Struggling company given a hydraulic lift

German manufacturer was facing serious problems until takeover by Chinese giant turned its fortunes around

Inside Chinese heavy machinery giant Weichai Group's 4-square-kilometer factory in Shandong is a small plant that many employees have not noticed. Security is tight and no photos are allowed.

In this plant, Weichai developed China's first hydraulic equipment in 2014. Before then, China relied on imported equipment.

Hydraulic equipment acts as the muscles for forklifts, industrial trucks and many other devices, allowing power to be translated into movement.

"Historically, China did not know how to manufacture such technology, and consequently it relied on imported hydraulic equipment from a small number of companies in Germany, Japan and the United States," says Ren Bingbing, vice-president of Weichai Power, a subsidiary of Weichai Group.

Heavy reliance on imported equipment can create insecurity for Chinese companies' supply chains. If foreign companies stop supplying, or suddenly increase their prices significantly, it can cause big problems.

"So for us, to bring hydraulics manufacturing expertise to China through our subsidiary Linde Hydraulics is also a big breakthrough for China's heavy manufacturing industry, developing a more secure supply chain," says Ren.

The hydraulics factory, which opened in 2014, is the China subsidiary of the century-old German hydraulics giant Linde Hydraulics. In 2012, Weichai Power paid 271 million euros ($330 million; ￡237 million) for a 70 percent stake in Linde, at a time when the German company was facing serious financial problems.

Linde Hydraulics' Chinese factory is now on track to produce 100,000 units of hydraulic equipment, a big increase from the 35,000 it produced annually two years ago.

The success of this partnership is a key milestone in Weichai Group's international expansion.

Linde Hydraulics, founded in 1904, was once one of the world's biggest hydraulic equipment manufacturers. After the 2008 economic crisis, many of its customers switched to its Japanese rival, Kawasaki Heavy Industries Ltd, which provided cheaper alternatives.

Meanwhile, Linde Hydraulics' parent company, the German forklift-maker Kion Group, was also encountering financial difficulties. In particular, its reliance on hydraulics equipment from Linde Hydraulics made its own products more expensive.

In 2011, Kion recorded a loss of 93 million euros. It was on the verge of bankruptcy and the company's two big shareholders, the hedge fund company KKR and investment bank Goldman Sachs, decided to sell their investment in it.

That was when Weichai decided to invest in Kion and Linde, connecting these two companies' niche market expertise with its significant production capacity and sales channels in China. Weichai Power bought a 25 percent stake in Kion for 467 million euros, and a 70 percent controlling stake in Linde Hydraulics for 271 million euros.

After opening the Linde Hydraulics factory, Weichai used its existing China sales network to improve sales in China. Weichai also invested in research and development to create the latest versions of hydraulic equipment to better meet the specifications of Chinese and other Asian heavy equipment manufacturers.

Meanwhile, it made additional investment into Linde Hydraulics, enabling it to open a new factory in the German town of Aschaffenburg. This factory, launched in 2016, allowed Linde Hydraulics to grow its production from 150,000 to 250,000 units.

All these efforts contributed to turning the loss-making Kion into a profitable business again. In 2017, the company reported distributable profits of 168 million euros.

Established in 1946, Weichai Group was one of China's earliest industrial equipment makers. For decades, the company's core business focused on making engines, but in more recent years it branched out into other sectors, including construction machinery, powertrain systems and luxury yachts.

Despite being one of China's most powerful manufacturers, Weichai has also encountered many ups and downs in its history.

Being a State-owned company allowed Weichai Group to face very little market competition in its early decades and cultivated a culture of bureaucracy and inefficiency.

This problem became increasingly serious in the 1990s, when many such State-owned enterprises could not withstand competition from more efficient private sector rivals, and Weichai was no exception.

In 1998, Weichai Group had a net debt of 300 million yuan ($47 million; 39 million euros; ￡34 million) and its cash account held just 80,000 yuan, which was not enough to maintain the day-to-day operations of the business. The factory's staff did not receive a salary for six months.

The management was at a loss for ideas on how to turn things around, so Tan Xuguang, a 37-year-old rising-star manager, was voted by management and fellow factory workers into the position of CEO, in the hope that he could lead the company to success.

On the day he became CEO, in 1998, Tan made a promise to repay workers two months of salary within 15 days. To acquire the cash, he visited a leading bank and then waited outside the bank chief's home for a whole day. His unusual action eventually persuaded the banker, who then lent Weichai 1 million yuan.

Meanwhile, Tan enforced strenuous reforms at the company. He cut the number of Weichai's departments from 53 to 35, meaning many workers lost senior positions within their existing departments. That was a daring move, since many of the affected workers came from families with far-reaching social influence. Those who opposed his plans were sacked immediately.

Tan's actions effectively shook up Weichai's corporate culture. Within a few years, Weichai became an agile market-focused company, backed by an efficient management structure.

Another key strategy has been the company's heavy investment into R&D, which paid off over the years as the company continuously supplied the market with machinery at the forefront of technological development. Total investment in core technologies and enhancing product reliability has reached 15 billion yuan over the past 10 years. Every year, R&D investment accounts for 5 percent of its annual sales revenue.

Its first overseas R&D center was set up in Austria in 2003. Today, it has R&D centers in five countries, together employing 3,000 people.

Next came international expansion, through a strategy of overseas acquisitions and investments, and by achieving synergy through combining overseas niche sector technology and products with Chinese market and commercializing capacity.

In 2009, it acquired the French marine engine developer and producer Moteurs Baudoui. In 2012, Weichai purchased a majority stake in Italian yacht maker Ferretti, to tap into the luxury yacht sector. The Kion and Linde Hydraulics investments were made in the same year.

In 2016, through Kion, Weichai bought the US-based logistics company Dematic for $2.1 billion.

In 2017, Weichai invested $60 million into the leading alternative-fuel power system developer Power Solutions International, and became its largest shareholder.

Weichai's 2016 financial figures show that its overseas projects reported positive profit growth. Currently, 40 percent of sales revenue and 30 percent of net profit are contributed by overseas markets. By 2016, Weichai Group had achieved 134 billion yuan in sales income.

"As China ventures into its increasingly high quality growth, we will continue to invest in developing leading technology to support China's advanced manufacturing industry," says Ren, the Weichai Power vice-president.

cecily.liu@mail.chinadailyuk.com

( China Daily Africa Weekly 04/27/2018 page30)