Chinese frenemy

A Tech Group Dances with Dragons

heraeus group's china investment and risk
Jan Rinnert (left) and Jürgen Heraeus, going global. Source: Heraeus Holding Gmbh.

Military police are in formation, holding submachine guns in front of their chests, and tanks are on stand-by as a line of dark limousines forms at a checkpoint. The exclusive island of Dongyu in the south of China has been entirely sealed off for the four-day Boao Forum, which brings together more than 1,000 decision-makers in Chinese politics and business each year. Right in the middle of it is Jan Rinnert, CEO of the Heraeus Group, one of Germany’s largest family-owned businesses.

Heraeus’s portfolio ranges from precious metals to medical components. But in China, the firm is deeply involved in that country’s vast internet expansion. Heraeus supplies the quartz glass used to manufacture telecommunication fibers, and the People’s Republic accounts for the lion’s share of that business. Heraeus sells silver paste to Chinese photovoltaic companies. It is also moving into the healthcare sector with bone cement and components for pacemakers. “China is of great importance to us,” says Mr. Rinnert, who is also the son-in-law of Jürgen Heraeus, chairman of the supervisory board.

His company, founded in 1851, is globally active, with 12,500 employees spread over more than 38 countries. But no market is as important as the People’s Republic. The company’s total revenue in 2016 was €21.5 billion ($24.2 billion), and China already accounts for a third of the company’s total sales. “We expect a continued growth of 6 to 7 percent in China,” Mr. Rinnert says.

He started his career as a spokesperson for the economics senator in Bremen and later switched to corporate consulting. He moved to the Heraeus Group in 2004, became its chief financial officer in 2007, then CEO in 2014. As head of the company he is clearly placing his bets on the People’s Republic. China is focusing more on qualitative growth and requires technology for environmental protection and recycling, which are areas Heraeus thrives in.

Mr. Rinnert would have been in very good company in Germany just a few years ago with his euphoria for China. China was once German industry’s promised land. Business was growing in almost every sector; German companies industriously made use of the “workbench of the world” and made a handsome profit at the same time.

But the jubilant mood is subsiding. It is becoming increasingly clear that the Chinese partners of today are turning into the competitors of tomorrow. The government in Beijing is driving this change forward. In its latest five-year plan, it defined the key industries to be strengthened, among them mobility, healthcare, information technology and regenerative energy production.

That sounds good. It sounds like growth. And it sounds like a lot of foreign expertise is needed. But for some outside companies, it sounds like a roadmap that could, in the long term, crowd them out of the market. Despite promises of becoming more open, there is a growing concern about China’s industrial policy methods, warns Jörg Wuttke, former president of the European Union Chamber of Commerce in China. “The frustration is growing and is reflected in the decline of European investments in China,” says Mr. Wuttke.

The chamber takes a particularly dim view of the strategy paper Made in China 2025. The plan’s long-term objective is for China to become an industrial superpower, ahead of Germany and other developed countries, by the People’s Republic’s centennial in 2049.

Heraeus could be hit particularly hard by China’s big goals. The group entered the market in 1974 out of Hong Kong with its core precious metals business. Since it has expanded to various industries in which China would like to cultivate domestic companies in the long term.

Does that make Heraeus particularly vulnerable? No, Mr. Rinnert says, for two reasons. “We also produce over 80 percent of the products for the Chinese market there,” says Mr. Rinnert. Heraeus started local industrial production over 20 years ago, and now employs 2,600 workers in the region, about half of them in Shanghai. Secondly, he says, Heraeus is well established in a vast range of industries. “Even if at any time things don’t go so well in individual sectors, we can compensate for it thanks to our broad portfolio,” Mr. Rinnert says.

The strategy makes sense, concludes Georg Stieler, managing director of Stieler Enterprise Management Consulting, but the brain drain poses a huge risk, especially for medium-sized companies. “No company can keep all of its employees. When they leave, their know-how leaves the company. That can strengthen future competitors, particularly in China,” Mr. Stieler warns.

The economic planners in Beijing are not only concerned about individual products in key industries being locally manufactured, “The People’s Republic wants to see the supply sector in key areas in Chinese hands,” Mr. Stieler says.

Mr. Rinnert also sees that the business is changing. “The old model of selling products from the West to China is becoming a thing of the past. In many relevant industries, products developed in China will be exported to Europe in the future and increasingly compete with the local economy,” the CEO says. “We can only sustain our position with continuous innovation.”

 

Stephan Scheuer is Handelsblatt’s China correspondent, based in Beijing. To contact the author: scheuer@handelsblatt.com

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