In the Reshaping of Global Manufacturing, JD Capital Supports “Intelligent Manufacturing in China”
Source: WeChat official account of Caijing Magazine
In May 2016, the Media Group launched a tender offer to acquire the German industrial robot manufacturer KUKA at 115 euros per share. Insiders remarked that this offer could be viewed as a transformation and breakthrough of “Made in China”.
Nowadays, it has become a trend for Chinese manufacturers to use such advanced means as robots and internet for the upgrading of traditional production methods, and to rely on the advantageous domestic market and the dynamic capital market for the acquisition of core technologies worldwide. During this process, for one thing, domestic enterprises seek transformation and innovation; for another, PE firms dedicated to industrial investment are to become one of the most important brains behind this great opportunity.
“As the pillar of one country’ economy, the manufacturing industry provides material basis and production conditions for all the other industries,” said one person from JD Capital, a renowned domestic PE firm, “What we care the most is the transformation and upgrading of China’s manufacturing industry; and the value investment philosophy we adhere to is to grow with the industry.”
It’s briefed that, at present, over 20 advanced manufacturers JD Capital invested in have gone public or been listed successfully, among which the Cathay High-speed Railway Technology Co., Ltd. (CHSR), Guangzhou Haozhi Industrial Co., Ltd. (Haozhi Jidian), and Anhui Fengxing Wear Resistant Materials Co., Ltd. (Anhui Fengxing) have gained an annualized return of over 40%. “This is also the best return for our dedication to manufacturing investment these years,” said the head of the advanced manufacturers investment team of JD Capital.
Discover segment bellwethers and persist in technological innovations in the high growth period
Over the past three decades since China opens its economy to the world, the country has cultivated a batch of outstanding leading enterprises in the manufacturing industry, either with powerful technological research capacities, extensive marketing channels, or an advanced international vision. They scatter in various segments of the large industrial system, and possess a strong voice and a sound market place in the segment.
According to JD Capital, Jiangmen Idear-Hanyu Electrical Joint-Stock Co., Ltd. (Idear-Hanyu), one of its investees, with the world’s largest annual sales volume and a net profit margin of 20%, is an exemplary case in this period.
As the bellwether in the drainage pump segment of China’s household appliance industry, Idear-Hanyu produces drainage pumps to be used as core components of washing machines, dishwashers and other household appliances. “The popularity of washing machines and dishwashers in China promises a vast market space for drainage pumps,” noted the head of the advanced manufacturers investment team. Take dishwashers as an example. Relevant statistics show that, the penetration of dishwashers in developed countries has reached 30% to 40%, as high as 60% to 70% in America, French and Germany, but only 1% in China.
“Apart from market development potential, the core competitiveness of Idear-Hanyu lies in the innovation of key technologies. The self-developed technology of replacing copper enameled wire with aluminum enameled wire reduces the production cost to a large extent, implying a distinct advantage in industrial competition,” remarked by the head of the investment team, “For the high standards of lower-stream customers on product quality, brand and production capacity, Idea-Hanyu, a pioneer into the customer architecture, now boasts distinct first-mover advantages.” Relying on technological innovations, the enterprise has acquired obvious cost advantage and abundant customer resources worldwide, including such household appliance industrial bellwethers as Whirlpool, Samsung, Electrolux and Siemens. It’s worth noting that, General Electric, a partner Idea-Hanyu has tried to win over for 8 years, now places over 1 million drainage dump orders a year from Idea-Hanyu.
At the time when it was listed on the ChiNext in 2014, Idea-Hanyu has become the world’s largest supplier of household drainage pumps with a global market share of 25%. At present, Idea-Hanyu manufactures a full array of products including drainage pumps, servo motors, spa toilets and electric vehicles. Though seemingly unrelated, these products share one commonality – all have motors and relevant control techniques at their core. To be exact, Idea-Hanyu makes technical breakthroughs and then applies the techniques in different businesses. “Exploring outstanding enterprises like Idea-Hanyu and its entrepreneurs is the first step JD Capital takes towards the advanced manufacturing industry.”
For years, the investment team of JD Capital delves into various segments of the manufacturing industry to find leading enterprises with core competitiveness and combines their advantages with JD Capital’s capital strength, so as to enlarge and strengthen the enterprises. Under the guidance of this idea, the firm has invested in several quality enterprises involved in high-speed railway, precision manufacturing and core spare and accessory parts, etc., among which Haozhi Jidian, Anhui Fengxing, and other domestic manufactures are exemplary investment cases.
Respond to “dual-directional extrusion” in the new normal: support intelligent manufacturing and reshape “intelligent and creative manufacturing in China”
In recent years, some major manufacturing provinces have witnessed the successive closedown of factories. For example, Nokia shut down its factories in Beijing and Dongguan; manufacturing enterprises with over ten thousand workers went bankruptcy in Suzhou and Wenzhou; and the footwear industry, once one of Dongguan’s six pillar industries, sent negative messages repeatedly. The low-end manufacturing industry of China is experiencing a cold winter. To find a way out, some enterprises relocate their production capacity to Southeast Asia, India and other regions and countries with a low production cost.
Besides, ever since the outbreak of the global financial crisis in 2008, with a sharp drop in energy cost and an increased efficiency brought about by robot application, some manufacturing capacity has flown back to the US-led developed countries. Strategies as the “Industrial Internet” of the US and the “Industry 4.0” of Germany set off an industrial reform centering on “intelligent manufacturing” and are reshaping global manufacturing.
“Confronted with the challenge of ‘dual-directional extrusion’, China’s manufacturing industry can only fight out by accelerating transformation and upgrading,” said JD Capital.
In fact, Made in China 2025 issued by the State Council last year has rather comprehensively pointed out the transformation direction of the manufacturing industry. According to the paper, the integration between informatization and industrialization will be deepened continuously; atomization and intelligentization of production process will become more widespread; the application of robots will compensate for the disappearance of demographic dividend; and the extensive use of industrial Internet, cloud computing and big data will link industrial production into an organic system in an unprecedented scale and efficiency.
“Under the background of transformation and upgrading, a batch of emerging industries is expected to blossom. High-grade numerical control machines and precision machining are fundamental to high-end equipment manufacturing; industrial robots and their core components, and intelligentized production line system integration are prerequisite for intelligent manufacturing; while drones, service-oriented robots and intelligent household appliances are of great help in our lives and work,” remarked by the advanced manufacturers investment team of JD Capital.
In 2015, JD Capital became a shareholder of Yantai Towin Machine Co., Ltd. “Towin used to be a manufacturer of precision bearing. In 2009, the company started to work with Ludong University for intelligent manufacturing. After years of painstaking works, a series of industrial robots have been developed independently and applied in several fields including tire, household appliances, apparel and military projects,” according to the team leader.
Able to work under harsh conditions, robots can improve both product quality and process efficiency. Therefore, in front of a rigid rising labor cost, most enterprises turn to use robots in their production. Data of the past three years shows that, the sales volume of robots in China grows by an average of over 40% each year, and the value of robot application market exceeds RMB 40 billion.
“This promises a life-time investment opportunity for PE firms. JD Capital initiated the establishment of a robot industrial fund, in an effort to explore investment opportunities in robot application, core components, industrial software, sensors, machine vision and other industrial segments,” said JD Capital. In the near future, JD Capital will finish its investment in some quality enterprises involved in such new technology fields as industrial VR, industrial drones and wireless charging.
Support industrial bellwethers amidst waves of global M&A
Faced with new opportunities brought forth by industrial transformation and upgrading and technological innovation on one hand, and the quality manufacturers represented by Media, Gree and Huawei on the other, JD Capital regards it as another important method for Chinese enterprises to tap into China’s improved industrial system, abundant engineering resource, the advantage of a lower cost, a large market demand and other conveniences, and thus transform and upgrade through international industrial integration.
“In terms of M&A, years of industrial investment endows many PE firms, JD Capital included, with distinct advantages in domestic industrial integration and even the capacity to assist enterprises in cross-border M&A,” according to the team. The acquisition of Dongguan Modern Metal Precision Die Casting Co., Ltd. (Dongguan Hongtu) by Tianrun Crankshaft Co., Ltd. (Tianran Crankshaft), one case JD Capital recently concluded, is typical in this regard.
As China’s leading manufacturer of crankshaft, connecting rods and other components of automobile engines, Tianrun Crankshaft takes a market share of over 40% in heavy trucks and other commercial vehicles. Dongguan Hongtu, a wholly foreign-owned enterprise established in Hong Kong, mainly engages in aluminum alloy die-casting for passenger vehicles, and works stably with GM, Ford and other mainstream automobile manufacturers worldwide.
“We believe that the automobile industry will become more intelligent, environmental-friendly and lightweight. To reduce the weight of automobiles, replacing steel with aluminum and magnesium alloy in auto parts production is the main solution. The same case goes with new energy vehicles. Supporting Tianrun Crankshaft in its merger and integration helps it push through limitations of the commercial vehicle market and enter the larger passenger vehicle market, realizes business coordination by taking advantage of Dongguan Hongtu’s quality clients, certification system and sales channels worldwide, and locates a path conforming to the development tendency of the automobile industry as well.”
In 2015, JD Capital became a controlling shareholder of Dongguan Hongtu. Shortly after that, Tianrun Crankshaft proposed to issue shares and purchase all stocks of Dongguan Hongtu by means of stock issue and cash. “Upon the completion of this M&A, the main businesses of the two parties are expected to form positive synergies. Tianrun Crankshaft can not only expand its business to the field of aluminum alloy die castings, but pioneer into the passenger vehicle market and overseas market quickly with Dongguan Hongtu’s existing resources,” according to JD Capital.
While assisting domestic enterprises for successful M&As, JD Capital and other PE firms of the same kind also focus on supporting cross-border M&A in the advanced manufacturing industry.
“Though many domestic manufacturers are relatively able to compete on the international arena after several decades of development, the core technologies of quite a large number of industries still lie in the hands of developed counties,” JD Capital remarked. In the robot industry, for example, four giants, namely Yaskawa, Kuka, ABB and Fanuc, take the lion’s share of the market, and a small number of Japanese enterprises monopolize the production of such core components as decelerators. Domestic products alike still lag behind, and the first-mover advantages of international bellwethers are difficult to transcend in the short run. However, since Japan, European countries and some others are now confronted with sluggish economic growth, some enterprises meet operation bottlenecks, and capital valuation goes lower than that in China. Hence, more and more domestic enterprises endeavor to go global to acquire quality assets overseas.
Take automobile lightening as an example. At present, JD Capital is working on acquisition of a European enterprise producing lightweight automobile materials. According to the project leader, the reason why JD Capital becomes the potential acquirer of the enterprise can be attributed to its strategic layout and in-depth research in the field of automobile lightening.
“Trading technologies with capital is a wise move in the current situation where domestic asset bubbles get bigger, and when transformation and upgrading becomes an urgent need for the real economy. This is also a hard-to-get opportunity for China’s manufacturing industry to realize a leap-forward development,” said the project leader.