Analysis: China woos ‘heirless’ family businesses of Germany

Published Jun 17, 2014

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Berlin - The small and mid-sized companies that form the backbone of the German economy are being snapped up by foreign, predominantly Chinese, investors as the families that run them find no suitable heirs to pass their businesses on to.

Two years ago, engineering firm Putzmeister passed into Chinese hands after the founding family was unable to find a successor. The takeover by Chinese giant Sany was one of the biggest investments by China in Europe at the time. But it was just the tip of the iceberg.

“Technology firms, hidden champions with problems finding an heir, that’s what Chinese investors are looking out for,” said Peter Englisch of EY (formerly Ernst & Young). “Every private equity fund in the world currently has its eyes fixed on this market,” the expert said.

“German firms, and particularly family-run ones, are the ideal takeover targets for Chinese investors,” said Stefan Heidbreder, the head of the federation of family-owned businesses.

EY says the number of direct investments in Germany by Chinese companies rose from 46 to 68 between 2012 and 2013.

Around 75 percent of small and medium enterprises (SMEs), or, to use the German term, “Mittelstand”, are in family hands. Specialising in hi-tech industrial applications, the sector is known for its innovation and is the driving force behind German exports.

But the tradition of succession where the father hands over the business to his son or daughter is crumbling.

Detlef Keese, of the Institute for SME Research at Mannheim University, estimates fewer companies are remaining in family hands: the proportion has fallen from between 70 percent and 75 percent in the 1990s to 50 percent now.

It may reflect the ageing population, but it is also a social phenomenon.

“In a lot of cases, the children are reluctant to step into their fathers’ shoes, [as] they have seen what toll it has taken,” said Arist von Schlippe, a psychologist and lecturer at the university of Witten.

“They have a different idea of life, they want a different balance,” he said.

In addition, a lot of companies are in a phase “where it’s not just entrepreneurial drive and spirit that is required, but also management competence, which the young people simply don’t have, or which their fathers believe that they don’t have”, Von Schlippe said.

The first wave of post-war entrepreneurs passed on the torch in the 1970s and now it is the grandchildren’s turn.

In the case of those companies set up in eastern Germany after the fall of communism, it is the time for the first generational changeover.

In the absence of a successor, it is sometimes the non-family management that takes over by way of a management buyout, with the financial backing, say, of a private equity fund. But the investment funds themselves sometimes act on their own. And in other cases, the firm is simply snapped up by a rival.

From this point of view, Chinese investors were a more attractive option, said Heidbreder. They relied on the current workforce and frequently held on to the existing management teams.

Another attraction was that Chinese investors were more willing to pay higher prices, said Jens-Peter Otto, who heads the Chinese-German business group at PricewaterhouseCoopers. – Sapa-AFP

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