Transformers, the sequel

Three Chinese white goods giants buy abroad – which got the best deal?

A staff member stands next to robots at a plant of Kuka Robotics in Shanghai

Best foot forward: Midea is taking control at German robot maker Kuka

In 1859 a French physicist by the name of Gaston Plante invented the world’s first rechargeable battery by separating two sheets of lead with linen cloth that had been soaked in sulphuric acid.

Back then, batteries had an energy density of about 30 to 40 watt hours per kilogramme. Today, the performance has moved on somewhat. NASDAQ-listed Altair Technologies is producing lithium titanate batteries with an energy density of about 4,000 Wh/Kg, roughly 100 times more productive. But this kind of technological advance lags far behind the huge leaps in information storage, where Moore’s Law crows that the number of transistors per circuit doubles every two years.

Improvements in battery density have been held back by the physical constraints of managing tangible quantities of energy and mass. As science magazines are fond of pointing out, overcoming this hurdle is the Holy Grail for the battery and energy storage industries.

It is also one of the driving forces behind Gree Electric’s planned purchase of Altair Technologies’ parent, Zhuhai Yinlong Energy, a maker of electric buses.

As we reported in WiC338, the Rmb13 billion ($1.95 billion) deal could be transformative for China’s largest air-con manufacturer. But Gree’s purchase is not just about electric vehicles, but battery technology too, where it wants to develop new capabilities for its move into smart devices.

Gree’s more advanced air conditioning units already sell excess electricity back to the grid. But in the not-too-distant future, homes are likely to become virtual power stations; employing solar panels to generate energy, which is stored in batteries that power all manner of interconnected household devices, including the family car, or alternatively sell the excess electricity back to the grid.

The takeover is one of a spree of M&A deals by China’s big three white goods manufacturers. Gree, Haier and Midea are all in the process of radically transforming their traditional and very China-focused manufacturing business models. All three anticipate a future that goes beyond simply producing the goods to creating an ecosystem in which they interact with each other and the wider world (a tech vision commonly referred to as ‘the Internet of Things’ or IoT).

The move up the value chain is supported by the National Development Reform Commission, whose Xu Lin tells China Daily that “by focusing on advanced technologies Gree will likely develop into a high-end service provider to China’s traditional manufacturing base”.

A feature in China Entrepreneur magazine has examined the pitfalls and opportunities that await the three as they embark on the next stage in their commercial development. On the surface, Haier’s $5.4 billion acquisition of GE Appliances (GEA) looks the most conventional of the deals. The purchase closed in June (Midea was also a bidder).

But China Entrepreneur believes that Haier is the most vulnerable of the trio as it reports lower margins than Gree or Midea (the new division from GE won’t help directly, as its margins are lower still). At the end of the first half, Haier reported revenues of Rmb48.79 billion compared to Rmb49.18 billion at Gree and Rmb78 billion at Midea. Net profit stood at Rmb3.32 billion, up 21.21% year-one year, but lower than Gree’s Rmb4.9 billion or Midea’s Rmb9.5 billion.

Haier currently has a leading market share in washing machines and fridges, while Gree leads in air-con and Midea in small appliances like kettles and rice cookers.

Financial analysts have a favourable view of the GEA acquisition as it not only helps Haier to become a more rounded player in the brands that it sells, but also a more balanced operator in terms of distribution.

That’s because future slowdowns in China might be counterbalanced by higher sales from the US market, helped by foreign exchange gains if the renminbi continues to depreciate.

HSBC forecasts that overseas sales will account for 47% of Haier’s total revenues in the 2017 financial year, compared to 13% during the first quarter of 2016, before GEA was consolidated into its accounts.

Shanghai-listed Haier has long had a reputation for innovation (potato-peeling washing machines anyone?) and the expansion of its product base has been accompanied by moves into the world of IoT. Here it is trying to establish the dominant eco-system for IoT-enabled products by making its operating system open source. It launched its U+ Smart Life platform in 2014 and later hooked up with Apple when it introduced its rival platform, HomeKit.

Midea’s move up the value chain has taken a slightly different direction, although it has also been looking overseas by acquiring Toshiba’s white goods business and the Italian air conditioning manufacturer, Clivet.

But the major acquisition has been Germany’s Kuka, one of the world’s leading robotics firms, alongside Switzerland’s ABB, and Japan’s Fanuc and Yaskawa Electric.

Earlier this year, the Chinese government outlined a five-year plan for the robotics industry which envisages three Chinese firms with a global presence by 2020. Midea is now leading the way after taking control of Kuka in August following three tender offers, which valued the firm at $5 billion. The German government approved the sale after initial reservations about the transfer of high-end technology.

For Midea, part of the focus is lean manufacturing and bringing down its production costs through automation. It also wants to sell automated production technology to third parties. China still trails nations such as South Korea and Japan in robot usage, where there are respectively 365 and 211 robots per 10,000 workers. According to China Entrepreneur, the Chinese figure currently stands at 17.

Midea says it can improve its own efficiency by a third through industrial robotics, although analysts have wondered whether the Kuka deal will cannibalise Midea’s existing joint ventures with Yaskawa (where one focuses on industrial, the other in service robots).

As part of its agreement with the German government, the Shenzhen-listed firm has agreed to retain Kuka’s separate German listing for the next seven-and-a-half years.

China Entrepreneur wonders whether Midea’s management is sufficiently international in its thinking, or culturally open enough, to capitalise on the Kuka deal.

It also questions whether Gree is in over its head in the fiercely competitive new energy sector. For example, Bloomberg has calculated that 200 companies are currently rolling out 400 new models of electric car and buses.

But all three firms have form when it comes to successful transformations. Haier’s CEO is Zhang Ruimin, the man who turned a bankrupt refrigerator manufacturer into a global giant using German technology (not to mention smashing 76 faulty fridges with a sledgehammer to highlight the need for quality; see WiC31).

Gree is led by arguably China’s most famous businesswoman, Dong Mingzhu. A company veteran, she is personally subscribing to the share offering that will fund the Yinlong purchase.

Analysts have also applauded Midea for its Rmb1.68 billion acquisition of home appliances brand Little Swan in 2008, which has been repaid more than tenfold in the intervening years.

Investors are interested in the trio too. Gree’s share price has been suspended since February pending the completion of the Yinlong acquisition, but Haier and Midea have both outperformed their respective indices. Midea has been particularly strong, rising 24.82% year-to-date versus an 11.29% decline in the Shenzhen Composite Index, while Haier is up 7.66% compared to a 12.67% fall in the Shanghai Composite Index.

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