No longer poles apart as ties increase(2)

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.