A Chinese machinery giant's efforts in Poland are paying off despite challenges, reports Du Juan from Stalowa Wola

In Stalowa Wola, a town with a population of about 65,000 in southeastern Poland, a Chinese company made its presence known with a takeover of a traditional local machinery company that connected two different cultures and markets.

Many Chinese companies have gone global in recent years but success can never be achieved easily.

Chinese engineers and management officials from Guangxi Liugong Machinery Co Ltd, one of the leading construction equipment manufacturing companies in China, spent three to four hours by car to reach this small town, which is located about 240 kilometers south of the country's capital Warsaw, following a more than nine-hour flight from China.

Guangxi Liugong Machinery Co Ltd's assembly line in Liuzhou, Guangxi Zhuang autonomous region. The company's acquisitions in Stalowa Wola, Poland, are expanding its capabilities into the European market. Wang Zhongbin / Xinhua

"Many entrepreneurs still hold a superficial understanding of 'internationalization' on the trading stage. However, trading is like floating duckweed on water without roots while marketing is different," said Zeng Guang'an, Liugong's vice-chairman and president.

"Marketing is like planting trees. After you plant a young tree in a local market, you need to take care of it until it grows bigger."

"One tree is not enough. We raise a forest," he said.

Leading the whole process of Liugong's takeover of Huta Stalowa Wola Construction Equipment Division and its distribution subsidiary Dressta Co in Stalowa Wola, Zeng completed his planting of the first tree in Europe.

It took more than two years of negotiations. Liugong acquired the Construction Equipment Division of HSW and Dressta in February 2012, a time when many European companies were suffering from a weak economy.

The acquisition became Liugong's first outright purchase of manufacturing facilities and distribution outside its domestic market.

Promising acquisition?

The takeover has brought mutual benefits to Liugong and HSW.

First, Liugong will acquire the first-class crawler dozers (a specialist bulldozer) production line owned by HSW, said Zeng.

Established in 1937, HSW is well-known for its manufacturing of high-quality crawler dozers at its plant in the Podkarpackie province in Poland.

"The research and development investment for crawler dozer production lines is huge and difficult," said Zeng. "No more than five companies in the world can really make high-quality crawler dozers. The technology Liugong can gain from the takeover is attractive."

Second, the takeover of Dressta can help Liugong expand its European market, which currently is not a major overseas market for certain Chinese companies.

In addition, Poland has almost the lowest manufacturing and labor costs in Europe. The payment of employees at Liugong Machinery (Poland) Co Ltd equals around one-sixth of that of Germans in the same line of work and only 1.5 times Liugong's Chinese employees.

In return, Liugong also helps the Polish company in many sectors, including reducing costs, improving production efficiency and expanding its sales markets.

"In addition to technology communication, Liugong has a well-established global distribution network that Dressta can make use of to increase its overseas sales," said Lestaw Holysz, chief executive officer of Dressta.

"We need more dealers and Liugong has them," he said.

Since Liugong started its "go overseas" strategy in 2002, it has built up a distribution network with more than 400 dealers in 130 countries and regions globally and two overseas manufacturing plants outside China.

Unlike many other Chinese companies, Liugong tried hard to infuse its concepts, culture and management into its overseas plants in addition to making money.

"We want to send a message to the Polish government and local residents that we are not only buying their technology through the takeover. We are also bringing our best technology and products here," said Zeng. "Plus, we will definitely continue our investment and Poland will become Liugong's manufacturing center in Europe."

Challenges ahead

Among hundreds of big and small outbound takeovers by Chinese companies in recent years, integration after transactions is the most challenging and crucial part.

China's largest outbound takeover in history was the acquisition of Canada's Nexen Inc by China National Offshore Oil Corp Ltd, the country's biggest offshore oil exploration company, which was finalized last summer.

Yang Hua, vice-chairman of CNOOC's board, said during a previous interview that a smooth integration determines the future development of the company but it takes time - from several months to three to five years - depending on the scale.

Even though Liugong has experienced a smooth integration after the takeover, it has also met many obstacles.

At present, the number of employees at Liugong Poland accounts for 12 percent of Liugong's total figure while they only contribute 3 percent of Liugong's overall revenues, according to Wu Yindeng, executive vice-president of Liugong Machinery (Poland) Co.

The reasons for this are many.

The European market for Liugong is not as big as the Chinese one and production efficiency at the Polish plant is much lower than it is in China.

Li Mingsheng, production manager of Liugong Poland, said the company has sent many Chinese engineers to Poland to work with local counterparts in order to raise efficiency.

"In Liugong's plants in China, every seven minutes there is one machine completed from the production line. However, only five to six machines can be completed in one day at its Polish plant," said Li.

In 2012, Liugong Poland sold about 400 machines, but had sold only about 200 machines by October this year, according to Li.

Zeng said the whole industry is facing a tough time because of the gloomy economy.

'The challenge is to bring the two cultures together," said David Beatenbough, vice-president of Liugong Machinery.

From the production side, Poland is very different from what we do in other parts of the world, he said.

"From the R&D side, Chinese engineers are young and passionate with less experiences, while the Polish engineers are very experienced and logical, but very hard to change in terms of their working methods," said Beatenbough.

At present, the company has 12 R&D teams in Poland with one Chinese and one Polish engineer in each, aiming at bringing the two cultures together in a smooth way, according to Beatenbough.

Facing the challenges ahead, Liugong will continue to expand its investments.

Beatenbough said Liugong has an ambitious plan for its global marketing.

In addition to existing overseas markets including South Africa, the Middle East and Russian-language areas, it will expand its North American market, which accounts for only about 1 percent of Liugong's total sales volume at present. Meanwhile, it will continue to work very hard inside in China.

"We have been investing in long-term and careful bases," he added.

Liugong established its North American subsidiary in Houston in the United States in 2008. However, as the largest and most open market for construction machinery equipment in the world, clients in North America are very strict with products, technology and after-sale services.

Liugong has been working hard to improve its products' quality and technology to adapt to the new market.

"First of all, we need to increase our distribution intensity," said Beatenbough.

In 2012, the overseas revenue of Liugong amounted to 3.66 billion yuan ($598 million), up 28.43 percent year-on-year, accounting for about 30 percent of Liugong's total revenues.

According to Liugong's half-year report in August, it achieved 6.6 billion yuan in revenue in the first half, a year-on-year decline of 10 percent. The net profit was 261 million yuan, a 16 percent drop year-on-year.

The company said the profit performance was better than expected.

China's machinery industry has been gloomy from the beginning of the year.

About 12,000 machinery producers - 16 percent of all companies in the sector - recorded losses in the first half. That was still an improvement from the start of the year, when 22 percent of companies in the industry were losing money, according to the China Machinery Industry Federation.

Looking further

It is good for Chinese companies to go overseas and expand their businesses, but it is more important for those companies to realize real growth after takeovers, said Cai Weici, vice-president of the federation during the first-half industrial performance conference in August.

"Chinese companies are working on upgrading their technology and production in order to gain back market share, which had been dependent on imports," he said.

Liugong is not the only company in the construction machinery industry to go overseas.

Last year, China's Sany Heavy Industry Co Ltd acquired Intermix GmbH, a German truck mixer maker, and Xuzhou Construction Machinery Group acquired a majority stake in German's Schwing Group GmbH, a concrete pump maker.

According to China's 12th Five-Year Plan (2011-15) for the machinery industry, the industry's sales volume will amount to 900 billion yuan by 2015. Outbound acquisition is an efficient way to realize this goal.

However, both the number and volume of overall Chinese companies' outbound mergers and acquisitions this year are dropping.

According to a report from PricewaterhouseCoopers China, China had 78 outbound M&As during the first half of the year, 20 percent drop compared with the same period last year, a record low since 2010.

In the first half of 2012, there were 95 outbound M&As by Chinese companies.

Contact the writer at dujuan@chinadaily.com.cn

(China Daily USA 10/08/2013 page15)