Last November – two years after its $5 billion takeover by Chinese electrical appliance maker Midea – Kuka’s chief executive told reporters in Shanghai that the German robotics firm was well positioned to become the leading player in industrial automation in China, with its parent group’s help.
But Till Reuter wasn’t destined to deliver on his prediction: a few weeks later he was ousted by his Chinese bosses.
When Midea made its bid for Kuka in 2016 German politicians worried about giving up a prized asset to an ambitious rival in the robot world. They were persuaded to wave the bid through, after assurances that business would continue largely as usual. Kuka’s main investors also lobbied for the takeover to happen, saying it would deliver significant new sales in the fast-growing Chinese market.
A little more than two years after Midea took control, both of those forecasts don’t look quite as reliable. The more cynical commentators have blamed post-merger rifts for tainting what was once heralded as a trophy acquisition. But other analysts diagnose it as more a case of short-term turbulence in a robotics market derailed by China’s trade and tech spat with the US.
What management changes have there been?
Kuka’s latest China CEO James Wang Jiangbing left the company at the end of June, although local reporters didn’t specify if he was sacked. Recruited by Reuter, Wang knew German corporate culture well, having worked for firms including Siemens and Roland Berger. He was promoted to head Kuka’s 1,500 staff in China last August, but the employees are now set to get their fourth new China boss since the takeover in 2016. The appointment will be made directly by Midea this time, bypassing Kuka’s German head office in Augsburg, says Jiemian, an online media, citing company insiders.
Are there also personnel changes at the head office in Augsburg?
China’s state-run newspapers hyped up the German firm’s coupling with Midea as one of the most promising matches of the slew of acquisitions made by Chinese firms overseas in the last couple of years (see WiC385). International media outlets were more cautious, which seems to have been wise in the wake of Reuter’s surprise departure last year.
After 10 years as an M&A banker, Reuter arrived as Kuka’s boss in 2009. He and an investment partner had amassed a 29% stake and the shareholding turned out to be pivotal when Midea came knocking in 2016.
Despite concern from German politicians (see WiC326), Reuter thought the bid premium was too good to turn down. He described the deal as offering “the best of both worlds” – German expertise and Chinese partnership.
Kuka was already active in China when Midea showed interest: Reuter was in charge when it opened its first plant there in 2013 and revenues there had grown nearly tenfold from 2009 to almost €500 million ($563 million) in 2017.
However, in an interview with the Financial Times that summer, Reuter said that his goal was growing Kuka’s business faster, and in mid-2017 he was still confident the China market was the means.
Back then there were few indications that he would soon be gone – in fact Kuka had extended Reuter’s contract as CEO till 2022.
Then came the shake-up: not just for him, but for five other senior managers, who followed him out of the door.
Peter Mohnen, Kuka’s CFO, has been appointed as interim CEO until a long-term replacement is found.
Why the management reshuffle?
Kuka’s recent performance had been disappointing. Sales fell in the first three quarters of 2018, dragged down by weaker demand for six-axle robots, one of its core products. Plans for stronger sales to new customers in China didn’t materialise as hoped, and Kuka sales and profits fell substantially.
This year has started better, with an 8% increase in profit in the first quarter on slightly declining revenues. But the weaker-than-expected performance has been reflected in Kuka’s share price: its market capitalisation had dropped to about €1.8 billion as of this week, significantly less than half the price that Midea paid for a controlling stake three years ago.
For Kuka’s overlords at Midea, a more fundamental concern is the unravelling of the logic that drove the deal in the first place.
Part of the rationale for the takeover was that Kuka would benefit from a local partner in China, helping it to challenge Japanese rivals like FANUC and Yaskawa Electric, and the Swiss giant ABB.
But progress here has been limited. “Over the past two or three years, Kuka’s sales in China have been lagging behind rivals such as FANUC and Yaskawa. Within the Big Four league, the gap between Kuka and the leaders has been widening,” one industry expert told Jiemian.
More a case of strife than synergy?
Faced by the slump in sales, interim CEO Mohnen announced plans to cut costs by €300 million before 2021, with a third of the savings expected this year.
The downsizing has already seen 150 jobs disappear from Kuka’s payroll of 14,000, with 350 more anticipated to go this year. That’s making the German labour unions restless – when Midea was pursuing Kuka it promised to maintain staffing numbers to 2023.
Midea also committed to maintaining Kuka’s existing strategy and the independence of its executive board, which is made up of its CEO and the CFO.
Midea’s voice is loudest on the 11-person supervisory board, where the Chinese firm has three representatives (six members are elected by Kuka employees).
Kuka said in its annual report last year that the relationship between its supervisory and executive boards has been “constructive”.
However, the FT reported last year that Reuter had clashed with Midea’s CEO Andy Gu over Kuka’s strategy in China and that his departure was a reflection of the fact that the German firm is now “firmly in Chinese hands”.
Handelsblatt has looked further back for the reasons for Kuka’s recent malaise, reckoning that both sides spent too much of their time overcoming the political resistance to the 2016 takeover.
It claims this diverted attention from the operational challenges Kuka faced as it plotted its next growth phase. These less public issues have been harder to resolve, the German newspaper added, because of a “cultural clash” with the new owners over the kind of robots that it is producing.
Midea executives have been critical of Kuka technology for being “overpriced and over-complicated”, with delivery delays adding more woes, Handelsblatt said.
Where does Midea see the future?
The sense is that Midea wants to capitalise on Kuka’s expertise to reach deeper into healthcare and warehouse automation, and to create a supply chain in smart appliances and internet-of-things (IoT) devices that profits on its pre-existing leadership in products like air conditioners and washing machines.
Part of that strategy has seen the launch of a new joint venture in Foshan: a Rmb10 billion ($1.45 billion) factory, where the German firm will develop a range of smaller and simpler robots. One of the hopes is that the switch will wean Kuka off some of its reliance on the automobile market, the segment from which it has traditionally derived the bulk of its revenue.
But advancing into new areas may also put more pressure on the differences in management style between the two companies, something that Wilfried Eberhardt, Kuka’s marketing boss, hinted at during a panel discussion at a conference in Munich last year.
“Very often we Germans tend to take a very long term view, with deep analysis, but we can spend too much time doing that,” he acknowledged. “But when you go to China, they just do it, and you can see the advantages. That brings a lot of speed. We have to learn from them that speed and change is not a bad thing. It’s good. It’s just that sometimes it’s not easy and not very comfortable.”
Isn’t the robotics industry slowing down more broadly?
It’s certainly true that the trade and tech rows between China and the US have sapped the investment appetites of many of the bigger manufacturers.
Demand for industrial robotics in China hasn’t been as strong over the last 18 months as proponents had hoped either. The Chinese have been the world’s biggest buyer of industrial robots since 2013 and about 130,000 robots were sold there last year, according to the International Federation of Robotics (IFR). But that figure is nearly a fifth lower than the IFR’s earlier projections and represented a 3.6% year-on-year drop in sales.
That was the first annual decline since 2009, following five consecutive years of double-digit growth.
Demand for industrial automation has been diluted by the struggles of some of the sector’s key clients: notably the carmakers and 3C manufacturers (computers, communications and consumer electronics).
In 2018, car sales in China fell for the first time in 28 years. About half of Kuka’s sales of industrial robots and related manufacturing systems are to automotive clients, HSBC research says.
Its rivals have felt some of the impact as well: both FANUC and Yaskawa reported a drop in 2018 revenues and both blamed sluggish demand from China for the decline.
Longer-term, the prospects look better for Kuka?
Mohnen described Kuka’s situation as “a ship in stormy water” at the shareholder meeting in May. But he has been trying to play down the suggestions of tensions between the firm’s supervisory and executive boards. The company also talked up the launch of an “inter-culturally experienced” taskforce as a conduit for driving change.
Of course, all the major robot makers have high expectations for sales in China, which is home to about 70% of the world’s electronics production, as well as a growing proportion of its automotive plants, thanks to its status as the world’s largest car market.
Both of those industries are major buyers of industrial automation. Optimists add too that robot density ratios in China trail those of other producer economies by some distance: China reported 97 industrial robots per 100,000 manufacturing workers in 2017, half as many as the US, and a seventh of South Korea’s, Bloomberg says.
That discrepancy is also why Beijing’s policymakers are pushing for a homegrown robotics sector as one of the priorities of the Made in China 2025 plan (a government-guided programme that continues to advance, even though it is no longer being trumpeted in the media because of the tensions with Washington).
Beijing’s stance is that it wants China to be the major supplier of the world’s industrial robots, not just the leading customer for them, and Kuka’s new factory in Foshan will address some of that mismatch, churning out at least 75,000 more robots a year by 2024. ABB also started construction of a new plant in Shanghai this month with a projected annual output of 100,000 robots when it is finished next year.
The more immediate challenge for Kuka executives is how to reboot sales growth by working with Midea on new opportunities, while also operating largely independently of Chinese control.
As one of the more high-profile acquisitions by a Chinese firm, the Kuka takeover is also going to serve as a yardstick for future M&A, especially for Chinese firms looking to buy their way into more advanced technologies.
German broadcaster Deutsche Welle believes that the appointment of the next Kuka boss will be scrutinised closely in Berlin too. “A China-centric appointment to replace Reuter will likely confirm the worst fears that critics of the deal in Germany had,” it warned.
Despite the challenges, the industrial logic of the original deal still seems to hold, especially if Kuka’s expertise can be brought to bear in sectors where Midea delivers the market access.
Finding the right mix between the two companies is clearly going to be crucial, with Handelsblatt predicting that the interim chief executive could make the role permanent if Mohnen is better able to bring the different teams in Augsburg and Foshan together.
“Given the controversy surrounding the takeover, Mohnen has to strike a particularly delicate balance. On the one hand, he must improve results and keep his Chinese bosses happy. But he also needs to convince staff and politicians in Germany that Kuka is still properly independent,” the newspaper said.
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