Germany a Gateway to Europe for Chinese Businesses

German investors have long trekked to China in search of lower wage costs and a huge market for their products. Recent years, though, have shown that business relations between Germany and China are not a one-way street. Investments are also flowing the other way.

Hamburg, for instance, has become a stronghold for Chinese investors in Germany. More than 300 companies from China have established a base in Hamburg, more than in any other German city. The Hamburg association for business development, HWF, and the city's mayor regularly send delegations to 20 Chinese provinces to advertise their city. “We organize presentations introducing Germany as a business location,“ explains HWF's Stefan Matz. As a special incentive, Hamburg pays newly established Chinese companies a monthly rent subsidy of EUR800 during their first six months in the port city.

Chinatex, China's second-largest textiles producer, is one company that opted for the city on the Elbe river. Last year, the company established a subsidiary in Hamburg. Mode Contor Hamburg designs fashion collections which are then put together at the parent company's Asian production sites. Once they have returned to Germany, the garments are sold at large department stores, such as Galeries Lafayette in Berlin. The German subsidiary had sales of EUR8 million last year. It hopes to double sales in 2004 and break even in 2005. “Mode Contor is Chinatex' window to Germany. At some later point, we also want to expand our business in Europe,“ says managing director Wang Yan.

Many Chinese investors regard Germany as their gateway to Europe. “We're at the beginning of an important development,“ says Engelbert Boos, an investment consultant for German and Chinese companies who worked in China for 10 years. According to Boos, German small and mid-sized companies have been weakened by the economic crisis, making it easier for Chinese investors to buy patents and technologies at a good price by taking over a German company. The buyer obtains an already established local brand and a sales network, distribution channels and customer relations that are already up and running.

In spring 2002, gas bottle manufacturer Welz Gas Cylinder, based near Berlin, declared insolvency and was taken over by a Chinese trading company for Chinese household and industrial goods, Huapeng Trading. “Germany has a strong industrial tradition and is an excellent location for technology production. The market is much more stable than the Chinese market,“ said the new managing director Jiang Zhou.

The young man from China achieved the turnaround at Welz Gas Cylinder, which posted a profit in 2003 and now expects sales of EUR6 million for 2004. Jiang has his eyes set on expansion. He is currently negotiating with five potential takeover candidates.

But it is not only private companies that are expanding into Germany. Haier Electronics is a state-owned group with annual sales of $10 billion, specializing in appliances such as refrigerators, microwaves and other electronic appliances. The company is setting up its own business structure in Germany. A few months ago, it opened two marketing and sales offices in Munich and Gießen. Haier hopes to sell around 45,000 electronic items and 200,000 household appliances in Germany this year, achieving a turnover of EUR35 million. “Germany is the most important target market for Haier,“ explained Haier Europe managing director Paolo Mainardi, “because it is the largest market in Europe and because German consumers appreciate quality.“ Haier's TVs are assembled by a German company. All other products are manufactured in Asia, but the German consumer can still rely on getting German quality, according to Mainardi. “We don't offer cheap products. We achieve the same quality as Samsung or LG because we use the same components.“

But the standards are not always met. Eager to circumvent protective U.S. tariffs, Asia's largest pencil manufacturer, China First Pencil Company, founded a subsidiary in Germany, Norddeutsche Bleistiftfabrik, in 1998. It hoped to produce 100 million pencils a year there and export them under the label “Made in Germany.“ But after only a few months, China First Pencil stopped production. The pencils could not be labeled as a German product because they were largely prefabricated in China. In addition, the machines that the company brought from China did not meet German safety standards. Around EUR3 million had been invested in the pencil factory.

Three years later the D'Long conglomerate failed with its acquisition of insolvent Hirschfelder Leinen- und Textil. The company went bankrupt again only 18 months later. “The Chinese today are making the same mistakes as the Germans before in China,“ says investment expert Boos. Chinese investors have to give their companies a European face to be fully accepted, he believes.