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The Path to Revival

Volume 3, 2016

By Sun Jiong

How does a state-owned enterprise, which 12 years ago was on the verge of going under, fight back and become a giant in the global sewing machine industry?

In the 1970s and ’80s, the Butterfly sewing machine, Shanggong Group’s flagship product, was a must-have for almost every household in China. However the Butterfly’s popularity didn’t last beyond the mid-1990s, when the high-tech products of foreign manufactures and low-priced ones of private local enterprises jointly stole its thunder. But by 2004, thanks to mergers with several German companies, the Butterfly was among the top three within the industry and its technical capabilities on par with the best in the world. Today its client list is a roster of the world's leading prestige brands, high-end car manufacturers in Europe and the United States, as well as commercial aircraft companies Boeing and Airbus.

In May the CEIBS 2016 Sichuan & Chongqing Entrepreneurs’ Tour took about 60 businessmen inside Shanggong Group, a CEIBS alma mater enterprise, to listen to President Zhang Min (EMBA 2013) share the company’s inspirational story.

Two negatives make a positive

In many ways Shanggong group is a typical listed global company, with highs and lows in its performance over the years. Launched in Shanghai in 1965, it enjoyed nationwide fame during its heyday but began to wane in the face of competition. 

"At the time, everyone said that there was no way for the company to survive,” said Zhang. The turning point came when SASAC of Pudong District was named Shanggong’s new controlling shareholder (it originally fell under the Shanghai Municipal Light Industry Authority) and the company’s management team was transferred to Pudong. Zhang, who was then chosen to lead the company, embarked on a global strategy that transformed Shanggong into one of the first movers in China’s light industry. Shanggong also has the distinction of being the only Shanghai-based company to make such significant inroads in the sector.  

Today Shanggong is an industry leader both at home and abroad; but it was a hard-fought battle. Throughout its journey, many doubted whether a company often on the verge of bankruptcy could successfully implement a new strategy that had globalisation at its core. 

Shanggong’s first acquisition target was DURKOPP Adler, a German company which was also performing poorly. The question was: could they generate a profit by merging two unprofitable entities. Most of the board’s outside directors (those whose only link to the company was their seat on its board) did not agree with the merger; but Zhang was confident it could work.

He believed that DURKOPP was losing money because it had failed to keep up with market trends that had seen sewing machine’s downstream industries being transferred from West to East. He was convinced that Shanggong could help DURKOPP regain market share by leveraging Germany’s advanced technology and China’s position as the main market for global garment processing.

Zhang was also personally driven by a need to succeed. His predecessor had left his mark by making Shanggong a listed company, and Zhang felt honour-bound to keep the company going – and successful. Sure that the acquisition of DURKOPP was vital to that success, it took him five tries but he eventually persuaded the outside directors to agree to this risky move. His gamble paid off and after eight years of hard work the merged entity turned a profit, proving that two negatives can indeed make a positive.

In 2013, a strengthened Shanggong did two other mergers by issuing shares: it bought PFAFF, a longstanding competitor of DURKOPP, and KSL, a relatively young enterprise (founded in 1964) that was attractive because of its 3D sewing machine robot technology.

Then in 2015, Shanggong invested in the German company H Stoll, the world’s largest manufacturer of flat knitting machines, with annual sales of about €300 million and a history of 145 years. The deal made Shanggong H Stoll’s largest limited partner and – coming as it did on the heels of previous acquisitions – led the German media to crown Zhang as the father of German serial acquisitions.

Innovation driven

But the successful acquisition of a business is just the first step; Shanggong still needed to reorganise its newly-acquired resources and creativity would be needed in order to do this well. Each step of the process was guided by Zhang’s belief that innovation is the basis of product technology. Starting from basic manufacturing of mechanical products, Shanggong now boasts mechanical and electrical integration, computer-controlled machinery, and technology for controlling robots that produce items in 3D. In fact, Shanggong has developed the world’s only robot manufacturing centre that produces flexible material; it is one of only five enterprises to have mastered fibre placement machine technology and if its small fibre placement machine were enlarged, they would be able to manufacture airplanes. Today they are working on ensuring that their system is in line with industry 4.0 standards, the very latest trends that will impact China’s entire manufacturing sector.

But what exactly does Shanggong do, and what does Zhang mean when he speaks so passionately about industry 4.0 in relation to industrial sewing equipment? He explained that it means, for example, working with three major customers to develop the “M2M” system for manufacturing car seat covers. The machines, ideal for thick material, are linked via Wi-Fi, enabling production data to be uploaded to the cloud for analysis by a central computer before feedback instructions are conveyed back to the production line. The combination of this system and ERP (Enterprise Resource Planning) is called intelligent sewing, and it can greatly improve the factory’s efficiency.

Zhang anticipates that this industry 4.0-driven system will be revolutionary. “Had it not been for technological innovation and product innovation, we would have had to wrestle with private enterprise to lower the wages of manual labourers and the cost of producing basic sewing machines. Those are the machines upon which we rose to prosperity 20 years ago but had to later abandon,” he explained. “Then, a single sewing machine sold for RMB3000, now the price is RMB700, does it make any sense to engage in a battle over price?”

In stark contrast to its humble beginnings, Shanggong is now manufacturing sewing machines with parts made from a carbon fibre composite, the same material used in airplanes and space technology. The machine is worth about RMB15 million.

Global resource sharing

This technological revolution was the fruit of tremendous energy and effort by Shanggong. In the past Zhang’s major meetings were limited to talks with the board of directors and supervisors in Germany. But at one point he had to play a major role in convincing all the company’s German mid-managers about the importance of changing the way their company had done business for more than a century. They were puzzled when he said, “What you've been working on for 150 years, you may want to stop that now.” He explained, “You spent 150 years studying sewing mechanical action and the line tension, and making sure the needle distance control is perfect. That’s enough. Now you need to focus on AMS. A stands for automation, M is for module, and after the two are completed, then comes S (Smart), which is the future.”

That was a turning point for the Germans. Today they focus on issues such as how to control the development process, or how to make a robot hold flexible material, such as cloth. That is a challenge which could revolutionise the garment industry and Shanggong is now working on it.

Innovation is also reflected in Shanggong’s business model. According to Zhang, while it is easy to issue shares with each of their acquisitions or mergers, he is keenly aware that institutional reform also requires innovation in the market. As far back as ten years ago Shanggong felt that the cost of manufacturing basic sewing machines in Shanghai was too high. So eight years ago they changed their business model to have the R&D and sales done in Shanghai, where it is relatively easier to attract and retain high-end talent, while the production process is done in factories in Jiangsu and Zhejiang provinces.

Another key issue in their strategy is what they refer to as global resource sharing. The company’s seven factories must not duplicate each other’s tasks; instead they must share their work. The same goes for the Chinese and European branches (whose main task is to provide support). The goal is to achieve the maximum degree of cost savings through global sharing of resources.

Shanggong organises its resources according to levels of cost: in Zhangjiagang and Taizhou where the labour force is relatively cheap, they set up factories for mass production products; electronic control boxes are made in a factory in Nanxiang, Shanghai; a factory in the Czech Republic is responsible for sewing machine casing machining and die assembly since they have a high level of industrialisation; and none of the four factories in Germany is for mechanical processing or production of parts and components as it has the highest wage costs.

Looking ahead

Through the acquisition of German enterprises, Shanggong formed a technologically strong R&D system which has guaranteed them a product that can meet market demand. That has translated into a healthy balance sheet. “In 2015 most sewing machine enterprises lost money, only Shanggong is still profitable, and we are doing well,” said Zhang. It helps that the company has been ahead of market trends. For example they moved into automation of the enterprise five years ago, and are now fully prepared to reap the fruits of today’s market demand.

What’s next for Shanggong? Zhang believes it is the aerospace manufacturing industry. His plan is to establish a firm foothold in the aircraft manufacturing industry chain, where he is confident that Shanggong’s new materials and new technologies will go a long way towards ensuring success.