Chinese Outward Foreign Direct Investments in Germany. Post-Merger Integration and Its Effects on Labor Relations


Bachelor Thesis, 2016

139 Pages, Grade: 1,3


Excerpt


Content

Figures

Tables

Abbreviations

1 Introduction

2 Literature Review
2.1 Definitions
2.2 Literature
2.3 Literature Overview

3 Conceptual Framework and Methodology
3.1 Chinese Outward F oreign Direct Investments
3.2 Methodol ogy

4 Case Studies
4.1 Case Study 1: Blau AG
4.2 Case Study 2: Grün GmbH

5 Analysis and Discussion

6 Conclusions

7 Reference List

Abstract: Cross-border M&A of Chinese state-owned and private-owned enterprises have rapidly increased in the past decades. The study of post-merger integration and the effects on labor relations is topic of this paper. Two German companies, that have been acquired by Chinese multi-national corporations, have been examined with qualitative research methods in form of case studies and interviews have been applied.

Key words: M&A, mergers and acquisitions, post-merger integration, foreign direct investments, labor relations, human resources, China, Germany

Figures

Figure 2.1: Phases of M&A Process

Figure 2.2: Impact of tasks and human integration process on acquisition outcome

Figure 2.3: Integration approaches

Figure 3.1: China's GDP from 1996 to 2014

Figure 3.2: FDI Net Inflows 2006-2014 in US$ billion

Figure 3.3: China's Foreign Exchange Reserves 1981-2016

Figure 3.4: OFDI flows between 1996 and 2014 in US$ million

Figure 3.5: Chinese Greenfield and M&A Transactions in Germany 2000-2014

Tables

Table 2.1: Exclusive criteria of mergers as compared with acquisitions

Table 2.2: Categorization of Mergers and Acquisitions

Table 2.3: Overview of selected definitions of integration

Table 3.1: Timeline of China's ODI Policy Framework

Table 3.2: Noteworthy Chinese M&A between 2004-2016

Abbreviations

Abbildung in dieser Leseprobe nicht enthalten

1 Introduction

The following thesis deals with Chinese outward foreign direct investments (OFDI) in Germany and the effects of post-merger integration on labor relations. As a result of the economic reforms that have been taking place in China for the past four decades, the People's Republic has become an economic giant, rapidly making cross-border investments across the globe. Backed by large amounts of currency reserves, China's OFDI reached a record breaking US$ 114 billion in 2014 (UNCTAD 2016), making it one of the top three global investors. The impending acquisition of Swiss Syngenta by China's state-owned enterprise China National Chemical (ChemChina), worth over US$ 43 billion dollars (Hjelmgaar and McCoy 2016), illustrates the aggressive expansion into new markets. Germany has also received its share of FDI inflows from China. While investments have remained rather modest in comparison to other countries, the acquisition of KraussMaffei Gruppe or EEF Energy From Waste GmbH—worth billions of euros—have headlined Chinese M&A in Germany. Chinese have topped the M&A discussions in Germany due to the speed at which so-called “hidden champions” are being acquired. The process of M&A is particularly of interest to us, specifically the post-merger integration (PMI) and the effects it has on labor relations.

The literature regarding M&A and PMI are extensive, but the overall selection regarding Chinese M&A and labor relations remains modest. With our paper we would like to contribute to the discussion and broaden the field by providing case studies into two German companies that have been acquired by Chinese companies. In order to do this, our paper has looked at the literature on PMI and extracted the important findings regarding the effects on labor relations. To test the theories, we have applied qualitative research methods in the form of interviews with HR managers and the work councils of these companies. By forming case studies, we then analyzed the data and came to our conclusions.

We believe that the post-merger integration has profound effects on labor relations, particularly when one considers the culture clash between Germany and Chinese enterprises. The differences in both corporate and national culture could play a role in how these M&A proceed to either succeed or fail.

It is important to understand how the employees perceive these acquisitions and the effect it has on them, whether precipitated by their involvement in the process itself or by the changes that come with the acquisitions.

This thesis will begin with a literature review on the current and past state of knowledge regarding PMI. Definitions of mergers, acquisitions and integration are given at the start of chapter two, followed in the second half by the various streams of literature pertaining to the topic. Chapter three will introduce the concept of Chinese FDI and the developments of the past 40 years; in the second half of the chapter, we will present the methodology of research we have chosen for the study and the various methods used. Chapter four consists of two case studies of German companies in the automotive sector that have recently been acquired by Chinese multi-national corporations (MNCs). From these case studies, we will make our analysis in chapter five and provide our conclusions in chapter six.

2 Literature Review

Our motivation behind selecting the reviewed literature streams was to show a chronological path on the subject of post-merger integration (PMI) and its various facets. At the beginning of the literature review, we will give general definitions for the following terms: mergers, acquisitions and integration. We will then suggest a definition for PMI based on our understanding of what the literature has provided (page 8). PMI itself is a wide-ranging topic, which is not limited to the aspects of HR. Consequently, the body of literature is very large. Every research paper starts with the motivation to conduct an in-depth study on a specific subject as part of a larger structure. We find that the literature selected for this paper largely represents the state of knowledge in the field of post-merger integration or, to be more exact, “the human side of mergers and acquisitions” (Buono and Bowditch 1989). In an attempt to facilitate an understanding of the topic and to avoid redundancies, papers with similar findings and research conclusions were left out. Each paper selected represents a certain aspect that either adds to a previous study or that gives opportunity for further investigation.

2.1 Definitions

The term “mergers and acquisitions” (M&A) has its origins in “the large wave of mergers at the turn of the century” (Nelson 1954: 33) that took place in the manufacturing sector of the United States from 1895 to 1904. This is now widely known as the “great merger movement” (Lamoreaux 1985; Strohmer 2000; Vogel 2013, Wirtz 2003; Hackmann 2010), in which 1,800 companies “disappeared into consolidations” (Lamoraux 1985: 2). To this day, the term M&A doesn't have a unified definition but is rather a synthesis of different concepts such as mergers, acquisitions, fusions, takeovers, joint ventures and strategic alliances that are all used synonymously (Wirtz 2003: 10).

Willers and Siegert (1988: 261) understand M&A as any form of external growth, encompassing a wide spectrum that extends from joint ventures to 100 percent acquisitions of a company. Reinecke (1989: 53) defines M&A as the acquisition of a minimum equity of 50 percent in a company, while Behrens and Merkel (1990: 13) define M&A as the mergers and takeovers of companies, parts thereof or their subsidiaries. Müller-Stewens et al. (1999: 1) broaden the term with the suggestion that it is not only the transaction or proprietary rights that define M&A, but also the transfer of control and leadership authority.

Boyle (2000: 2) writes that “M&A occur when two or more organizations join together all or part of their operation”. He argues that the distinction between the two ideas is made on three levels: “the relative size of the individual companies in the business combination, ownership of the combined business and management control of the combined business” (2000: 2). Furthermore, the term merger can be defined both broadly and narrowly. A broad definition is “any takeover of one company by another, when the businesses of each company are brought together as one” (2000: 2), whereas a narrow definition is “the coming together of two companies of roughly equal size, pooling their resources into a single business” (2000: 2). Additionally, in this more narrow definition of a merger, the owners of the pre-merger companies share equity and the senior management is left intact. This is in contrast to an acquisition, which is the actual takeover of company equity, including management (2000:4). Boyle (2000) expands on the distinction between mergers and acquisitions with his list of five (Table. 2.1) major criteria that are exclusive to mergers:

Abbildung in dieser Leseprobe nicht enthalten

Table 2.1: Exclusive criteria of mergers as compared with acquisitions . .[T]he coming together of two companies of roughly equal size, pooling their resources into a single business” (2000: 2)

“.[N]either company is portrayed as the acquirer or acquired” (Boyle 2000: 3)

“Both parties participate in establishing the management structure of the combined business” (2000: 3)

“[B]oth companies are sufficiently similar in size that one does not dominate the other when combined” (2000: 3)

“[A]ll or most of the consideration involves a share swap rather than a cash payment, etc. In a merger, very little if any cash changed hands” (2000: 3)

Source: Own table, citing Boyle (2000: 2-4)

Boyle (2000) maintains that an acquisition (or takeover) of a company by another company is defined by the acquiring enterprise's interest in purchasing both the acquiree's controlling equity (or stock) and its core operation and assets (2000: 4). In “Post-Merger-Integration”, Gerds (2000) acknowledges the need to differentiate between the terms and sheds further light on any form of cooperation that is based on trade associations, strategic alliances and joint ventures. These forms of cooperation only have a light impact on the economic autonomy of the companies that are involved in M&A (2000: 9). For the sake of simplicity and to make a clear distinction between mergers and acquisitions, we suggest the following categorizations based on Boyle (2000) in Table 2.2:

Abbildung in dieser Leseprobe nicht enthalten

Source: Qwn table, citing Boyle (2000)

Extrapolating from the definitions above and the works of previous authors, we will henceforth use the term M&A for any coming together of two companies in which one company loses its economic and legal autonomy to the other, as suggested by Hackmann (2013: 13). Just as the literature delivers a plethora of definitions for the terms “mergers” and “acquisitions”, so too has the term “integration” been broadly defined. In Table 2.3 we have used the overview of selected definitions found in Gerds (2000: 13), who is following Gerpott (1993: 116):

Abbildung in dieser Leseprobe nicht enthalten

Source: Own table, following the table from Gerds (2000: 14), who followed Gerpott (1993: 116), with the exception of Schrivasta (1985), found in Bucerius (2003)

Considering the variety of the definitions presented in the above table, scholars have argued that there is no unified definition for the term integration (Gerds 2000; Strohmer 2000, Brast 2005). Bucerius (2013) suggests a solution by asking what goals and outcomes are to be achieved with integration, what the object of integration is, and what specific measures and activities should be applied and/or undertaken (Bucerius 2013: 14). Value creation in the form of sales and revenue, transfer of know-how, or utilization of resources to which the acquirer had no access prior to the deal is an important goal that should enter into the discussion about integration.

Gates and Very (2003) propose a value creation framework that takes into consideration the acquirer's strengths and their capability to capitalize on resources that will boost revenues and sales, as well as the “ability to exploit sources of cost reduction” and the preservation of the “intrinsic values” of both companies (Gates and Very: 2003: 171).

Lindgren (1982) and Chakrabarti (1990) disagree on their understanding of the term integration. The former (Lindgren 1982: 61) sees both the subsidiary (the object) and the changes in the system (by the acquirer) that affect the processes in the subsidiary as being in the forefront of the discussion, while the latter (Chakrabarti 1990: 263) sees the companies as two separate entities that engage with each other to create a new unit of organization, thus becoming the object of integration. Bucerius (2013: 16) suggests that Shrivasta's definition (1986) offers the most value, as Shrivasta (1986: 65) proposes that for a single integration unit to be formed, the processes have to be extracted from different layers of the integration. If these layers are ranked by the degree of challenge, the bringing together of the accounting departments and the creation of a new legal body turns out to be less problematic than, for example, “the integration of physical assets, product lines, production system and technologies” (1986: 65). One of the big challenges—if not the biggest—seems to be for the personnel on a managerial level, which can cause a clash between the corporate cultures and management's standpoint (1986: 65).

At this point we would like to suggest a definition based on the listed concepts and definitions of both M&A and integration that describes the term post-merger integration (PMI) as follows: post-merger integration is the process of transferring and adapting the structural, cultural, intellectual, locational, legal, economic and technological resources from one formerly independent company to another for the purpose of strengthening one's position on the market, creating synergies, increasing the company value and gaining cost and competitive advantages by utilizing the acquirer's companies strengths and advantages after the acquisition has been made.

2.2 Literature

Before we continue to identify the streams of literature that address both the study of PMI in greater detail and those aspects of PMI relevant to this paper, we would like to briefly review the different phases that the M&A process goes through (see Figure 2.2.).

Looking at the M&A process as a whole, three distinct phases can be identified—all necessary to reach the goals and intentions set by the involved companies (Buchner 2002; Gerds 2000; Hackmann 2010, Kuhn 2010). In the pre-merger phase, management must strategically plan, prepare, develop and formulate the corporate objectives of the merger. The acquiring company must analyze the potential augmentation or complementation to the strategy of the acquiring company and determine how much value it can add or create. This is known as the “strategic fit” (Dietrich and Kraft 2012: 394). The company's administration, size and form are also factors that are equally important as part of the “organizational fit” (2012: 394). Once a candidate has been identified by carefully scanning the market based on the developed objectives and goals, the acquirer can set out to contact the candidate and perform a stringent evaluation of the company. The speed at which this phase will transition into the next phase depends on the objectives and goals set in place. A more aggressive expansion strategy will translate to a faster shift into the transaction phase (Hackmann 2010: 19).

In the transaction phase, the acquirer has to gather all the necessary information needed to be able to evaluate how well the acquisition will meet the objectives and conditions originally planned for. The acquirer must carefully analyze and evaluate all opportunities, risks, strengths and weaknesses connected to the merger and weigh the results against the targets and goals (Hackmann 2010: 19). This process, which can be implemented by both sides—buyer and seller—is known as due diligence. Depending on the kind of investment that is to be undertaken—strategic or financial—the due diligence process can have different mechanisms and angles. While the strategic investor wants to increase his return on investment (ROI) and strengthen his market strength and potential, the financial investor is interested in maximizing his internal rate of return. It is not unusual for the financial investor to liquidate his shares (or equity) in the company once these the targets are met (Pomp 2015: 11-12). The results from the due diligence process help the buyer (buyer side due diligence) to go into the negotiations with a target price, i.e., an accurate bid for the acquisition, while the seller (vendor side due diligence) is prepared to counter accordingly (2015: 12). A stringent execution of due diligence, which includes an evaluation of the financial and tax records and legal documents, as well as environmental aspects, will minimize the danger of the M&A failing in the post-merger phase. Once the due diligence process has been completed by both sides and the parties are confident with the results, an offer can been made (and countered accordingly), the agreement drafted and the contracts signed. The process now enters the post-merger phase.

Gerds (2000) subdivides the post-merger phase into two separate phases or stages. The first phase is the planning phase, also known as the “stage setting stage” (in Haspeslagh and Jemison 1991: 169), in which the preparation for all organizational procedures occurs after the contracts have been signed. Within the framework of the stage setting stage, an integration plan is designed based on the activities, responsibilities and milestones during the organizational procedures (Gerds 2000: 13). The second phase, or the “project phase” (in Balloun and Gridley 1990: 91), is the actual execution of the integration plan. Here the teams are built, each with different tasks to carry out in the actual integration (Gerds 2000: 13). Alternatively, Grube and Töpfer (2002: 46) divided the post-merger phase into integration management (also Gerds 2000: 17), in which the planning, analysis of capabilities and inclusion of strategy are factored in, while the actual carrying out of the tasks on the strategic, organizational, administrative and cultural levels is known as the integration procedures, i.e., the second phase.

Despite the large amount of literature surrounding PMI, there is a constant scholarly need for further research into its various aspects, particularly the “human side of mergers and acquisitions” (Buono and Bodwitch 1989), which is the focus of this paper.

Although every PMI involves multiple aspects of integration management, many see the human resource and labor relations components as a key factors in the success or failure of M&A (Thomas et al. 1994; Applebaum et al. 2000; Bohlin et al. 2000; Schuler and Jackson 2011).

For the above given reasons, we have reviewed various streams of literature on PMI and identified the relevant works that have contributed to the study of this specialized field. In order to make the literature on the concept of labor relations in PMI more manageable to follow, we have arranged the various streams in chronological order, but didn't hesitate to cross-reference with more contemporary streams if necessary.

Even though Buono et al. (1985) studied the effects of a merger of two equals (see Table 2.2. citing Boyle's definition [2000: 3]) on labor relations and organizational culture, the findings can nonetheless be applied to both mergers and acquisitions. In their study Buono et al. (1985) analyzed the merging of two banks and the effects it had on the employees and the organizational culture at the newly formed company. The study undertook to answer how workers perceived the former and newly formed company, what the general attitude towards their co-workers was and how the perceptions and attitudes were formed (1985: 478)—particularly in regards to the “potency of organizational culture and the acceptance of the merger” (1985: 495). The study found that while employees were visibly uncomfortable during the pre-merger period, they ultimately came to terms with the situation. However, during the merger phase, employees of Bank A communicated clear discontent with the situation, as they perceived Bank B to have too much control and influence on the culture and procedures of the new bank. On the other hand, the surveys and questionnaires from Bank B showed that the employees of Bank B felt much less “alienated and negative after the merger” (1985: 495). The employees in Bank A didn't experience the merger as a “merger of equals” (Boyle 2000:3). The study showed that “hard organizational factors and characteristics” (Buono et al. 1985: 496) such as salary, work hours, et cetera didn't affect the employees as much as the objective culture and management style did. The study concludes that change is something that is accepted if it is understood but that this acceptance is limited in its rate and amount. Resistance to change could emerge when one's culture is threatened. This is rooted deeply in a human being's sense of security and comfort. The sense that one organizational culture “takes over” the other culture can create a climate of distress and lead to resistance or even sabotage. Subculture and counter cultures can emerge, and while the former accepts the change and finds similarities in belief, the latter rejects the dominant culture existent in the new organization (1985: 497).

Noble et al. (1988) focused on establishing important lessons that could lead to merger success. In a case study, the authors analyzed the merger between the two technology companies Burroghs and Sperry, which led to United Information System—Unisys, for short—worth 10 billion dollars (Reitman 1991). Noble et al. portray two companies that are struggling under the shadow of IBM and basing the merger on the assumption “that combing their resources could eliminate redundancies and improve their competitive position” (Noble et al. 1988: 83). The merger led to the announcement of imminent lay­offs numbering in the thousands. Naturally the atmosphere among the employees after such an announcement was one of fear and concern for their livelihood. Management had to find a way to efficiently and effectively transition into the new operation while keeping the employees' concerns in mind. The solution was hiring psychologists and counselors and engaging in open communication about why the measures had to be undertaken. (1988: 84). This was done based on the theory that if sufficient explanation had not been given to the employees, the entire strategy might have failed to succeed. Providing severance packages, relocations, early notification of job eliminations and assistance in finding new employers was not “done out of corporate altruism or blind generosity” but to secure the support of “the survivors” (Barnikel 2007; Gutknecht and Keys 1993; Grieves 2003, Marks and Mirvis 1992). The company recognized that the remaining staff or workers' perceptions of the method in which the employees were laid off could greatly affect their morale and motivation. Investments in severance packages were a small price to pay in this context (Noble et al. 1988: 84).

Shrivasta (1988) documented a similar case, taking a closer look at the DuPont-Conoco Merger,1 which was known at the time as the largest takeover in U.S. history. The value of the deal was worth over US$ 7 billion and was drawn out over months in a bidding war with Seagram and Mobil (Ruback 1982). Shrivasta described the necessity of introducing integration prior to the merger phase. It is vital to include the managers in the analysis of the acquisition and the decision-making process as well as the screening process (Shrivasta 1988: 74). Equally important is proper communication of the merger to all stakeholders. The stakeholders “include stockholders, suppliers, customers, employees, labor unions, government agencies, the press and financial community” (1988: 74). Post-merger activities should include “compensation, employee benefits and personnel policies” (1988: 74) in order to avoid “shocks of ownership changes” (1988: 74), among other negative effects, which have a profound impact on employees—as observed by Shrivasta (1988).

Applebaum et al. (2000) analyzed and discussed the effects of M&A on the employees' stress levels and categorized the effects (and the measures to combat these effects) under the three phases of mergers (see Figure 2.2: Phases of M&A Process). Because the pre-merger phase involves a lot of uncertainty and concern over “sudden” change, there is the need to communicate as much information to the employees as possible, even if it means information overload. The paper suggests that if a sufficient amount of information is not communicated, there is a possibility that fabrication of information will start to set in, which increases stress levels and has a negative impact on the whole organization. It is crucial that the given information is not of a contradictory nature and/or designed to deceive the staff, nor should the information give the employees a false sense of security; i.e., it has to be realistic (2000: 676). Sensitivity towards the feelings of the employees and empathy for their pain should be displayed (2000: 676). Managers who are not able to deal with this situation should be trained to acquire the necessary soft skills for this task. Another important observation is the fact that some employees—due to uncertainty regarding their future—will create a competitive space in order to keep their jobs. This can cause hostility amongst the staff and cripple “the organizational goals and requirements at hand” (2000: 676). Those that choose not to fight might end up leaving the company, which can lead to the loss of knowledge and experience. The merger can also have numerous effects on the former CEOs and managers of the target company due to the fact that they are usually “the most creative and innovate people in their company” (2000: 676). Once power and the high status that comes with the position is essentially removed from these individuals, complications with health and well-being can set in. In fact, the stress levels of these individuals can actually “work [their] way through the chain of command and affect subordinates as well” (2000: 676). While the middle phase, or “merger phase”, is dominated by the tasks and measures identified as necessary by Noble et al. (1988) (e.g., severance packages, consultations, assistance with finding new employment, et cetera—found to reduce stress, anxiety, fear and the concerns of employees) the post-merger stage is dominated by something called “the merger syndrome” (Mirvis and Marks 1985 in Applebaum 2000: 678). The syndrome's effects can be observed at the top chain of management and is seen as the “cause of failure of otherwise healthy, mutually beneficial mergers (following Mirvis and Marks 1985). One of the causes could be because of “crisis management techniques during the actual merger process” (Applebaum 2000:678). This phase is described as particularly burdensome for survivors, who now have to face new changes and concerns about failing to integrate into the new company as well as their new position in the hierarchy. During this phase, the employees display a high amount of dependence on each other in order to work through the change. The authors of the study, after recommending a number of measures and precautions during each phase, come to the conclusion that communication, paying attention to the concerns of the employees and empathy are the keys to successfully minimizing the amount of stress that the merger places on each employee. The positive effects of correct measures can keep the negative effects in bounds and positively affect the post-merger phase. Ultimately, the survivors of the new company have to feel comfortable at the new company and with their new positions (2000: 683), which in turn can precipitate a successful merger and reduce the chances of failure.

Building on Haspeslagh and Jemison's (1991) study on integration and their categorization of four different schools of thought on acquisition (financial economics, strategic management, organizational behavior and process perspective), Birkenshaw et al. (2000) addressed the processes that provided specific value creation for an acquiring firm through “the human aspect” in their study of three Swedish M&A (Birkenshaw et al. 2000: 396). While the authors both agree that in the main bodies of literature, the two most researched aspects of PMI are (a) the importance of viewing the process itself (how effectively management leads the PMI) and (b) organizational behavior perspectives (goals and targets being met by successfully managing the process, proper communication with the employees and showing a sensitive approach to their concerns) (2000: 398), they admit that there is a difference in how both these perspectives view the objective functions of PMI. The process perspective is concerned with value creation through “transfers of capabilities and resource sharing” (2000: 298), while the organizational behavior perspective sees value in the satisfaction and shared identity of both companies (2000: 398). Furthermore, task integration is defined as “the identification and realization of operational synergies” (2000: 400), while human integration is defined as “the creation of positive attitudes towards the integration among employees on both sides” (2000: 400). Figure 2.2 illustrates the effect of both dimensions in relation to the emphasis given to each and serves as an example of the outcome of the study.

Building on a study from Forbes 500, in which CEOs were asked why most mergers are not able to produce synergies, Bohlin et al. (2000) found that one of the main factors of failure — from the CEOs' perspectives— was the incompatibility of cultures (2000: 226). While the shareholders are able to gain and profit from rationalization, streamlining processes and the elimination of duplication and redundancies, it is quite difficult to actually implement these measures. A mere reduction of the workforce will not bring forth the synergies that are required. To achieve these goals, it is important that the entire organization works and pulls through with the merger, i.e., are committed and engaged. The new company will suffer and eventually unravel if knowledge capital is lost, employees from “the other team” feel that they are treated as second class citizens and if the actual process of merging the company is not innovative enough. Employees will surrender and not care enough about the business. Opinions that are not valued or even heard lead to de-motivation and lack of support for the company by employees. If the entire process is deemed unreasonable or unjust, the merger can cause the loss (dysfunctional turnover) of good employees, who leave in the hopes of finding better jobs and challenges (2000: 226). Just as the due diligence process is important prior to the merger, there must also be a cultural due diligence process. The managers must analyze and evaluate the “historical and present labor/management culture and resource policies and procedures” that make up the way employees see the elements of culture (2000: 228). Sudden changes in the way employees work, clock in, receive incentives or arrange their work day can critically disrupt the environment. This is why surveys, questionnaires, interviews and overall communication with the employees must be factored in and used “to identify areas of similarity and dissonance” (2000: 228). Synergies can be achieved through communication and by involving the employees in the actual merger. By building merger teams and advisory groups, management communicates the willingness and intent to achieve the goals together. This gives employees the feeling of being needed in the “new” company and helps them contribute to the innovation, vision and architectural design of the merger. Through this synergy of human integration, the “new way” can replace the “old way” and satisfaction can be achieved by giving the employees the chance to participate and contribute to the success of the merger (2000: 231).

In their case study of a merger between two high-tech companies from Israel (Alladin) and Germany (FAST), Weber and Tarba (2011) analyzed the effects that organizational culture and national culture have on the degree of integration. Weber et al. (2000) suggested a multi-level approach defined by absorption, preservation and symbiosis (using terminology of Haspeslagh and Jemison 1991) illustrated in figure 2.3:

The paper proposes that national cultures play an equal—if not greater—role in addition to the confrontation between corporate cultures. The reason for this is the premise that “national culture represents a deeper layer of consciousness, and should therefore be even more resistant to change than corporate culture” (Weber and Tarba 2011: 204). When doing cross-border M&A, the effects of national and corporate culture distance have to be addressed in order to find a correct approach to the integration process and the implementation. Through optimal integration approaches, international M&A can achieve higher levels of success than other M&A. The study suggests that national and organizational culture significantly impacts the “complexity” of mergers and PMI processes (2011: 214).

2.3 Literature Overview

Author, Date and Summary

Buono et al. (1985): Buono et al. analyze the merger of two banks from the organizational culture perspective in a case study. Cultural and organizational climate is researched through information gathered from archives, interviews, questionnaires and observations. The authors come to the conclusion that although the companies are from the same industry, there are still major difficulties in merging two different organizational cultures.

Noble et al. (1988): Noble et al. explain why and how acquisitions take place by looking at the strategic rationales behind M&A. Particular attention is given to the shortcomings of managers who underestimate the PMI process. They also recommend eight lessons for merger success based on case studies from U.S. industries.

Shrivasta (1988): Shrivasta builds on the false assumptions of companies that growth will automatically set in after M&A. Evidence based on case studies finds that the key for growth is a fundamental approach to PMI and its explicit needs.

His framework guides merger managers into identifying which types of PMI (physical, procedural, managerial, socio-cultural) are needed to create the right strategies and to successfully apply them.

Haspeslegh and Jemison (1991): Haspeslagh and Jemison identified the four challenges in M&A that stood out the most during interviews with managers: (1) making sure that the strategy remains consistent with the decisions for the acquisition, (2) proper assessment of decision-making that will enable firms to make the right M&A, (3) correct transfer of capabilities after the acquisition and ensuring the involvement of participants, (4) embracing the learning curve during the acquisition and adapting to new challenges in order to change strategy and organization when needed. The research uses a case study of BASF's acquisition of three U.S. companies in the mid-1980s.

Applebaum et al. (2000): Applebaum et al. study the issue of stress for employees during M&A and the uncertainty of the outcome for the individuals. The article also gives post-M&A strategy tips and guidelines for managers. The three phases of M&A can be subdivided into stress, corporate culture, communication and strategy. The paper gives managers the theoretical tools to assess the individual situation in each phase accordingly.

Birkenshaw et al. (2000): Birkenshaw et al. researched the PMI process of multinational Swedish companies, using questionnaires and interviews. Effective integration was proven by a two-phase approach. In the first phase, task integration was the focus of the process, with limited interaction between buyer and seller, which led to a calm transition of the human integration process and successful cultural convergence. The second phase built on the success of the first phase and its effects on human integration in order make both companies more interdependent. They found that the individual operational units had to have a high level of performance for there to be effective task integration and that human integration was a difficult process to manage, but critically important to the success of the acquisition.

Bohlin et al. (2000): In their study with Forbes, Bohlin et al. analyzed the failure rate of attempted synergies and the contributing factors such as incompatibility of cultures.

The organization during the PMI requires the commitment and engagement of employees. It also looks at the dangers of de-motivation and the lack of cultural due diligence before the merger. Their findings include the necessity for communication between managers and employees, thereby giving the employees the feeling that they are part of the process rather than byproducts of it.

Weber and Tarba (2011):

Since research in M&A has gained strong traction in the past couple of decades—which is undoubtedly associated with globalization and the need for companies to investigate new markets, exploit new resources, find new revenue streams and customers and profit from various local advantages—the general direction of literature is most definitely going towards the analysis of cross-border M&A. One example is Weber and Tarba's (2011) study of the M&A of the Israeli company Alladin and the German FAST.

We find that our paper will contribute to the ongoing discussion of OFDI. While we acknowledge that an absolute research gap has not been fully identified, our paper will positively add to the body of literature by analyzing two case studies by analyzing two acquisitions of German companies2, that are active in the automotive industry, by Chinese firms in the last five years. We also believe that since a PMI study that relates to the effects on human resource and involves these two particular companies has not yet been done, it represents a unique study and should be valued for its attempt to test theory against practice.

3 Conceptual Framework and Methodology

3.1 Chinese Outward Foreign Direct Investments

China's explosive growth over the last 20 years (see Figure 3.1) and its role in the BRICS3 countries has been a focus of attention for quite some time. In 2014 the People's Republic of China boasted a gross domestic product (GDP) of US$ 10.35 trillion, making it the second largest economy in the world behind the United States (US$ 17.4 trillion). China alone represents 85 percent of the total GDP of East Asia and the Pacific as well as 13 percent of the world's GDP (World Bank 2016a). The country's average GDP growth has been 10.08 percent over the past 25 years (World Bank 2016b).

China's GDP from 1996 to 2014

Source: Own figure, based on World Development Indicators from the World Bank (2016b)

Abbildung in dieser Leseprobe nicht enthalten

Figure 3.1: China's GDP from 1996 to 2014

One of the many reasons why China's economy grew so fast was because of the economic reforms that were adopted in the late 70s. The Chinese economic reforms that started in 1978 have essentially transformed the once planned economy into a type of social market economy. Unlike some of the sudden changes that took place in Eastern Europe, China's transition has been very gradual. While the 1970s were shaped by the opening of global trade, TVEs, and the permission to make foreign investments through EJWs, the 1980s saw a rather profound series of changes such as introduction into the IMF and the World Bank, the opening of coastal cities and regions to attract FDI, the establishment of economic zones and the acceptance of the private sector as being integral to the state sector. In the 1990s the first two stock markets were opened in Shenzhen and Shanghai, tax reformation took place, the communist party officially endorsed the social market economy as a goal and banking reforms were intended to protect China from massive inflation and an overheated economy. The collapse of TVEs led to China pushing for more privatization, while the Asian Financial Crisis led to a number of responsive reforms in the financial sector. The century ended with China joining the WTO. Since 2000 China has been loosening its stranglehold on the economy, protecting private property and allowing private trade of A and B shares, all while investing billions of dollars in stimulus packages (CSIS n.d.).

As impressive as China's growth has been over the past 25 years, it seems to be slowing down due to recent economic transitions. According to a report by KPMG (2014), “China is now a pursuing more sustainable growth pattern” (KMPG 2016: 5), while at the same time, the following effects have been observed: negative impacts from overcapacity of production of traditional products such as steel, high-value production of technologies which traditionally had not been a priority in China, lower prices on the real estate market, a reduction in the government's interference in SOEs and the allowing of effective capital management for private investors (KPMG 2014: 4; Wildau 2014). The government is also “moving to streamline administration, delegate power, and encourage entrepreneurship and innovation” (Wei 2015) with the goal of making China a high-income developed nation and changing “gears from high-speed growth featuring quantitative expansion to medium-to-high-speed growth that features qualitative improvement” (Wei 2015). For this to happen, China will be investing heavily in both upgrading production lines and in R&D. Nevertheless, until China has made this transition—which may take years to complete—growth has been forecasted to decline between 2016 and 2020 by up to 3 percent (Trading Economies 2016). Be that as it may, China has been able to penetrate the global consumer market with high quality technologies and products in recent years. Chinese Emerging Multinational Companies (EMNCs) like Huawei, Xiaomi or ZTE—virtually unheard of 10 years ago—have firmly established themselves on the list of the biggest tech companies in the world by producing high quality mobile phones and computers that can compete with Apple and Samsung. In 2015, Sinopec, China National Petroleum (ChinaChem) and State Grid—although SOEs—were in the top ten of Fortune Global 500, with Sinopec and China Petroleum occupying second and fourth place. As of 2015 there are a total of 100 Chinese companies in the Fortune Global 500 (Fortune 2016), whereas in 1996 there were only two (KPMG 2013).

China's exponential growth and low costs of labor, coupled with the opportunity to serve over a billion customers in one of the World's largest markets, has attracted high volume investments by MNCs and even SMEs from all over the world (He and Lyles 2000). The opportunity to serve the Chinese market while also producing cost effectively for domestic markets has made China the number one recipient of inward FDI,4 surpassing the United States for the fourth year in a row in 2014 by over US$ 158 billion (see Figure 3.2), with an additional US$ 115 billion of FDI inflow into Hong Kong (World Bank 2016c).

Abbildung in dieser Leseprobe nicht enthalten

Source: Own figure, based on World Development Indicators from the World Bank (2016c)

Figure 3.2: FDI Net Inflows 2006-2014 in US$ billion One of the main strategies for strengthening and securing China's economy—next to relaxing restrictions on inward FDIs since the economic reform—has been outward FDIs. China has massive currency reserves, averaging over US$ 837 billion between 1980-2016 (see Figure 3.3), with a record high of US$ 4 trillion in April 2015 (Trading Economics 2016b).

Abbildung in dieser Leseprobe nicht enthalten

Figure 3.3: China's Foreign Exchange Reserves 1981-2016

The government actively encourages companies to invest in cross-border M&A. Due to the massive amounts of currency reserves and the fact that the government controls the largest banks and capital institutions, more Chinese companies are supported in going global to acquire strategic assets (Alon et al. 2012) and “to catch up with global giants (Deng 2007: 74). Competitive advantage and performance are determined by strategic assets according to Barney's (1991) resource-based theory (Barney 1991: in Deng 2007: 74). Amit & Schoenmaker (1993) define strategic assets as “as set of difficult to trade and imitate, scarce, appropriable and specialized resources and capabilities that bestow the firm's competitive advantage” (1993 35: in Deng 2007:74). Cross-border M&A have been an excellent source for Chinese companies to gain these assets and have been at the center of China's “Go Out Policy” (also known as “Go Global Strategy”). The policy has gone through a number of changes in the past decades and has seen a number of restrictions lifted.

According to a working paper published by BBVA Research (2015), China's ODI Policy Development can be divided into seven phases, from 1979 to the present (see Table 3.1).

Table 3.1: Timeline of China’s ODI Policy Framework

Abbildung in dieser Leseprobe nicht enthalten

Source: Own table, Working Paper Number PB09-14, Peterson Institute of International Economics and BBVA Research: in Casanova et al. (2015)

In 2014, during a press conference by the Chinese Ministry of Commerce, spokesman Sheng Danyang told Pheonix TV that China had accumulated outbound investments of over US$ 116 billion for the present year and that China had now transitioned to “become a net exporter of capital” (MOFCOM 2015a). Adding reinvestments by third- party financing, it had surpassed—for the first time—the inward FDI of US$ 120 billion by over US$ 20 billion (MOFCOM 2015a). China has been a top three global investor next to the United States and Japan ever since ODI outflows reached US$ 55 billion. Additionally, China became the number one global OFDI investor among the BRICS countries by surpassing Russia in 2008 (Yanlin 2013; UNCTAD 2016) (see Figure 3.5), while being well on its way to becoming the biggest global investor by 2020, “which includes investing in corporate mergers, acquisitions and start-ups” (Anderlini 2015).

In 2015 completed mergers and acquisitions reached over US$ 1 trillion globally, with China being responsible for US$ 61 billion (6 percent of the global M&A) of that amount. By comparison, China's stock in M&A was worth around US$ 2.5 billion in 2004, which equates to a 2400 percent increase in a little over ten years. In 2013 China's M&A value peaked at 10 percent of the total global M&A (Hannemann and Gao 2016). The sectoral landscape has also changed since 2004. While energy and material assets made up the majority of Chinese M&A targets, diversification has led to an increased amount of M&A with industrial targets such as consumer business, automotive, technologies, media and telecommunications (TMT), financial services and manufacturing (Hannemann and Gao 2016; Global Chinese Services Group 2015). Table 3.2 gives an overview of some of the diverse and noteworthy M&A by Chinese companies in the past twelve years.

Table 3.2: Noteworthy Chinese M&A between 2004-2016

Abbildung in dieser Leseprobe nicht enthalten

Source: Lenovo (2004), Reuters (2007), CBCNews (2009), Welch, D. (2010), Kung and Back (2012), Butler, K. (2013), Halverson, N. (2015), Dawson, C. (2015), Barreto, E. (2016), Zha and Kirchfeld (2016)

The lion's share of Chinese ODI stock has been gathered by Asia (US$ 447 billion), followed by Latin America (US$ 86.1 billion), Europe (US$ 53.2 billion), North America (US$ 28.6), Africa (US$ 26.2) and the Oceania, with US$ 19 billion (BBVA Research 2015: 8). Between 2000 and 2015, the U.K. has been the European beneficiary of the largest Chinese ODI stock with cumulative investments of €15.2 billion, followed by Italy (€11.2 billion), France (€9.4 billion) and Germany, with €7.9 billion (Hanemann and Huatori 2016). Italy's strong numbers in 2015 are a direct result of ChemChina's (China National Chemical) acquisition of Italian tire maker Pirelli for €7.1 billion, which turned over 143 years of Italian ownership to the Chinese SOE (Arosio and Masoni 2015). As big as these recent acquisitions have been, they might be dwarfed by ChemChina's recent proposal to buy the Swiss rival Syngenta for a stunning US$ 43 billion, which could become the biggest Chinese outbound acquisition of all time. Syngenta recently rejected an offer from Monsanto for US$ 46 billion, which fueled the rumor bin that the acquisition would make ChemChina the “largest supplier of crop-protection products” in the world (Hjelmgaar and McCoy 2016).

While the acquisitions of KraussMaffei Gruppe by ChemChina and EEF Energy from Waste GmbH by Beijing Enterprise might only be worth a fraction of the Syngenta deal (or the Nexen deal for that matter), they are still record-breaking takeovers in Germany. China remains one of the most important trading partners for Germany, accounting for 7.5 percent of German foreign trade. Bilateral trade had reached over €154 billion in 2014. Germany's own OFDI stock on China has risen to a total of €48 billion—in comparison to China's ODI at €7.9 billion—with an estimated 5,200 companies invested in The People's Republic (GCCC 2015: 2-3). The EEF acquisition is the first legit billion-plus Euro acquisition of a German company by a Chinese acquirer, followed by a close €935 billion for KrausMaffei Gruppe.

Figure 3.6 illustrates the investment values and the exponential growth of Chinese M&A between 2000 and 2014, found in Hanemann and Huotari's (2016) Report on Chinese ODI in Europe. So far, the investments in Germany up to April 2016 will already be twice as valuable as 2013 and 2014, respectively.

Figure 7: Strong Outlook for Chinese OFDI in Germany Chinese investment in Germany, 2000-2015 FUR million

Abbildung in dieser Leseprobe nicht enthalten

Source: Hanemann and Huotari (2016: 9)

Figure 3.5: Chinese Greenfield and M&A Transactions in Germany 2000-2014

Abbildung in dieser Leseprobe nicht enthalten

SOEs made up 50 to 70 percent of strategic investments. Private entities invested in agriculture, biotech, real estate, TMT, and energy, while SOEs still concentrated on the “traditional” Chinese investment sectors such as metals, minerals, industrial/automotive/aviation equipment and transportation (Hanemann and Huotari 2015: 22). The most popular locations of Chinese M&A have been Lower Saxony, North Rhine-Westphalia, Baden-Württemberg and Bavaria (2015: 16). The combined GDP of these four German regions in 2014 made up 63.3 percent of all sixteen federal states (Statistical Offices of the Laender n.d.). These regions have a very high rate of “Hidden Champions”, i.e., companies that occupy the top three ranks of market leadership in their respective markets, make under € 3 billion in yearly revenue and are usually not very well known to the public (Simon 1998: 14 and 2007: 29 found in Pitroff 2011). Of the 2,734 hidden champions, 1,307 of them are from Germany (Simon 2014), which is one of the reasons that Germany is such an attractive market for Chinese acquisitions. While 40 percent of acquisitions between 2001 and 2005 were for market entrance, the number has gone down by 11 percent in the last five years, at the same time that there has been an increase of 22 percent in acquisitions for the purpose of investing local know-how (Raffel 2016).

The rate at which Chinese M&A have been taking place in Germany has not gone without notice by the public and media. According to the “Global Attitudes Survey” by PEW Research (2014: in Hanemann and Huotari 2015: 30), 80 percent of Germans still have a negative perception of foreign takeovers of German companies. In a study (N=2600) carried out by Huawei (2014), in cooperation with GIGA German Institute of Global and Area Studies und TNS Emni, 79 percent of Germans thought that Chinese companies want to steal German technologies and innovations, while only 8 percent thought that China developed their own products. 71 percent also thought that China just copied western products (Huawei 2014: 103). While the general reception of Chinese M&A by the public might be negative due to the perception that China is an exporter of products of lesser quality (The Economist 2009; Midler 2010; Ming 2013; Volodzko 2015), managers and politicians have been welcoming investments, and the media has also been objective in covering the motivation behind these acquisitions (Dostert 2016; Friese 2015; Idries 2015; BusinessOn.de 2015; Henrich 2013; n-tv. de 2013; Manager Magazine 2013).

Policy makers in Germany have been especially vocal about the need ease the trade policies with China. Since 2003, China and Germany have had a bilateral investment treaty, i.e., BIT (Shen 2012), which ensures that investments are protected and not discriminated against or treated arbitrarily (Investmentpolicyhub n.d.). The new Double Taxation Treaty (DTT) between Germany and China, which has been in place since 2014, also eases FDI schemes and makes taxation more transparent. When the EU proposed a 47 percent provisional levy against Chinese solar panels, Germany took a clear stance against such a measure. Philipp Rösler was quoted as saying that Germany was in favor of an “open market and fair competition” and he clearly voted no on the need for penalties (Industryweek 2013). This stance demonstrates Germany's interest in keeping disruptions from hurting the much valued trade partnership, for obvious economic reasons.

So far, the overall theme has been that Chinese acquirers tend to leave operations and management intact and are interested in acquiring technological know-how, management strategies and market positioning (Freitag 2011). The preferred method of integration seems to be a “light touch approach” (Bruche and Wallner 2013). Andreas Sahl, Head of Large Corporates at the LBBW Bank, says that Chinese investors intend to keep corporate locations in Germany because they value the merchandise mark “Made in Germany” as a seal of quality (Wickel 2014). Plants and companies aren't stripped, disassembled and reassembled in China, but are maintained the way they were before the M&A (Doll and Hartmann 2012). Management and operations are kept intact, as confirmed by Karl Krause, CEO of Kiekert AG, an automobile technology company that specializes in high quality side-door latches, among other things (2012).

In light of this reputation that Chinese M&A have developed, we propose to put the theory of PMI, in conjunction with Chinese M&A in Germany, to the test. There have been a number of studies related to Chinese M&A in Germany in the past few years. However, most studies tend to focus on the numbers and motives behind these acquisitions as well as the policies, strategic interests, issues with market entry, impacts on economies and climate of trust (Xu et al. 2012, Jungbluth 2013, Hannemann and Huotari 2015, Reisach 2016). One study in particular looked at the PMI process of Chinese OFDI in Germany but only touched on the issues with labor relations on the outskirts of the study (Otto 2013).

At this point we would like to propose our research question by asking, “How do the post-merger integration processes of Chinese FDI in Germany affect labor relations?” The question leads us to hypothesize that Chinese FDI in Germany negatively affect labor relations in the post-merger integration process.

[...]


1 DuPont decided to divest in Conoco in 1998. The deal had a net worth of US$ 15 billion dollars by offering public stocks (Bloomberg 1998).

2 Company names have been anonymized at the wish of the managers. More in section 3.1 Methodology.

3 BRICS is short for Brazil, Russia, India, China and South Africa. These countries represent the fastest- growing countries in so-called emerging markets, with a combined GDP of US$ 16.6 trillion dollars, making up 21 percent of the world's GDP.

4 “Foreign direct investment refers to direct investment equity flows in the reporting economy. It is the sum of equity capital, reinvestment of earnings, and other capital” (World Bank 2016c).

Excerpt out of 139 pages

Details

Title
Chinese Outward Foreign Direct Investments in Germany. Post-Merger Integration and Its Effects on Labor Relations
College
Berlin School of Economics and Law
Grade
1,3
Author
Year
2016
Pages
139
Catalog Number
V984211
ISBN (eBook)
9783346362377
ISBN (Book)
9783346362384
Language
English
Keywords
China, Germany, FDI, M&A, post-merger intergration, SOE, POE, labor relations, HR, Personalmangement, human resources, foreign direct investments, mergers and acquisitions, imf, IPO, OFDI, WTO, MNC, R&D, ROI, EJW
Quote paper
Schahram Ghalebegi (Author), 2016, Chinese Outward Foreign Direct Investments in Germany. Post-Merger Integration and Its Effects on Labor Relations, Munich, GRIN Verlag, https://www.grin.com/document/984211

Comments

  • No comments yet.
Look inside the ebook
Title: Chinese Outward Foreign Direct Investments in Germany. Post-Merger Integration and Its Effects on Labor Relations



Upload papers

Your term paper / thesis:

- Publication as eBook and book
- High royalties for the sales
- Completely free - with ISBN
- It only takes five minutes
- Every paper finds readers

Publish now - it's free