German angst over Chinese M&A

Kuka’s robotic arms are a familiar sight on assembly lines, like this Mercedes-Benz plant in Germany, but the majority Chinese-owned company wants to expand beyond the factory

 

Germany is a top target in China’s search for innovative engineering groups — but some see a threat

At this year’s Hannover Messe, the world’s biggest industrial fair, it was one of the stars of the show: an elegant, ultra-sensitive robot known as an Iiwa that can pour a beer and brew a cup of coffee.

Angela Merkel and Barack Obama, guests of honour on the Messe’s opening day, were intrigued. “Can it squeeze lemons?” the German chancellor asked.

The Iiwa — or intelligent industrial work assistant — is produced by Kuka, one of Germany’s most innovative engineering companies. But it will not be entirely German for long. Less than a month after the fair, a Chinese appliance-maker called Midea offered to buy Kuka for €4.5bn, in the largest ever Chinese takeover of a German company.

The idea of a Chinese entity owning one of the nation’s great innovators is a cause for widespread angst in Germany. The hand-wringing started soon after Midea revealed its bid.

“Kuka is a successful company in a strategic sector that is important for the digital future of European industry,” said Günther Oettinger, the EU’s digital commissioner and a close political ally of Ms Merkel. He called on other European companies to make a counter offer, but no one came forward. Midea announced on Monday that it now holds 94.55 per cent of Kuka’s shares.

Even before the Kuka deal, Germany was becoming the top destination for Chinese investment in Europe. Transactions with a total value of $10.8bn were announced in the first half of this year, according to EY, the professional services firm — more than all previous years combined. Chinese investors acquired 37 German companies in that period, EY says — compared with 39 in the whole of 2015.

“In China, we have a lot of respect for German manufacturing excellence, their craftsmanship, their dedication to technology,” says Andy Gu, Midea’s vice-president. “There is lots of goodwill towards German brands, and that is also true in our organisation.”

Midea says it saw a chance to help expand Kuka’s presence in its home market. Most Chinese factories are not automated: the country had just 36 robots per 10,000 manufacturing workers in 2014. In contrast, average robot density is 85 in Europe and 79 in the Americas.

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The pivot towards Germany “reflects [China’s] strategic plan to be much more focused on innovation, on high-tech brands, to enable them to shift to a more advanced industrial society”, he adds.

German technology firms are a key focus, but the Chinese net has widened to include everything from pharma and biotech companies to clinics and care homes. Meanwhile, “since the Brexit vote, several top managers in China are thinking about moving their European headquarters from Britain to Germany”, says Yi Sun, a partner at EY Germany.

Regulatory scrutiny

Midea’s announcement of its offer for Kuka on May 18 rang alarm bells in the German political elite, given the company’s place at the heart of “Industrie 4.0” — Germany’s ambitious drive to link the real-life factory with the virtual world. The company is best-known for big industrial robots used to make things like cars and planes. But it is working on more intelligent machines that can send and receive data from the cloud and connect to the much-vaunted “internet of things”.

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World’s largest robot market

Founded by Josef Keller and Jakob Knappich in the Bavarian town of Augsburg in 1898, Kuka began life as a producer of acetylene gas for street lighting, and later branched out into welding machines. In 1973, it developed one of the world’s first industrial robots.

Midea’s relationship with Kuka goes back years. The company has installed about 100 Kuka robots in its factories, producing everything from vacuum cleaners to washing machines. Last year, Midea acquired a small stake in the German company, building it up to 13 per cent by this spring. Then in May, it unveiled a tender offer for all the remaining stock, offering €115 per share — a chunky 36 per cent premium to the previous day’s closing share price.

But as it moves away from heavy industries towards a more consumer-driven economy, China intends to become one of the world’s top 10 automated nations. By 2020, it plans to have 150 units per 10,000 workers, Wang Ruixiang, president of the China Machinery Industry Federation, said last month.

“China is becoming the largest robotics market in the world, [and] we want to capture that growth potential,” says Midea’s Mr Gu. “There’s demand not just from us, but from all industries.”

Kuka is already big in China, with 15 per cent of the market, but it wants to be even bigger and having Midea as its owner will help.

“Midea has a clear picture of how Kuka will benefit from the Chinese market,” says Till Reuter, Kuka’s chief executive. But the reaction from Kuka’s workforce to the offer was one of shock.

“Anyone who hears China and Chinese investments being mentioned initially takes fright,” says Armin Kolb, the workers’ representative on Kuka’s supervisory board. “I’d be lying if I said everyone kept calm and everything proceeded as normal.”

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Ms Merkel, who happened to be on a trip to China with a delegation of German businessmen, also reportedly expressed her concern. A key source of irritation in Berlin is that such a deal would be impossible in China, which in many industries restricts foreign companies to joint ventures. “We expect reciprocity on the Chinese side too,” she told officials during the trip.

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The future of German industry?

What may have swayed them were the concessions Midea made to win support for the deal. It promised a hands-off approach, committing itself to preserve existing jobs and factory sites for the next seven-and-a-half years, and not to delist or restructure the company during that period.

“Alternative bids from other investors would have been worse, and would not have ensured our long-term future,” says Mr Kolb.

Full article: German angst over Chinese M&A (FT)