Gaining a foothold in unfamiliar territory

New Terrain China Subsidiary Startup

New territory - In 2013, a German company with a history of more than 150 years in the machine tool industry and with several factories already in four countries decides to set up production, sales offices, purchasing and a design office in China. 

This decision had become necessary in order to remain attractive to the company's own customers, who have also expanded in China. 

The initial situation: A new subsidiary

The company, which has no experience in China, wants to set up a subsidiary in China with the support of the German Chamber of Commerce and a German bank.

However, the advising bank and also the lawyers reject the foundation and cannot support the company extensively.  

The emerging difficulties in the unfamiliar terrain

As the months go by, the customs clearances, building and other permits become more and more complicated. Among other things, the company is forced to produce its own electrical energy. To make matters worse, the supply of diesel is becoming increasingly complicated. 

Since the original consultants can no longer handle the increasingly complex start-up process, local agents are more frequently called in to handle the bureaucratic hurdles, since they can better understand the difficulties on site. When selecting external consultants, the Chinese customers support the inexperienced German company. 

After two years, the subsidiary's operating costs will increase by around EUR 560 million. 

The solution: an external consulting team

In order to actively address these problems, the company is now making use of our expertise and experience. After an initial analysis, we determine that the enormous increase in operating costs is largely due to bribes paid to the intermediaries. 

To counteract this development and ensure a successful restart, three main actions are developed. These follow the principle of exit and re-entry as well as customer and supplier protection. 

First, the financial bleeding is to be stopped, targeted losses accepted and employees replaced. Then, the company is to be reorganized to ensure sustained profitability. The third step is to set up market and competitor surveys so that the company can get an overview of the competition and what is happening in the market and better assess its own positioning. To ensure that these actions can be implemented effectively, an external project manager will be appointed who will be integrated into the company's decision-making chain and will observe what is happening on the ground.

Operational measures

Three actions are performed simultaneously:  

  • Environmental analysis and assessment of influences
  • Evaluation of various contacts (Level 2 Due Diligence)
  • Risk mapping (limited to the current situation)
  • Immediate dismissal of the Chinese local management
  • Replacement team from Germany
  • Strengthening of the interim management in Germany with 2 binational consultants with many years of experience in Germany
  • Organizational measures
  • Search for and hire three recognized consulting firms in China to manage legal, HR, B2B industry engagement. 
  • Analysis, definition and implementation of the new organization (partial transfer of the main function abroad)
  • Establishment and training of the environmental survey organization
  • Additional effort without additional costs: measures in the field of communication
  • Relocation of the communication interfaces to Germany 
  • Intensive communication of the exit
  • Planning of the re-entry with customers and suppliers
  • Legal: Intensive cooperation with the authorities in China and Germany 

What has changed?

Following the implementation of the comprehensive measures, the company is now recording annual savings of around EUR 540 million. The subsidiary is functioning perfectly.  

In addition, a similar solution was introduced at another Chinese customer with a comparable problem. 

As the central coordinator and project manager, the Paul Labic identified the grievances of the Chinese subsidiary and coordinated the exit and re-entry of the company.