5 years ago

MDA Technologies 4/2016

MDA Technologies 4/2016

Author: Sushen Doshi,

Author: Sushen Doshi, correspondent India for MDA Technologies China now flexing its muscle in the hightech sector NEWS AND MARKETS Sushen Doshi Chinese companies are on course to set record levels of investment in Germany this year, raising concerns about Germany losing the grip on its most innovative and technologically advanced companies. In 2049, People’s Republic of China shall be celebrating the centenary anniversary of its founding, by this time China aims to be the world’s leading power in science and technological developments. At a conference in May, Chinese President Xi Jinping asserted the government’s goal of making the country a dominant high-tech player worldwide. The Chinese government is acting as a major driving force to ‘create internationally competitive companies’ with this policy also reflecting in its current five-year plan and its “Made in China 2025” initiative. The shopping spree As China’s double digit growth slows, its investors have now set their sights on Europe in search of desirable targets for acquisition. It is particularly the case in Germany where in 2015 China had completed approximately 25 mergers and acquisitions with German companies. In the just first half of 2016 Chinese companies have targeted, acquired or are in the process of acquiring more than 24 German firms already, that’s roughly a rate of one acquisition per week. At this pace they will soon surpass the record of 28 German acquisitions racked up in 2014. The deals have already achieved a new high in terms of spending as well. By May 2016, Chinese investors had offered more than $ 9 billion for German companies, well beyond the record $ 2.6 billion splashed out in 2014. So far in 2016, 24 of a total 120 Chinese acquisitions in Europe have been in Germany, followed by France and U.K. with 15 each. What makes German companies appealing to the investors are the high technical standards, high priority for R&D as well as the excellent reputation of its employees with high productivity. But Chinese investors are not just interested in any given German company. Germany is the top target for very specific sectors of industry. Chinese investors follow a strategy which places them in a dominating position in the world market by searching out the big players in relatively small industry sectors. For example, back in 2012, Chinese companies acquired concrete pump producers Putzmeister and Schwing positioning China as the global market leader for such pumps; or the billion-dollar takeover of KraussMaffei Group, a cutting-edge equipment maker that processes plastics and rubber. Another example of a Chinese company seeking to buy into Germany’s technological and research prowess is the purchase of EEW, a corporation based in Germany’s Saarland region that converts waste into energy. And the latest $ 5 billion takeover deal involving Kuka, a German manufacturer and one of the global leaders in industrial robotics and automation. MDA Technologies 4/2016

To be a market leader in any industry segment, why isn’t China developing its own domestic companies and then fighting for the market share? The problem with this strategy is that it takes a lot of time and excellent technical abilities to compete with the Germans. Not that China doesn’t have the skills and abilities to create technically mastered products but the worldwide perception of Chinese companies has been ‘masters of low cost products’ whereas German companies are associated with ‘high class and quality’. In order to break this perception and create a new image for themselves it will take a lot of time, commitment and consistent improvement in all the industry segments from Chinese companies. But China has other ways of achieving its target. By partly or completely acquiring the German companies the hope then is that these mid-sized German companies can serve as launching pads in the world market. These acquisitions also provide the Chinese with valuable resources in terms of technology in various forms besides patents and the knowledge in its technological assets like products, machines and manufacturing plants, but it is especially the ‘integral knowledge held by the employees’, which is most sought after. In the past decade, more than any other European country, Germany has benefited the most from rapid expansion of Chinese economy. Between 2005 and 2014, German exports to China have more than tripled, reaching approximately 75 billion Euros. German companies, especially the auto sector, profited from a surge in Chinese demand that counterbalanced the weakness in their home European market. In 2015, however, exports to China declined for the first time in nearly two decades. And now after a golden decade of economic ties between Germany and China, concerns are growing in Berlin especially over the trade barriers to German firms in China and a muscular foreign policy adopted by Beijing. Concerns for Europe China’s resolve to ascend the technology value chain by outright purchase of the top tech companies is increasingly becoming a source of concern for many in Europe. Behind the surge in China’s European acquisitions are China’s rising labor costs and shifting demographics, which have slowed domestic growth. Now that China’s wage advantage has gone, the government has realized the importance to create world leaders in markets. The splurge is drawing attention not for the amount of money being splashed but the companies being targeted, some of which are considered fundamental in Germany’s ‘Industry 4.0’: the national initiative to digitize manufacturing. To fend off the Chinese bid for Kuka, German Economy Minister Sigmar Gabriel even called on European industrial groups to forge an alliance and make an alternative offer. For Germany, Kuka and its technological advances are of central importance to its industrial strategy of “Industry 4.0” with the company already operating a highly automated plant, or as they call it the ‘factory of the future’. The purchase of Kuka also has to be seen in the context of the Chinese government’s “Made in China 2025” plan which aims to enhance competitiveness in the manufacturing sector through automation involving “Industry 4.0” instead of labour intensive production. This seems to pose a direct challenge to the leading industrial nations like Germany. The Kuka takeover also shows that the political class in Europe only has limited tools to secure the future of high-tech industries as well as research and development in Europe, but for strategically important sectors, it needs to be examined what could be done at a national level and at the EU level. For instance, in the US, the government did not hold back from acting against a few business deals in the name of national interests or whenever key technologies are involved. A powerful committee comprising of members from various ministries such as Biggest Chinese acquisitions of German companies 1. Kuka – Automation and robotics 2. EEW Energy from waste – Energy sector 3. Hanwha Q cells – Technology 4. KraussMafei Group – Machinery 5. Putzmeister – Pumps 30 25 20 15 10 5 0 Number of mergers and acquisitions done by Chinese companies in Europe 2016 2015 Germany France UK Switzerland 1. Germany: 24 (2016 * till date), 25 (2015 *entire year) 2. France: 15 (2016), 12 (2015) 3. UK: 15 (2016), 26 (2015) 4. Swiss: 11 (2016), 10 (2015) finance, defence and justice, stopped the Chinese conglomerate from acquiring the US chipmaker Micron Technologies in a transaction valued at around $ 23 billion. Chinese acquisitions are often accompanied by Germany’s fears about relocation of production facilities, intellectual property rights, patents and loss of jobs. Even though Germany’s fears about relocation and loss of jobs might be striking, it is not yet alarming because over the last few years with so many acquisitions taking place, we haven’t seen any relocation of production. The times in which a factory can be taken down and built back up in China are gone. In fact, Chinese investment can even open up big opportunities for German firms - for instance by improving their access to the Chinese market. Also interesting to note is the timing of these mergers and acquisitions, as they have come at the same time the European industry is complaining about difficulties in doing business in China with the environment becoming more hostile towards foreign companies and markets remaining skewed in favour of domestic competitors. This could be very damaging in the long run as investor confidence starts to deteriorate. China’s response A lot of financial and technology analysts in China are unable to comprehend why politicians in Europe are so worried about the takeovers. Their perspective is that the acquired companies are not involved in the development of any sensitive technologies. For example, Kuka which only offers robotic solutions and automated systems for advanced manufacturing. As long as there are no plans to de-list Kuka from the German stock exchange, there is no reason for the Europeans to be nervous. The Chinese market has great potential. In future, international companies may not be able to maintain their dominant position over their Chinese competitors. When it comes to robotics the Chinese are already about to emerge as a competitive player, at least in the low and mid-tech segments. China is no longer just the factory of the world, now it is a big enough market to allow a Chinese brand to become a global leader in the respective industry sector. Photographs: teaser fotolia z MDA Technologies 4/2016