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(Updates with Starbucks share price in sixth paragraph. )

Aug. 6 (Bloomberg) -- As Starbucks Corp. intensifies its charge on China, one of its little-known weapons is a family- owned company in a sleepy Swiss village.

Thermoplan AG, based among cow pastures in Weggis, a town of 4,400 inhabitants near Lucerne, makes the automatic machines for espressos and cappuccinos in each of Starbucks’s almost 21,000 shops around the world.

“Fully automatic machines are something very German and Swiss,” said Chief Executive Officer Adrian Steiner, an electrical engineer who has worked for Thermoplan for 17 years. “It’s a product that matches the technology of those countries. It’s like the watch industry, where you have everything from education to the people, the quality, value, to reliability.”

With 230 employees, Thermoplan, which exports 98 percent of its wares, is emblematic of Switzerland’s globally oriented small- and medium-sized companies that bank on craftsmanship to drive their business. A free-trade accord between Switzerland and China and the rising popularity of creamy coffee drinks in the Asian giant -- with China set to become Starbucks’s biggest market outside the U.S. -- have given Steiner cause for optimism.

Despite being home to big listed companies such as Nestle SA and UBS AG, 99 percent of Swiss businesses are SMEs, generating two-thirds of employment. Thermoplan joins companies from watchmakers such as Swatch Group AG to producers of precision tools like Mikron Holding AG setting their sights on more business from Beijing and Shanghai.

Starbucks said last month that it plans to add 800 new stores in China and the Asia-Pacific region in fiscal 2015. The shares rose 0.1 percent to $76.87 at 9:59 a.m. in New York trading.

Whipped Cream

Thermoplan’s foray into the world of coffee can be traced back three decades when it made whipped-cream machines.

Then, in 1999, with just 20 employees, its fortunes soared on an exclusive global contract for Starbucks. The coffee-shop chain had decided to replace traditional espresso machines that require baristas to prepare grounds and steam milk, with automatic models.

With the contract, Thermoplan’s machines have become ubiquitous at Starbucks outlets from New York and Paris to Beijing.

A basic Thermoplan model starts at 7,000 francs ($7,700), with bigger, self-cleaning ones going for as much as 17,000 francs. The Mastrena, which Thermoplan produces just for Starbucks, was introduced in 2008. To make a cappuccino, the operator needs merely to select from a computerized menu.

“Its reduced height and ease of use encourages baristas to connect with customers for personal, immediate interaction and service,” Lisa Passe, a Starbucks spokeswoman, said via e-mail.

Service Pledge

Thermoplan’s contract with Starbucks is up for renewal next year. Both companies declined to comment on the possibility.

Steiner said his company’s ability to work swiftly and innovatively was what clinched the deal, calling it “the power of the big and the flexibility of the small.”

Assembling a machine, primarily by hand, takes six to eight hours. At one point Thermoplan was delivering 84 machines a day to the world’s largest coffee-shop operator. Today, the Seattle- based giant accounts for a third of Thermoplan’s sales. Other clients include Nestle, Google Inc. and Costa Coffee.

Thermoplan’s revenue touched 130 million francs last year, up from less than 100 million francs five years ago. An initial public offering isn’t in the cards for now, though Steiner declines to rule one out for the future.

The company has also been aided by its service pledge.

Before a machine heads out the door, it must successfully brew 100 cups of coffee. A trained technician from one of Thermoplan’s service partners is on site within four hours to fix a problem wherever a machine breaks down. Modular components keep maintenance simple, Steiner said.

Strong Franc

In spite of high production costs and an unfavorable exchange rate, Thermoplan produces locally, in four airy halls a short walk from the sparkling waters of Lake Lucerne.

“We’ve of course done an analysis of what we’d need to produce in Germany, or in eastern Europe, or even in Malaysia,” said Steiner.

There are 40 employees in Thermoplan’s R&D department, plus 140 in production. An abundance of skilled labor, laws that make hiring and firing straightforward, efficient government services and low taxes keep Thermoplan producing at home, Steiner said.

“That’s something that sets Switzerland apart,” he said.

In 2011, when the franc nearly hit parity with the euro, Thermoplan cut prices by 5 percent. The exchange rate now isn’t a problem, he said.

“Salaries are expensive in Switzerland -- that’s a fact,” he said.

For now, the company plans to ride the gains from the spreading social phenomenon that coffee drinking has become, the executive said.

“Ukraine, Russia, Kazakhstan -- they’re just discovering cappuccino,” he said, sitting in a room overlooking a soccer field that Brazil’s national team used as a training ground for the 2006 World Cup. “It’s fascinating how a drink like a cappuccino is changing the world.”

--With assistance from Hans Nichols in Weggis, Switzerland and Thomas Mulier in Geneva.

To contact the reporters on this story: Catherine Bosley in Weggis, Switzerland at cbosley1@bloomberg.net; Corinne Gretler in Weggis, Switzerland at cgretler1@bloomberg.net To contact the editors responsible for this story: Vidya Root at vroot@bloomberg.net Zoe Schneeweiss, Jan Schwalbe

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