In safe (Indian) hands: European manufacturing

More and more EU companies are choosing to be part of the Indian growth story, writes William H. Avery.

The Pauwels Group is a Belgian manufacturer of electrical transformers, with a factory midway between Brussels and Antwerp. Its history parallels the recent history of manufacturing in Europe. Founded in 1947, Pauwels expanded rapidly in post-war Europe and then abroad in the 1970s and 1980s, eventually developing a network of customers in 135 countries.

Then, in early 2000, the company went through a self-described "difficult period", which included a loss of €20 million in 2003. In February 2005 Compton Greaves, an Indian electrical equipment manufacturer, acquired Pauwels.

The Indians saved the company. They proved themselves to be wise, long-term investors by electing not to close the Belgian manufacturing facility. Instead they chose to view Pauwels as a European platform for growth. In 2006 Compton Greaves announced €2m investment at the Belgian factory.

More and more European companies are choosing to be part of the Asian growth story, with Indian companies emerging as major acquirers, far outpacing buyers from China and the rest of developing Asia. These deals are giving EU companies, many of which were uncompetitive on their own, a second lease of life. As India’s European buying spree expands, the combined effect of these deals will give Europe’s entire manufacturing base a second lease of life.

According to Mergermarket, a mergers and acquisitions news service, Indian companies made 19 acquisitions of EU-based companies during 2006. This is up from just six acquisitions in 2004. In Belgium alone, Indian companies have made six buys in the past three years, in sectors ranging from industrial products to pharmaceuticals and food processing.

Big deals such as Tata Steel’s €9.5 billion acquisition of Corus get the media attention, but the vast majority of India’s buys have been of companies with less than €100m in sales turnover. Many of these deals are in sectors that investment bankers would describe as unloved: automotive components (Germany), hot-forged steel parts (Italy), truck manufacturing (Czech Republic), agricultural machinery (Denmark) and refractory products (UK). These are the sectors where Europe is hurting the most, owing to high cost and low productivity labour.

Fortunately for Europe, these are precisely the areas where India’s economy is growing and where Indian companies are keen to expand overseas.

And this is only the beginning. Goldman Sachs predicts that India’s economy will grow at an average rate of 8% through 2020, by which time it will have surpassed the UK as the world’s fifth largest economy. This domestic growth will provide the liquidity Indian firms need to continue to expand overseas. And acquisitions will continue to be a primary tool for growth, especially in the fragmented European market where an established brand name and pan-European distribution channels are attractive to a foreign buyer.

What does this mean for Europe’s manufacturing jobs? Over time, it is inevitable that most manufacturing jobs will leave Europe for lower cost locales; market forces will see to that. Yet Indian acquirers have an interest in keeping as much manufacturing close to customers as European labour costs will allow. Local production minimises the complexity of the supply chain and avoids foreign exchange risk. More importantly, to relocate production en masse would be to risk losing valuable technology that rests both in the design of the products and in the manufacturing process. The most likely model for Indian companies which acquire in Europe will be to shift most manufacturing to India over the course of several years, while ensuring that the technology is transferred as well. The end result would be a research and development presence in Europe (to fuel further innovation), combined with a limited manu-facturing capability for high-end products where labour is a relatively low proportion of overall cost.

Today there are thousands of ‘old economy’ companies in Europe burdened by uncompetitive cost structures. Until recently they faced a stark choice - restructure or slowly die. Now there is a third option: sell to the Indians. Indian buyers not only have cash, they also have something far more important: a sustainable, growth-driven business model that sees value in European manufacturing companies and their employees. In the hands of India Inc. Europe’s manufacturing base may have a future after all.

• William H. Avery is an investment banker based in Brussels.

More and more EU companies are choosing to be part of the Indian growth story, writes William H. Avery.

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