When Rheinmetall AG chief executive officer Armin Papperger talks tanks and cannons, his audience hangs on his every word. If he discusses the automotive sector of his company, eyes glaze over and interest dwindles.
Düsseldorf-based Rheinmetall is certainly in the business of armaments, but it earns most of its money as a supplier of automotive parts to Volkswagen, Daimler and BMW. Mr. Papperger is determined to further expand operations in the lucrative and fast-growing Chinese market through another joint venture with Huayu Automotive Systems Co. Ltd. (HASCO) in Shanghai.
Rheinmetall’s KS Aluminium-Technologie in Neckarsulm, which designs and manufactures lightweight aluminum crankcases ranging from simple four-cylinder engines for compact cars to complex 12-cylinder engines designed for limousines, employs 1,000 and has annual sales of about €200 million. Hasco, a division of Shanghai Motor Corp. Ltd., will provide the cash to finance the expansion. Ownership will be split evenly between the two companies, according to Rheinmetall.
“We are already working together in other fields and have had good experiences there.”
The search for a deep-pocketed partner to help finance expansion of aluminium products has been going on for a long time. “We are seeking a global presence in order to move the business forward,” said the Rheinmetall board member Horst Binnig.
The deal serves the interests of both parties. The German firm will use Chinese capital to greatly expand operations without adding any debt to its balance sheet. The Chinese company receives access to state-of-the-art engine components for its rapidly growing domestic market.
This is the fourth joint venture between the two companies. Projections call for annual sales from the four ventures to rise from about €700 million ($ 942 million) to €1 billion by 2018.
“The ownership structure is intended to remain unchanged over the long term,” said Mr. Papperger. The long investment cycle is critical to the partnership, as outlays for new facilities will pay off in five years, much longer than most other investments made by the manufacturing company.
A recent report on the Chinese automotive sector by New York-based business consultancy McKinsey & Co. estimates the annual growth in the sector will average 8 percent over the next several years. By 2020, the report says, vehicle sales will reach 22 million, surpassing both Europe and North America.
In recent years, Rheinmetall has invested about €140 million per year in the automotive sector, but those dollars have been spent wisely. The company has carved out a favorable position in the area of emissions controls, which will ignite sales of its products as the developed world continues to address the problems of air pollution. Emissions standards were recently tightened within the European Union with similar measures being considered in North America and China.
The joint venture also helps Rheinmetall by increasing liquidity for its armaments divisions, which produce tanks, artillery and ammunition. The company is Germany’s largest maker of armaments, but the appetite for growth has not been slaked.
There have been rumors the Düsseldorfers are looking at their Munich-based rival Krauss-Maffei Wegmann GmbH & Co., Europe’s leading manufacturer of armored wheeled and tracked vehicles, even though it already is in merger discussions with the French armaments company Nexter Systems. Some politicians have expressed support for a merger between the two German companies, which would require Mr. Papperger to come up with a lot of money to finance such a deal.
So, the financial relief offered by the joint venture with China is a welcome development for the company, particularly because Rheinmetall has been pleased with its previous ventures with Hasco. “We are already working together in other fields and have had good experiences there,” Mr. Binnig told Handelsblatt.
While the previous joint ventures between Hasco and Rheinmetall have produced products exclusively for the Chinese market, the new venture will target the global market for lightweight automotive parts. “Now, we are going one step further by working together throughout the world,” Mr. Binnig said.