Eurofins Digital Testing: Variegating

Feb 18, 2019

In the last 18 months, when looking at Eurofins’ spending spree, we stumbled across a few acquisitions that did not fit into ERF’s traditional strategy and M&A patterns – such as Electronic Test and Calibration, Hursley EMC Services and Edge Testing (all in the UK). Further research on that lead us to a surprising website: Apparently, under the veil of secrecy, Eurofins had entered the field of Electrical Products/Electronics Testing and Cybersecurity.

One could expect such an amendment of company strategy to be reflected and announced by the company at some point of time. But, read page 7 of Eurofins 2017 Annual Report and the notes of the HY1/2018 press statement: “Eurofins Scientific – A Global Leader in Bioanalysis. Eurofins Scientific (…) believes it is the world leader in food, environment and pharmaceutical products testing as well as in agroscience CRO services. It is also one of the global independent market leaders in certain testing and laboratory services for genomics, discovery pharmacology, forensics, advanced materials sciences and for supporting clinical studies.” So far, so good, but nothing said about Electronics, Digital Testing and Cybersecurity – a good reason to take a closer look.

Before reflecting potential motives and implications, let’s review the facts:

  • Two companies acquired in 2015 can be considered as the nucleus of all that: Digital TV Labs (UK/Hong Kong) and Testronics Labs (Belgium), both merged to form a larger media delivery and device quality assurance (QA) company: Eurofins Digital Testing
  • Logically, Eurofins Digital Testing’s (EDT) service portfolio historically revolved around Digital TV (content, signal/media delivery and devices such as TVs and set-top boxes), and was constantly expanded to account for new demands in that field – take Wireless connections, IoT or Cybersecurity. However, it appears that EDT attempts to leverage these technical capabilities also in other fields, e.g. medical devices, household appliances, automotive and aerospace products
  • Additional M&A, such as the three mentioned above, but also Labatus, My Eye Media and MET Laboratories was performed to further strengthen the platform. Especially the acquisition of MET Labs indicates further ambition, as this company claims to have “broken the UL monopoly for product safety testing and certification in the United States 30 years ago” and was one of the very few larger independent Consumer Goods testing companies – would have been an interesting add-on for any TIC player
  • Cybersecurity, in a scope significantly beyond TV sets, seems to be a particular priority for EDT, as they not only hired a number of “Cyber Security Engineers / Pen Testers / Ethical Hackers” in Hong Kong, but also high-profile management, such as the Chief Technical Officer of TÜV SÜD Digital Service GmbH
  • All this sums up to an estimated platform revenue of EUR 85-90m in 2017. Maybe only a drop in Lake Eurofins, but clearly more than “just experimenting”. Even when bearing in mind that a good part of that is Cybersecurity, which most other TIC players separate from Product Testing in their accounting and organizational structures, this means that EDT has managed to successfully establish itself as a relevant player in the Consumer Goods segment

Which brings us to potential reasons and motives, and implications.

The least friendly and potentially most unsettling explanation could be that Eurofins’ top-management simply has lost control and oversight, allowing a subordinate manager in charge for a non-core business to secretly expand his reign and crown himself viceroy of Product Testing. This however would raise the question how this person could tap and mobilize significant corporate funds and resources for a number of acquisitions.

In the last 14 months, EDT clearly was an investment focus, with six dedicated acquisitions in the field. Regardless of the fact that these are rather esoteric services and test-objects for Eurofins, and that EDT was developed under the radar, the company thus seems to be serious about this move and portfolio extension. Hence, the “chacun à son gôut”-story does not sound very convincing.

A more plausible internal explanation could be that Eurofins might have recognized a need to grow even more aggressively to justify current valuations, generate enough cash and “keep the dream alive”. In this narrative, EDT simply opportunistically harvests business in other TIC segments, without much strategic logic behind – after all the “good old wide-angle strategy” of the rest of the industry.

Moreover, Eurofins might have felt compelled to develop additional growth avenues, beyond its traditional focus, because growth in these has started to slow down, in contrast to the past and to expectations. In this case, not over-ambitious growth targets and internal needs triggered expansion, but an externally-induced slowdown in the core business made this inevitable.

Both potential explanations are not nice for the TIC industry, as they could fuel skepticism reg. the industry’s growth prospects. Eurofins might be an extreme case with its aggressive growth strategy and very ambitious targets, but if even this company is now reaching certain limits, was does this mean for the rest of the industry?

In any case, the creation of EDT further increases competitive pressure in Consumer Goods, a key segment on which the wellbeing of much of the industry hinges, and where most of the players have placed their strategic bets. It will not get much nicer and easier there.

Most importantly though, this exposes a certain lack of Strategic M&A excellence at many players – how on earth could Eurofins outmaneuver the rest of the industry on a completely new turf and acquire all these companies, which would have been nice additions for most other players as well? This industry does not need to “grow up”, it needs to be run in a more professional way – at least when it comes to strategies, in design and execution.

TÜV SÜD/Vale: Risky business

Feb 11, 2019

More than three weeks have passed since the Vale-owned waste dam burst in Brumadinho on Jan 25, with more than 150 confirmed deaths and another 180 people missing probably the worst incident of this type in the last 50 years in Brazil. While consensus is growing (or reached) reg. the technical causes of the catastrophe, we are far from this concerning liability and responsibility.

Not meant in an impious and disrespectful way, rather well aware of the human tragedy, we would like to comment that this is not first time that disaster strikes even though a TIC company was somehow involved with some kind of service or after it had performed some sort of “inspection”. Just recall:

  • The PiP breast implants scandal (TÜV Rheinland)
  • The collapse of Rana Plaza in Bangladesh (Bureau Veritas, among others)
  • The VW diesel emissions scandal (TÜV Nord)

In each of these cases, TIC companies could not be held responsible, legally. So far, so good? Not really, in our opinion – because something sticks.

For an industry dependent on its reputation of untouchable impartiality and superior technical competence, for an industry conveying the image that it is worthwhile to pay the price for its services because these safeguard and enhance safety, such events occur far too often and have far too dire consequences.

TIC companies should finally scrutinize their service portfolios and begin to discontinue those services with an unreasonably high reputation risk (in relation to the often miniscule revenue and profit generated by them) or substantial survival risk (killing the company if something goes wrong) – or install functioning, much tighter control mechanisms for the risky businesses, if deliberately deciding to perform/offer these. In other words: Either don't do it at all, or exercise extra care when doing it.

The more negative news somehow associated with or connected to TIC, the less will customers and consumers believe in the viability and value of it. The TIC industry should not stretch the limits of its business model too far in search for the quick dollar – or it might wake up one day without a business model at all.

It must be read as a warning sign that several commentators have begun to draw analogies between Auditing/Accounting and TIC, indicating that the latter could be caught in the same massive conflict of interest as the former, and that stricter regulation in a similar vein is necessary. This would mean to strictly separate Audits and Consulting work, by law. And that would be the end of any “Assurance”-type TIC concept of integrated support along the value/supply chain some industry participants actively promote.

With the TIC Council formed, now an association exists that covers almost all of the industry. In the interest of all participants, it should not just send out fancy press statements on ethics and compliance, but maybe start enforcing these and put its own rules to the test.

China-US trade tensions: Tariffs, Decoupling, Containment?

Feb 4, 2019

The world sighed with relief when, at the G20 summit in Argentina in November 2018, President Trump and Xi Jinping agreed to start negotiations on the trade dispute and postponed the next round of tariff hikes until March 1st this year. Many were hoping that this would buy enough time for the difficult negotiations and allow coming to a resolution. Unfortunately, little progress has been achieved so far.

Which probably is not that surprising after all. In the last months, several experts have pointed out that the underlying cause of the conflict is distinctly political-military in nature, and that the trade dispute is only a proxy-fight or one arena of a much more fundamental conflict. In that view, it is not about current account deficits or unfair benefits from trade, but about power, national security and wrestling for global political dominance. Technology plays a key role in this game, both as an economic enabler and as a military means.

Will the U.S. be able to retain the comfortable position as the global apex predator, or will China be able to successfully challenge that and reach super-power status as well? That seems to be the question, and the stoic hyper-rational logic of the homo oeconomicus simply appears to be insufficient, too narrow and a bit naive to fully grasp the consequences.

Political considerations can, and frequently do, override economic considerations. History books are full of examples. The last conflict between two global superpowers, commonly referred to as the (First) Cold War in the 20th century, is one.

Most of us tend to only recall the agony and decay of the Soviet Union from 1980 onwards. It is often forgotten that the country managed to achieve spectacular GDP growth rates in the 1950s and 1960s, of 5.8% resp. 3.0% on average per year. The bold claim of overtaking the West economically did have a real foundation then.

Only the economic resources generated by that strong growth allowed the Soviet Union to establish as a global superpower and fund all its well-remembered military and space programs – just think of Sputnik or Yuri Gagarin. However, due to a complex set of factors, the Soviet economic model slowed down and essentially stopped working in the 1970s. Much of this was caused by internal problems, not a result of U.S. or NATO policy. And it was this, at the time largely unobserved, crash of the Soviet economy that initiated its downfall in the end. Soviet leaders made the great mistake of keeping military spending high and engaging in costly wars, significantly re-directing more and more increasingly scarce resources to military purposes – and so overstraining their economy without external influence.

When the West decided to intensify its own defense spending in the 1980s, this was only the straw that broke the camel’s back – it only pushed an already mortally weakened economy finally over the edge. The USSR did not lose the (First) Cold War because of military inferiority, but because of economic collapse.

This story is reflected by the numbers. Interestingly, with 8 to 13%, U.S. military expenditure (as share of GDP) was as high or maybe even higher than the Soviet Union’s in the 1950s and 1960s, with the burden decreasing significantly from 1970 onwards (Korea war, Vietnam). Conversely, Soviet military expenditure picked up from an est. 9% in the 1950s to 11 to 15% from 1970 on – with some estimating it as high as 20% in the early 1980s (Afghanistan war). For the U.S., even with SDI etc., defense spending never went above 6.6% in the 1980s – the economy could easily handle even these ambitious military projects and investments.

The pattern and strategy that can be derived from that is obvious: Thwart the adversaries’ growth model, ideally crash his economy – limit his resources. Keep up military pressure. Impose additional external burdens, such as excessive military spending. That way, either limit his military ability or send him into an economic downward spiral. All in all, an elegant way to get rid of an opponent.

China has begun to challenge the U.S. in the military sphere; its spending is minor in terms of GDP, but already perceived to be dangerous by some. Advanced technical capabilities and technology hikes might exacerbate this. In that situation, why not revert to a very successful strategy of non-conventional warfare that won the (First) Cold War without major bloodshed?

Even though China may appear invincible today, it might be not, with its rapidly ageing population, property market bubble and bloated shadow-banking system. Intensified confrontation could deliver a painful blow in a critical phase.

This leads back to the trade dispute: Considering the analysis above, we most likely haven’t even seen the beginning of a potential escalation of this conflict. There are many more torture instruments in the cabinet, such as:

  • Prohibitive tariffs
  • Strict export rules – cp. the (First) Cold War’s rules on high-tech exports
  • Rules of origin (products, assemblies, parts)
  • Import bans
  • Sanctions for Chinese companies or Western companies doing business in China
  • Outright embargos
  • Mutual exclusion clauses

When carefully reading Vice President Pence’s Oct. 4 speech on the subject, in essence a comprehensive list of Chinese wrongdoings and American complaints, “Decoupling” the two economies seems to be the logical consequence. Such removing of China and Chinese companies from Western supply chains and products would fit perfectly well into the strategy described above. On from there, it’s only a small step to “Containment”, trying to limit the other’s influence in the world by forcing all others into an unwelcome choice: “you’re either with China or with America”.

Even President Trump’s seemingly accommodating statements that he sees “good chances for a deal” and that “it will be the best deal” should be read with care, in our opinion. Most probably negotiation tactics, they also fit all too well into what Satoru Mori of Hosei University (Japan) calls a “zig-zag upward trajectory” of short relief and intensifying tension. A pattern observed in U.S.-U.S.S.R. relationship in the (First) Cold War as well.

It does not take a lot of visionary thinking to see that such a development would be disastrous for global trade, a major driver of TIC growth in the recent past. And the much hoped-for opening of the Chinese domestic TIC market might not happen at all, in such a world of intensified hostility between the “West” and “China”.

We are not too optimistic that this trade dispute can be resolved and rather believe that things will get much worse. We would thus recommend TIC players and investors to accept the new political reality, finally factor this in and provide new guidance – instead of pretending that it’ll all be good.

Of course, you’re free to believe otherwise – at least for the time being in this part of the world.



Easterly, William and Stanley Fisher, "The Soviet Economic Decline: Historical and Republican Data" World Bank Policy Research Working Paper Number 1284, April 2001. Also published in the World Bank Economic Review 9(3): 341-371, 1995.


Photo © David Pacey (cc-by-sa/2.0)