M&A, Talking Point

Going for the Germans

Midea in multi-billion dollar bid for next-generation robot maker Kuka

U.S. President Obama and German Chancellor Merkel watch the work of KUKA robot during their tour at the Hannover Messe in Hanover

Arms race: firms like Kuka are a key part of Germany’s industrial masterplan, making their sale sensitive

According to the Chinese zodiac, 2016 is the year of the monkey. But you could be forgiven for thinking that it is dedicated to robots instead.

Robots are everywhere at the moment: in the news, at tech fairs and in government reports. That’s despite China already becoming the largest market for industrial automation, with unit sales rising 16% last year, or twice the global average, according to the International Federation of Robotics.

In fact, Chinese authorities want to see even faster growth, hoping that the rise of the machines will help with a raft of economic and social challenges, from overcoming labour shortages to caring for the elderly.

That meant it was headline news last week when China’s biggest home appliances manufacturer Midea offered $5 billion for a controlling stake in the German industrial robot firm Kuka.

What’s the background to Midea’s bid?

Founded in 1968 in Guangdong, Midea has been on a diversification drive for some time. It ranks first among all Chinese home appliance makers in exports (overseas sales reached $8 billion last year and accounted for 40% of Midea’s revenue in 2015) and it is keen to sell more of its air conditioners and microwave ovens in global markets such as France and the US. That means Midea has been acquiring foreign brands, and in March it bought Toshiba’s home appliances business for $490 million.

Midea has been looking to diversify into new product areas as well, including two joint ventures with Japan’s Yaskawa, one to develop industrial automation, the other to produce robots for service industries. Along similar lines it raised an initial stake in Kuka beyond 10% in February, saying that it wanted to increase its shareholding further. So this month’s bid for more of the Augsburg-based firm should have come as little surprise.

The goals are twofold. Midea wants to use more automation on its own production lines. “If it’s a task that a robot can do, we’ll have one do it,” Wu Shoubao, a manager from Midea’s air conditioner division, told Caixin Weekly last year.

It also plans to develop robotics products to sell to others and Kuka seems well positioned to help in China, where it opened a Shanghai factory three years ago.

The German firm currently generates around €420 million ($470 million) of sales in the Chinese market and hopes to increase its revenues beyond €1 billion by 2020.

Another sign that China is joining the robot revolution?

WiC looked at the background to the rise of China’s robot economy – as well as Midea’s own – in its Focus edition on the Pearl River Delta earlier this year (see www.weekinchina.com/focus-editions).

The motivation is well known: years of wage inflation have pushed up labour costs to a point at which investment in automation looks less daunting. Previously China counted on its vast pool of migrant workers to spur growth, exploiting its dramatically lower cost of labour to grab business from more advanced economies. As this situation changes, the old model is losing its lustre. That’s leading to more cases like Changying Precision Technology from Dongguan in Guangdong, which shifted its plant for mobile phone parts to an all-robot operation last year.

Changying says operations now run around the clock, output has tripled and product quality improved markedly. But less than a tenth of its 650 employees kept their jobs, the media also reported.

Of course, much manufacturing work requires flexibility and dexterity that the current generation of robots cannot provide, and it may have been this kind of technical challenge that has slowed the revolution at contract manufacturers like Foxconn. Indeed, that firm has come up short on its promise to have a million robots working at its plants by the end of 2014.

The same picture applies to the wider economy, where the Chinese are some distance behind their rivals with just 36 robots per 10,000 workers – a tenth of Germany’s ratio, and a fifteenth of South Korea’s.

Local robotics firms are relatively inexperienced too, with Qu Daokai, the president of Siasun Robot and Automation – China’s largest robot maker by market value – describing the homegrown sector as “like a toddler” (we first mentioned Siasun in WiC4 when it was an even more junior player. The Shenzhen-listed firm now has a market value close to $6 billion).

Often they are being forced to turn to imports in the effort to catch up. “Most of the components are still imported from foreign countries, whose steep tariffs increase the cost of robots,” Qu told the China Daily last month.

That’s frustrating for policymakers, who don’t want to repeat the experience of the last generation, when the manufacturing economy was too reliant on foreign technology, eroding its share of the final profits. Hence the release of the latest development plan from the Ministry of Industry and Information Technology last month, which set goals for raising robot-to-worker ratios fourfold by 2020 and tripling the number of domestically produced machines.

The blueprint is promising easier financing, tax breaks and streamlined certification procedures for companies involved in the production of high-end robotics.

“With labour costs rising and the demographic dividend gradually disappearing we must change to a mode of production which is smarter, more flexible and precise. The need to build a new intelligence-based manufacturing system is extremely urgent,” it warned.

An invite to Industry 4.0 – the bigger prize for Midea?

The rationale for industrial automation goes far beyond the basic goal of replacing higher-cost workers; instead focusing more on a world in which robots are completing tasks beyond the spectrum of human ability.

This new era is the fulcrum of Germany’s plan for ‘Industry 4.0’ – the next generation of ‘smart manufacturing’ that draws deeply on technological advances in areas like big data and the ‘internet of things’.

The Chinese have been talking about something similar in their ‘Made in China 2025’ plan – a document that seems to have been inspired by the German original.

The vision is for a future in which factories use new technologies to create a digital supply chain. Production and logistics are integrated and optimised, allowing the robots to work with greater precision. These connected machines also generate huge volumes of data that allow them to “learn” autonomously and communicate across company-wide platforms.

Because the final goods will be connected to the internet as well, there are opportunities to manage servicing and upgrade cycles, and to incorporate reams of information on consumer behaviour into new product design.

This is the brave new world for China’s industrial planners. Reaching it looks daunting – though investments in companies like Kuka may make the journey a little easier.

“Skipping an entire stage of industrial development – from Industry 2.0 to Industry 4.0 – may sound attractive, but it requires a hard climb; it would mean introducing far more automated machines along with new forms of data-driven coordination,” Klaus Meyer, a professor at the China Europe International Business School in Shanghai, told Forbes magazine last week. “In reality, many discussions I have with people in China are mainly about automation of production, rather than with integration of factories and value chains using big data analytics. This is where Kuka – one of the world’s leading robot manufacturers – comes in.”

The robot revamp will prove especially important if Industry 4.0 has the same disruptive impact on manufacturing that social media tools such as Facebook and WeChat have had on communications. Kuka says its platforms are already game-changers as new technology allows more complex robots to be configured and controlled by people with little technical knowledge, just as smartphones are seen as simple and intuitive to operate today. The melding of data, analytics and robotics should help to build tools for other sectors, including medical diagnosis. But the implications are going to be most profound for manufacturing, moving some of its focus away from lowering unit costs to a context characterised by higher quality, and just-in-time production.

What are the chances of Kuka accepting Midea’s offer?

The €4.5 billion offer from the Chinese buyer was made at a 36% premium to Kuka’s closing share price before the bid, valuing the German firm on a price-to-earnings multiple of 38 times.

Smaller shareholders might be tempted to sell at such a lofty valuation. Midea has made clear that it wants to own more than 30% of Kuka, and in passing this threshold it is required to make a general offer for all the outstanding shares. But any effort to acquire complete control will need the agreement of German billionaire Friedhelm Loh and the family-controlled Voith Group, which own almost a third of the company between them.

“We, as the largest shareholder, expect Midea to explain its plans and intentions,” Voith told Reuters in a statement.

In fact, Midea is trying to position the bid as an increase in its current shareholding rather than as a n outright takeover and says that it wants the major shareholders to stay invested. It also confirmed that it is committed to maintaining Kuka’s headquarters in Augsburg and that there are no plans to alter the group’s structure.

Analysts say that it is relatively unusual for a suitor to make an unsolicited bid for a minority stake. Perhaps, though, it’s designed to reassure Kuka’s customers that its independence won’t be compromised. There is obvious sensitivity here, says Meyer from CEIBS, as competitors in the white goods industry could have second thoughts about building new plants based on Kuka’s technology if Midea is in a position to see sensitive data.

What else does the bid say about Germany’s goals?

Midea’s softly-softly approach to the Kuka deal might help with anxiety in the German establishment too, as the Chinese raid deeper into its manufacturing heartlands.

The policy line from Berlin is to avoid interference in cases of overseas investment like this, although the temptation to intervene will be stronger when a standard bearer for Industry 4.0 is involved.

“Regulators in Germany and elsewhere will scrutinise the deal,” Erik Gordon, a professor at the University of Michigan told the Wall Street Journal. “Washing machines are not considered crucial technology, but robots are.”

After all, the German leadership has been extolling the new era of robotics in competitive terms. “We must – and I say this as the German chancellor in the face of a strong German economy – deal quickly with the fusion of the online world and the world of industrial production,” argued Angela Merkel in Davos last year. “Because otherwise, those who are the leaders in the digital domain will take the lead in industrial production. We enter this race with great confidence. But it’s a race we have not yet won.”

Merkel was expressing concerns that the world’s tech titans might get the upper hand on Germany’s famed Mittelstand, dictating terms to its manufacturers. But allowing the Chinese to get their hands on one of the pioneers in the sector hardly helps in the quest for victory, complains Jost Wübbeke from Berlin’s Mercator Institute for China Studies.

Wübbeke warns that it would be naïve to take Kuka’s long-term independence for granted or to assume that it can keep its technology under wraps once the two sides enter into joint production. He puts the Midea offer for Kuka in the same bracket as other Chinese investments in German machine tools, like ChemChina’s €925 million swoop for industrial machinist KraussMaffei – a deal which was partly motivated by the Munich-based firm’s advances into smart manufacturing. The intentions were similar for an investment in Stoll, which makes knitting technology, by the Shang Gong Group and Shanghai Electric’s stake in Manz, which specialises in electrical components. (There were 36 Chinese acquisitions of German firms last year, Nanfang Daily notes.)

Wübbeke says that selling more of these companies to foreign investors is the equivalent to giving up Germany’s grip on the technological future. “If China’s buying spree in this sector continues at the current speed and volume, Industry 4.0 may end up being China’s and not Germany’s success story,” he worries.

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.