gain in price. Take concrete machinery, for example. On average our products are priced 5% to 10% higher than other Chinese brands and 15% to 20% higher if our products are newly developed or have higher teclmology content. If customers buy our Chinese competitors' products, the purchasing cost for them is usually 15% to 20% lower and in a few cases 30% lower, including the interest-free benefit, gifts and other benefits they get.

SANY responded to price competition by improving its product design and components, by conducting more in-depth market research to understand customer needs, by improving product quality and differentiating itself through innovation to satisfy the needs of different customer segments, and also by providing comprehensive service and educating customers to consider value and long-term benefits over price and short-term benefits. Zhu cited some examples:

Instead of giving a RMB300,OOOor RMB500,OOOprice cut, we train customers' operation and management staff; help them with planning, medium- and long-term financing; or offer them reproduction service, trade-in, or other value-added service. And we try our best to quantify the value of the service we provide. We can respond to customers faster by reducing the time to repair a machine to increase customers' equipment utilization. We can also improve the energy efficiency, environmental friendliness, and product reliability. We hope to c.reatevalue for our customers, and lead the industry to compete in an orderly manner and to develop healthily by providing our customers with services that cover the entire value chain and life cycle, because price competition among equipment manufacturers will eventually lead to price competition and negligence of service quality among our customers.

In 2012, as SANY grew bigger and the customer base and industry structure changed, it decided to move away from a direct sales model to a distributor model for mature products with large sales volume. In2000, construction companies had accounted for 30% of SANY's sales, and over 50% of the construction companies owned their machinery. Now they preferred renting to buying the equipment, so fewer than 30% of the construction companies owned the equipment. As a result, local rental companies and installation companies increased their share of SANY's sales to 80%. With the distributor model, SANY sold equipment to distributors with cash-on-delivery payment; distributors then sold the equipment to rental companies, most of which used bank financing for their purchase. The construction companies then rented the equipment from the rental companies.

SANY continued to sell some products to construction companies directly, but the percentage was shrinking. Zhu commented, "The distributor model is more compatible with the renta.! market. More and more companies will provide professional service in the future. TIley will be more professional and grow bigger." The distributor model also better served the growing scale of SANY. Zhu explained, "For example, it is fine if you sell directly to your customers when your revenue is below RMBSbillion, but your resources can't keep up once the scale is too big. The labor cost is too high and the management scope is too big." Huang Jianlong, vice president of SANY Group, added, "The

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distributor model will have lower cost and facilitate faster decision making. For example, 1 or? people at a distributor's company can decide whether they will take a customers order, but for a big company, the order will have to be reported back to the head~ua~ters to g~ through, the app~oval process, which may involve 8 to 10 people." SANY selected 30 dlstnbutor~ WithextenslV~expenenc~ and local resources as its provincial distributors and provided them With the following support. brand building; assisting them in negotiating with the local government to get relatively cheap land, preferential tax treatment, and other resources; assisting them in negotiating with banks to get loans; and organizing distributors from different business units to participate in bidding for large, complete sets of equipment.

Many distributors had once been SANY sales staff. Liang Zhi, chairman and general manager of SANY South China Co., Ltd., a sales subsidiary ofSANY that became SANY's exclusive distributor for Guangdong Province, commented on the pros and cons of this transition:

1 used to care mainly about how to achieve better performance during my term of office since SANY changed the general manager of a sales subsidiary every three years. Now Ican develop a strategic plan for the next 5 or ]0 years based on the local conditions and from the perspective of achieving long-term benefit. Of course, independent distributors have their own interests, but we are different from a usual distributor. We came from SANY.

Liang's company planned to make all investment of over RMB200 million (US$31.64 million) ill the relatively underdeveloped eastern, northern, and western regions of Guangdong in order to establish complete dominance in these regions in three to five years.

To be recognized by SANY, distributors were required to provide evidence of their financial capability. For example, the registered capital of SANY South China was RMB 10 million (US$1.58 million). SANY asked that distributors sell only SANY products and would give them more products to sell if distributors' management capability and resources were satisfactory. Distributors provided after-sales service to customers, for which SANY paid them a fixed amount. For example, SANY paid distributors a service allowance of RMB670 (US$106) for each concrete pump truck every month. In comparison, Putzmeister paid its distributors a onetime, lifelong maintenance fee of RMBl0,OOO (US$1,582).

SANY placed great importance on service. Ren Yuan, vice president of sales and board member of SANY South China Co., Ltd., noted, "In the China market, where the protection of intellectual property rights is not strong, our competitors' products will be more and more similar to our products. Service will be the final battlefield." SANY took several measures to ensure the service quality of its distributors. Zhu explained SANY's approach:

If distributors don't have the capability to service customers, we will not allow them to do so. 1£ ~e~ service capability doesn't meet our requirement within a certain period, we will take back.Its nght to.servlce.custo~ners. ~fter the~ meet the requirement, if they don't share SANY's service mentality or if their service quality is not satisfactory when we evaluate th if performance, we will take back its right to service customers. If they don't improve their service, then we will take back its distribution right as well.

SANY set explicit requirements for the distributors' service resources. Take SANY South China Co.,. Ltd., for example. E~ery se.rvice en~eer w~s in charge of maintaining 17 to 19 pieces of equipment, and every serv~cevehicle provided service to 25to 28 pieces of equipment. With over 150 staff people, customer service was the largest department in SANY South Chi C L d Th . f. taff t . . . tI na 0., t. e ratio 0 servrce s a equipment muse IJ1 te market was about 1:13, compared with 1:18 for domestic

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co~petit~rs. (For many years, Putzmeister had had only one sales representative and one service engmeer m Guangdong, where the market size was RMB4 billion to RMB5 billion [US$633 million to $791 million]). SANY's pricing and payment settlement system also contributed to its control of the distributors' service quality. A distributor's net profit margin was about 1% to 2% and, in some cases, close to zero if it fought with competitors for a customer, but SANY's yearend rebate to a distributor could be over 2%. SANY based the rebate on a comprehensive evaluation of distributors with key performance indicators (KPIs) such as market share and customer satisfaction. SANY would call some customers, calculate complaint rates, and use "mysterious customers"16 and other means to obtain customer satisfaction data.

In contrast, SANY's major competitor which also had a sales system made up of provincial subsidiaries further enhanced its management of the subsidiaries by adding regional Layers,such as an eastern region or a southern region, between its headquarters and its provincial subsidiaries.

SANY in Overseas Markets

Globalization Road Map

As SANY became a leading player in the home market, it started to export its products overseas and set up sales subsidiaries in foreign countries in 2002.Once it learned that a particular market had great demand, it would set up assembly factories. Chairman Liang explained SANY's rationale for market selection:

SANY set up factories in India and Brazil, because we believe these countries will have a big market for construction equipment in the future. The purpose of being in India and Brazil is to replicate SANY Heavy Industry. TIle path will be the same, but the scale may not be as large. Why did we set up companies in Germany and the U.S.? It is because we need standards, technology, and talents from these countries. The market in the U.s. and Europe is not large, but it provides us with R&D capability that aUows us to be competitive in China. This global expansion allows us to raise our product and technology standard to that of Europe and the U.S., while having "made in China," "made in India," "made in Brazil," "made in Germany," and "made in Ll.S." manufacturing costs to satisfy different customer needs in different countries.

Liang added:

We went to India because it is similar to China: it is a developing country with a large population and fast-growing economy. The purpose of setting up a factory there is to produce locally and sell locally to achieve scale. Germany is a different story. We want to do R&D and production in Germany. In the minds of the Chinese people, Germany is a country for high- end manufacturing. In order to learn from German companies, we need to set up a company there. It will be a window for us to attract talents who might not be willing to come to China, but who might want to work for our company in Germany.

SANY had to learn the different market demands and conditions in order to come up with a proper strategy for each country. For example, customers in developed regions such as Europe and the u.s. were less price-sensitive and paid more attention to quality and brand than those in developing countries. Tariffs for importing construction equipment varied greatly among countries: in Germany, the tariff was about 5% to 10%, but in india, the tariff was over 30%. Africa seemed an attractive market, but SANY decided not to set up factories there because of concerns about stability.

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India and China were both developing countries, but their market maturity and customer needs were

different. Liang elaborated:

TI,e construction equipment market in india is about US$5 billion, about ~~ same size as China 15 years ago. Indian customers demanded lower prices. They can sacrifice features. of comfort, such as air-conditioning, for lower price. ln India, operators of construction equipment are not the owner of the equipment, but in Chtna. it is usually the same people that own and operate the equipment. Besides, the workload of the construction equipment in .~h.ina is more than three times that in India, so operators in China can't do without an air-condItiOner. And 70% of the Indian customers need financing or leasing service, while in China, only 35% of the customers buy construction equipment with financing from banks or financing companies. In addition, we must use engines from Cummings in India because other engine suppliers in India do not have the same level of after-sales support due to small sales volume, but in China, customers are willing to accept engines from Europe, the U.s., or Japan.

SANY India SANY established its first overseas subsidiary in Pune, India, in 2002. In 2007, it set up a new

340,OOO-square-meter assembly plant in Pune with an investment of US$60 million and an annual capacity of 500 pieces of concrete equipment. SANY sent 20 staff from China to India and hired most of the 700 employees locally because 01 the low labor cost. Most of SANY's products sold in India were manufactured in China and shipped to India because of the lower production costs with large volume in China. The Indian factory supplied only some components. The leading players in India were multinational companies that had factories in India, such as JCB from the U.K in excavators, and Putzmeister and Schwing in concrete machinery. SANY had about a 20% market share in concrete machinery, over a 20% share in crawler cranes, and about a 3% to 4% market share in excavators, due to its short history in the country. After its acquisition of Putzmeister, SANY transferred the concrete equipment business in India to Putzmeister's Indian subsidiary. With the exception of the concrete equipment business, SANY worked with six distributors in India that took care of sales, marketing, and after-sales service for other SANY products and paid them for the after- sales service. These distributors set the price, but SANY did not allow them to carry the construction equipment of other brands. After 10 years of operation, the Indian subsidiary broke even in 2011 and expected to achieve sales of about US$100 million in 2012,

SANY Brazil

With a la.rge population~ rich resources and land, and as the venue for the 2014 World Cup and 2016 Olympic .Games, Bra~il was .a~other very attractive market for construction equipment. SANY ~tarted to sell Its produc~ I.nBrazil til 2007. In 2010, it set up an assembly plant in Silo Paulo with an investment of US$200 million. The plant started producing hydraulic excavators in December 2010 and assembling and producing truck cranes in March 2011. SANY Brazil had a strong team to provide technical support to its Brazilian distributors. SANY expected to reach US$160 illi '

I 'B 'I' 2 d 5 nu on insa es 111 razt 111 012 an U $1 billion in five years.

SANY America

SANY America was set up in 2006 with an investment 01 US$30 million, In 2011, it finished construction of a new 400,OOO-square-foot assembly plant and corporate I d ' P h. .. . lea quarters til eac tree CIty, Georgia, WIth an investment 01 US$60 million, SANY America employed over 100 staff including an R&D team of 60 from the world's leading research institutes. It developed and sold

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crawler cranes, rough terrain cranes, concrete pump trucks, motor graders, and excavators for the North American market, with many more global products in the pipeline. In faU20n, SANY America announced that it was building a US$25 million R&D center alongside its headquarters and manufacturing facility and employing 300 hydraulic and mechanical engineers.

Goals and Challenges

In 2011, the overseas market contributed 5% to SANY's total revenue. Except for Germany and the .U.S., SANY's subsidiaries in other countries were all profitable. SANY hoped 30% of its revenue would come from overseas in five years and 50% from overseas eventually. SANY's medium-term goal was to exceed Komatsu in 2022 and become number one or two globally in the construction equipment industry.

However, to achieve these targets, SANYfaced a number of challenges. Zhao elaborated:

SANY has little gap in technology compared with leading global companies, but SANY lags behind them in building a global brand and in managing global operation. Outside China, people know Caterpillar and Komatsu, but they may not know SANY. And our employees lack experience in global business operation. We need sales and management staff for foreign markets. OUf service staffs need to develop English language skills. Besides, cross-cultural integration takes time.

The Putzmeister Acquisition

SANY Germany

SANY first entered Germany in 2007 and set up its German subsidiary in Cologne in 2008. In January 29, 2009, SANY signed an investment agreement to invest f100 million (US$l44 million) to build a 250,OOO-square-meterR&D center and machinery manufacturing base in Bedburg. Chinese Premier Wen Jiabao and German Chancellor Angela Merkel witnessed the contract-signing ceremony for this, the largest investment a Chinese company had ever made in Europe.

The plant produced concrete mixers; it also conducted new product R&D that targeted high-end markets globally, with total output in the next five years to reach 1,800 units. Liang introduced SANY's plan for the German base:

We sent our product drawings, sample machinery sold in China, and a few technicians to Germany. Based on the product in China, they can develop a new product that meets the European standard in six months. Without a factory in Europe, we would need at least three to five years to do that. For the next step, we will supply some components from China for products made in Bedburg. We chose Bedburg and Cologne because they are close to the port city of Antwerp, Belgium. We can send components from China to Bedburg through Antwerp. We will not only have German standards, technology, and quality, and made-in-Germany products, but also low-cost components from China.

At the current stage, sales were not the priority for the German subsidiary. Huang noted, "We care about how many new and competitive products it has developed. We are not selling our new products in the market yet. We want customers to test them for a long time before we launch them in the European market." For example, an Italian customer was testing new concrete machinery

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developed in the German plant. Because the labor costs in Germany were much higher than those in China, SANY was very careful about adding new staff in Germany.

The Putzmeister Deal Founded by Karl Schlecht in 1958, Putzmeister was a world leader in high·quality concrete

pumps, with 40% global market share for many years (see Exhibit 11 for the company's structure). Putzmeister was held by the Karl Schlecht Foundation. With about 3,000 employees, Putzmeister had a niche focus and strong engineering capability. It was a typicallfhidden championF (a little- known world market leader with less than $5 billion in revenue, as defined by Hermann Simon 18) and represented "the backbone of the German economy."19 Putzmeister located its first overseas subsidiary near Paris in 1974. Then it set up over 10 subsidiaries in Italy, Spain, the U.K., Brazil, the U.S., and Japan. It broke many world records. Its equipment was used to cool the damaged Fukushima nuclear reactors and to construct Bur] Khalifa, the world's tallest building.

Putzmeister set up a manufacturing base in Shanghai in 1996. CEO Norbert Scheuch recalled, "In the best time, we had a 30% market share in China. Now we have 1.2%, but the market is bigger." Scheuch explained:

We have been an export world champion, but not a real global player. An export world champion has one location and says, "I manufacture the best product. Take it or leave it. I ship it to the whole world." You c,anuse that approach when you do have leading-edge technology, but not when you manufacture a machine like a concrete pump that others can disassemble, make a deep analysis, and rebuild. We stuck too long to this German approach, which created problems for us in India, Brazil, and Chi.na. In other markets, we did not have strong domestic players, but the Chinese companies copied the Putzmeister machine, made it cheaper, and adapted it to the Chinese quality level and expectation. They also built up the scale advantage.

In addition, as China gradually opened the construction equipment industry to foreign investment, foreign companies faced restrictions in investment in some special purpose equipment segments such as production of commodity concrete machinery.P Foreign companies also had to pay import duties for machine parts from outside China.

Putzrneister was hit hard during the 2008 and 2009 financial crisis. Its 2009 revenue was £440 million (US$630 million), falling by more Ulan half, compared with 2007 sales of €I billion (US$1.5 billion)." SANY overtook Putzrneister as the largest concrete pump manufacturer in sales volume in 2009. In 2011, Putzmeister's revenue was £570 million (US$738million). Ten percent of its sales came from Gennany and 90% from overseas markets.

Liang continued to explain the reason for buying Putzmeister, "Without the acquisition, we are only number one in China, especially considering the fact that Putzmeister is our major competitor in expanding our concrete machinery business globally. We become number one globally after the acquisition, which also turned our competition into cooperation." Xiang added:

Even if the deal costs RMB20billion, we will still pursue it. RMB20billion is only two years of P~O:I.tfor o~r concrete m~ch~ery .business. This kind of resource is irreplaceable. This acquisition can t be measured m financial terms. Putzmeister's technology b d d tw k, b db" ' ran ,an ne or can t e measure y money. ThIS acquisition can bring us something" t d ., p . I .' rna money an time can t buy. utzmeister ras 52 years of history and has built up a net k i 52 '. . wor ut years. You can t measure Its value With money. Our products are mainly sold in rt.:. d . th 5

" f I v.runa, an our export IS less an ;0 0 our revenue. SANY has the largest sales globally but SANY . I b, IS not ago al brand.

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