The big jump.

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030 SchweizerElectronic 1 20180913 DSF5878 2Expansion. The Swabian family business Schweizer Electronic has an exciting past behind it. And an even more exciting future ahead. "Over the next ten years, we will enter a completely different dimension," says CEO Nicolas Schweizer, making it clear: "The construction of a new factory in China will enable us to almost quadruple sales to 500 million dollars in this period.

"This is the future of printed circuit boards," says Nicolas Schweizer, showing, well, a piece of metal. "You see what's missing? It's the little black beetles."

Printed circuit boards are carriers for electronic components. The important silicon chips have so far been placed on the plate and actually look like small beetles. "With our embedding technology, on the other hand, the chip is embedded directly into the printed circuit board. This makes the plate smaller, lighter and more powerful - exactly what electric cars and autonomous vehicles need."

Schweizer has invested ten years of development time in this technology. Again and again, potential customers are asked where improvements are still possible. Optimized. "Now the market is ready. In ten years, that'll be the standard.

In March 2017, I therefore sat down with my fellow board member Marc Bunz and considered the matter: What do we do now? So let's go greenfield, build a factory, and if so, where and how big? We quickly agreed: "Yes, we dare, in China, and really big."

In November, an investment agreement is concluded with the government of Jintan. One month later the new company Schweizer Electronic Jiangsu (China) was founded. Approvals were obtained from the Chinese environmental and construction authorities for the construction of the sustainable production facility. 120 million in credit lines secured.

The foundation stone will then be laid in August 2018. "In the new factory, we can generate three times as much sales as here in Germany. The first printed circuit boards will be produced there as early as January 2020," says Nicolas Schweizer, breathing out audibly. "All in all, we have the potential to make $500 million in sales. Half a billion. Then we will advance into a completely different dimension."

For this leap, the traditional family business from Schramberg in Baden-Württemberg took a long run-up. The founder, a plasterer, came to Schramberg in 1839 to furnish a church. He later supplemented his service by painting wooden dials for Black Forest clocks and handed them over to his first son.

This company also produces enamel dials for tiled stoves. "Their production methods were similar to the production of printed circuit boards. My grandfather, a chemist and typical Swabian inventor, introduced them to us in 1958," says Nicolas Schweizer. At that time it was still a very uncomplicated technology used in the so-called white goods - household appliances such as washing machines, stoves and refrigerators.

1972 Nicolas' father Christoph and his cousin Gerhard take over. His father is a mechanical engineer and focuses on growth. He builds a new production hall and works with a clear focus on the printed circuit board industry. His major customers are Miele and Siemens, the formerly small craftsman's business achieved converted at that time - there was still the D-Mark - around five million euros in turnover.

But that is not enough for the entrepreneur. He dares to expand into Asia, founds a joint venture in Singapore and manufactures printed circuit boards there in very good quality at favorable conditions. "We packed all the equipment here, loaded it into the container and then went over - there wasn't much technology then. My father built a toilet together with two boys," recalls Nicolas Schweizer. Over the next five years, sales will grow to the equivalent of 51 million euros.

In the middle of the 80s the business changes. Multilayers are invented. They enable individual printed circuit boards to be stacked on top of each other and multiply the current conducting capacity. In order to keep up, Christoph needs Swiss capital. In 1989, he floated 25 percent of the company's shares on the stock exchange, receiving the equivalent of around 13 million euros in return.

To sell shares is atypical for a family entrepreneur at this time, but the Swiss do it anyway. Success proves him right. The growth rates over the next few years will be between ten and 22 percent.

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However, it is only a short flowering period. Asia is catching up technologically and Swiss customers are now increasingly buying directly there. In 2004, his joint venture partner retired. The Swiss lack the money to take over. An American company gets in and a Swiss company gets out. "Losing our foothold in Asia after 20 years of intensive work, even though the entire business took place in Asia, was a heavy blow," says Nicolas Schweizer. No printed circuit board manufacturer can survive without local production in Asia.

In August 2005 the factory in Schramberg burns down. The pillar of smoke can be seen on 70 kilometres, it is the biggest industrial fire of the year. Christoph Schweizer has been Chairman of the Supervisory Board for four years and lives in Italy, Nicolas Schweizer works as a lawyer in Munich and his sister Maren (Marc until the civil status adjustment in 2014) works as a mechanical engineer in the aviation industry in Paris. A non-family managing director runs the company.

Is that it? Is the family business just at the end?

"Honestly, giving up wasn't an option for us. After all, we have a responsibility as an employer here in the region. We sat down under the big chestnut tree in the yard, looked ourselves in the eye and said: "No question, we're going on."

Maren Schweizer returns to the parent company and becomes a member of the board, as does her great-grandfather cousin Bernd. And the family's building a state-of-the-art new factory. "The Swabian insures at reinstatement value. but if you need it, it's vital to survive."

The new beginning entails a redefinition of the business model. "We searched for our raison d'être and decided that we had to think much more about the end user of our products. Previously, the product was developed, tested and then presented to the customer or at trade fairs - the so-called Technology Push. Today, development often takes place together - this brings better results for everyone involved."

However, this requires trust: The customer discusses with Schweizer his product, the material, the processing, gives insight into the costs for electronics and mechatronics.

"We then build a printed circuit board that costs perhaps ten percent more, but saves 20 percent in mechatronics," explains the entrepreneur, adding: "Actually, we have set ourselves up as a technology consultancy with an associated printed circuit board factory. This enabled us to set ourselves apart from our Asian competitors. She doesn't have the consulting competence and doesn't get the insights we get. Our basis of trust is our advantage."

Maren Schweizer sorts the company's product belly shop and focuses on power electronics, system cost reduction and embedding. All other products are removed from the range. In 2007 she took over the chairmanship of the board.

The second consideration at the restart is: "How do we rebuild Asia?" The family opts for the proven model of cooperation. In 2009, they will enter into their first partnership with the printed circuit board manufacturer Meiko in Japan, an owner-managed 800 million dollar sales company. A share swap with approximately five percent mutual participation. Schweizer becomes the exclusive distributor for Meiko products in Europe, which can be manufactured in large quantities and sold at more favourable conditions than their own.

"The customers get our consulting competence and the good quality from Meiko at a competitive price," explains Nicolas Schweizer, "we are high technology in printed circuit boards and consulting competence. Meiko is high volume in the technological automotive sector and scores where the price runs away from us."

Many things are now working for Schweizer again. Turnover is rising and the share price is rising tenfold from the financial crisis level of 2009.

But not every expansion will be a success. "Our trip to the solar sector turned out to be a disaster," admits Schweizer. "The processes are similar when you come from the printed circuit board. The business model was a great idea. We had even bought a plot of land in China. But then the market fell. The prices fell so dramatically that we had to get out immediately." That too is a management quality - pulling the rip cord when it is necessary.

Nicolas Schweizer will join the Board in 2011. "I had to get to know the world first. At the time of the fire, I had just completed my Second State Examination and was working as a lawyer. I wasn't ready then."

Together with his sister, he agreed in 2014 on a cooperation with the Chinese family-owned company WUS. The 800-million-dollar sales company acquires a 4.5 percent stake in Schweizer. "WUS builds high-frequency radar circuit boards for driver assistance systems and future autonomous driving - like us. For us, this was an important step in ensuring that we could meet the needs of future customers in China and Asia."

Even then Nicolas Schweizer was not afraid of revealing valuable knowledge: "When we develop a technology and put it into series production, the Asians undercut us in price as soon as it comes to volumes. Then it's better if I source to Asia and stay in on the revenue."

When Swiss people talk about Asian entrepreneurship, a lot of respect resonates anyway. "The Asians are incredibly busy, they have an entrepreneurial spirit, enthusiasm, they don't doubt so much. You can do it. Europe, on the other hand, is in a comfort zone. We think more about how to preserve what already exists than how to create something new. We're not shaping the future with this."

Its embedding technology is now almost ready for production and has even convinced the seven billion euro company Infineon. With 9.4 percent, the group will acquire a stake in Schweizer Electronic in 2014. "Our technologies complement each other. Infineon is the technological leader in power semiconductors, and we are the market leader in high-performance printed circuit boards for the automotive and industrial sectors. With chip embedding, we are securing our market breadth," explains Schweizer.

In May 2015, Bernd Schweizer said farewell to the company, and in September his sister Kristina also resigned from the Supervisory Board. The second family line withdraws from the operative business. "Bernd and Christina had a different view on how the company should proceed," Nicolas Schweizer cautiously puts it.

Now it goes blow auf Schlag. The decision to invest in China is made in 2017. "Shortly before, my sister left our family business," says Nicolas Schweizer. Besides, the second family tribe now wants to sell. He offers Nicolas and Christoph Schweizer his 25 percent stake in the company for sale. But they don't have the money.

An external interested party from the private equity sector would take over the share package. But for Nicolas Schweizer a better alternative is opening up. The long-standing partner Wu wants to increase its share package. "Our fathers have known each other for 30 years. Chris and I are the same age. We both grew up next to our fathers' desks. We have a strong relationship of trust and agree on Schweizer's future strategy. I was very happy when the Wu family expressed interest in the second strand share package - and eventually took it over."

The cooperation partner WUS now holds 29.8 percent of Swiss, Christoph Schweizer and his children hold about 25, Infineon 9.4 and the rest is Freeflow. For Nicolas Schweizer it's no problem to no longer hold a majority stake in the company: "At 25 percent you don't have full power. But without my father's consent, nothing will happen here. I'd like both tribes to stay at the company. It wasn't meant to be. But the Wu family today is something like our second tribe."

How well the partnership works can be seen in the financing of the China adventure. From the point of view of the company, this will be a small feat.

Schweizer Electronic itself borrows 30 million dollars in Europe - no problem in view of the solid balance sheet ratios - and contributes them as equity to its subsidiary Schweizer Electronic Jiangsu. A Chinese bank consortium is providing 120 million US dollars in credit. "And this is non-recourse - in the event of insolvency, lenders can only access the factory in China. The parent company in Germany is solely liable for the equity capital of 30 million dollars, but not for the debt capital," says Nicolas Schweizer, visibly proud and adds: "The fact that Chris Wu was involved in talks with the banks significantly strengthened our position vis-à-vis the Chinese banks.

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Doesn't he sometimes get scared when he thinks of the scale of the investment, of the weakening economic outlook, of US tariffs, which would then also apply to his factory in China? "If the economy collapses, we would of course also be affected in the short term. But we are on the move in the big markets of the future, e-mobility and autonomous driving. That's where our applications are needed. And that's where we'll see structural growth - regardless of the economy."

The US trade tariffs are also of little concern to him. "If you want e-cars, you need our circuit boards. They will then become more expensive outside China, which will hurt us. But for many customers there is no real alternative to embedding technology. I am also convinced that at least two-thirds of the new factory will ultimately be fully utilised by demand from China itself."

In fact, China is now taking electromobility seriously. According to an analysis by asset manager Robeco, the country is already the largest market for cars with electric or hybrid drive. The Chinese market accounted for 53 percent of sales of such vehicles in 2017. Robeco expects sales of electric and hybrid cars in China to grow by an average of 32 percent per year between 2016 and 2025. A state points system introduced in April provides a considerable boost. Depending on the fuel consumption and range of their vehicle models, the major car manufacturers receive bonus or malus points. If, for example, a car manufacturer does not produce any electric or hybrid cars at all, it must acquire bonus points from suppliers of such vehicles in order to comply with government regulations.

Robeco's forecast: The number of electric and hybrid cars sold in China will rise from currently one million to six million annually by 2025. 80 percent of these will be produced by Chinese companies themselves. They are potential new customers of Nicolas Schweizer and Chris Wu.

Despite these promising prospects, Nicolas Schweizer has still taken a few precautions in good Swabian tradition. "When it comes to speed and investment volume, we are progressive. But also cautious in implementation, Schwaben halt."

Although the factory building is constructed as a whole, it is put into operation in subsequent stages: "We have a three-phase concept. Depending on the workload, we can expand the production. That makes us flexible and doesn't tie us to such high fixed costs."

The first printed circuit boards are due to leave the assembly line in January 2020, seven years later full capacity utilization is planned. As early as 2022, start-up costs from China should no longer be reflected in the Group's balance sheet.

A tight schedule. Rolf Merte took over as the third managing director in October 2018, so that he would not be put at risk by a lack of management capacity - Schweizer reduced the Executive Board from four to two persons in recent years -. "China and the introduction of embedding technology are two really big projects. I need an experienced man with technological expertise and extensive experience," explains the family entrepreneur.

What if something unexpected happens? "We still have a joker. We could easily float the legally independent subsidiary in China on the stock exchange. We do not have factoring, our balance sheet is conservative. Everything is set up so that an IPO would be possible. It would be really interesting to see how such a start-up would be evaluated in an absolute future market." ®

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Schweizer Electronic - an interesting investment.

At the price level of mid-November (14.50 euros), the entire Schweizer Electronic company is worth around 55 million euros. This is actually not much in view of the sales expectation of 124 million euros for the year 2018.

At the moment, however, the company is facing some headwinds. Die The automotive industry is weak. Werden produces fewer cars, this naturally also means lower sales of printed circuit boards.

Accordingly, Schweizer has just lowered its sales and earnings expectations for 2018. Three months ago, Schweizer had still hoped to be able to turn over six million more - i.e. 130 million. The further hohe Auftragsbestand of 169 Millionen Euro should provide a certain buffer in the coming quarters. If, however, the automobile economy continues to decline significantly in the future, the Swiss would also be negatively affected.

For potential investors, this is an interesting constellation - here the difficult present, there an exciting future. If the big leap is successful, Schweizer Electronic will look completely different in five to ten years. If the factory in China (above:  Foto the laying of the foundation stone) is fully utilized, the total turnover could reach 500 Millionen dollars. And profitability would probably increase. Nicolas Schweizer himself expects a clearly higher margin in the production of embedded technology.

A small numbers game shows what is possible. To date, the EBITDA margin has been between seven and nine percent. If it were possible to increase the ratio to twelve percent, earnings before interest, taxes, depreciation and amortization could ideally climb from currently ten to eleven to 60 million euros - with a corresponding impact on the share price.

If Schweizer fails with its expansion strategy, the equity share in the subsidiary - 30 million dollars - must be written off. This would probably not upset the company, but the share price would of course react significantly downwards.

The extreme poles of the expectation range for investors are thus about 50 percent loss and 500 Prozent Gewinn. In between, anything is possible from today's point of view. The fact that the Swiss are strong in the growth regions of  Elektroautos and autonomous driving, however, gives rise to hope for a positiven Ausgang of the China adventure.

The risk-reward ratio would even improve if investors were to make a more favourable move in the coming months. It's not impossible. The global economy is weakening, the automotive sector is in crisis and the construction of the plant in China will initially weigh on Swiss earnings.

This constellation could repeatedly lead to "disappointments" in the short term. Those who believe in the China story will then have the opportunity to access this narrow-market value. And should proceed afterwards after good alter Kostolany manner: Kaufen, take a sleeping pill and only look at the course again in five years.

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Author: Yvonne Döbler

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