CHINA CALLING

Beijing on German Shopping Spree

kuka.dpa Picture-Alliance.Huang Zhengwe
Kuka robotics on display at the China International Industry Fair 2015 in Shanghai, China.
  • Why it matters

    Why it matters

    Acquisitions by Chinese investors stand to transform the makeup of small and medium-sized companies known as Germany’s “Mittelstand.”

  • Facts

    Facts

    • Chinese investment in foreign companies more than tripled in value worldwide between 2013 and 2015 — from $154 billion to $481 billion.
    • A 2014 poll by U.S.-based Pew Research showed roughly 90 percent of Germans disapprove of foreign investment in their country.
    • Chinese takeovers during the first quarter of 2016 accounted for nearly 30 percent of global acquisitions.
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    Audio

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When shareholders of German robot maker Kuka visited the company’s headquarters in Augsburg last month, it wasn’t just to get a look at the latest models.

Investors were far more eager to hear from the company chief executive, Till Reuter, about a bid by Chinese appliance maker Midea to increase its 10 percent stake in Kuka to more than 30 percent.

Mr. Reuter is now trying to sell the idea to skeptical investors at home. Addressing shareholders at the company’s annual general meeting, he touted China as “the biggest robotics market in the world.” Midea’s influence, he said, would give Kuka the chance to grow there – and virtually guarantee the company’s goal of raising revenues from €3 billion to €4.5 billion by 2020.

“They invest in new machines and facilities and, in doing so, guarantee (German) jobs they’ve assumed control over. ”

Garrelt Duin,, state premier of North Rhine-Westphalia

Midea’s offer values Kuka at roughly €4.5 billion ($5.12 billion). But that has done little to ease concerns in Berlin about Chinese control of Kuka’s technologies, which play a pivotal role in the digital side of industrial production.

Some European policy makers have their own reservations about the deal.

The European commissioner for digital economy and society, Germany’s Günther Oettinger, has come out against the takeover, citing Kuka’s “strategic significance.” And German Economics Minister Sigmar Gabriel said he would prefer a deal with a domestic or European company.

It’s often a similar story when Chinese buyers make bids for “Mittelstand” businesses, the small and mid-sized companies that are the backbone of Germany’s economy. And in the first half of this year, investors from China made more offers for German companies than ever before.

Most recently, it was reported on Monday that over 80 percent of the shares in the struggling Frankfurt-Hahn Airport would be purchased by the Shanghai Yiqian Trading Company. It’s not the first struggling regional airport to be bought up by Chinese investors, and more such purchases are said to be in the works.

Amid Beijing’s growing interest in German industry, public opinion is decidedly against foreign takeovers, especially from China. A 2014 poll by U.S.-based Pew Research showed that 90 percent of Germans disapprove of investment from abroad.

Chief concerns are unfair competition, Chinese state influence, intellectual property theft, lack of transparency or the sale of key technologies.

But often those fears don’t bear out. Most takeovers don’t result in factory closures, job cuts or patent abuses. Instead, they open doors to the Chinese market – while allowing the companies’ German executives to continue running businesses as they see fit.

“They invest in new machines and facilities and, in doing so, guarantee (German) jobs they’ve assumed control over,” said Garrelt Duin, economics minister in the state of North Rhine-Westphalia, a hub of domestic industry in western Germany.

 

China's Corporate Hunger-01 Kuka chinese takeovers acquisitions

 

Employees seem happy enough under Chinese leadership too. A survey of workers by the union-friendly Hans Böckler Foundation found workers are “very satisfied with their new employers.”

In 2012, when Chinese competitor Sany announced plans to take over German concrete pump maker Putzmeister, workers were initially outraged. Hundreds of the firm’s 3,000 employees took to the streets in protest.

Ultimately, most of their concerns were unfounded. The company’s Chinese buyers reacted to the employees’ uproar with a charm offensive and job guarantees, which were recently extended through 2020.

Asked what has changed under Sany’s stewardship, the head of Putzmeister’s works council, Jörg Löffler, answered simply: “Nothing.”

The bosses in China appear to be mostly focused on their own market. They exercise little control over how Putzmeister’s management team under Gerald Karch sells concrete pumps around the world.

Volker Treier of the Association of German Chambers of Commerce and Industry, or DIHK, sees little cause for concern about excessive Chinese influence through German acquisitions. And union bosses seem to agree.

“The claim that Chinese investors just take the patents back home is unfounded,” said Wolfgang Nettelsroth of the North Rhine-Westphalia branch of Germany’s largest union, IG Metall.

Those reassurances are often ignored, however. At German chipmaker Aixtron — which is being bought up by China’s Fujian Grand Chip Investment (FGC) — many workers are worried.

In the years before Asian competition brought down prices, Aixtron flourished with its LED and semiconductor chip technology. But for four years now, the company’s numbers have been in the red.

FGC has promised to invest in research, guarantee jobs and keep CEO Martin Goetzeler at Aixtron’s helm, but the company’s employees remain skeptical.

“We have to wait and see,” said one engineer. “Besides, we can’t do anything about it anyway.”

Like Aixtron, a number of European companies have piqued the interest of Chinese buyers.

In the biggest deal of its kind, ChemChina plans to acquire the Swiss agrochemical firm Syngenta – at a cost of some $43 billion, or €37.8 billion.

In Germany, Chinese investors opted to buy EEW Energy from Waste, as well as the water technologies unit of Bilfinger.

Worldwide, the value of transactions involving buyers from China more than tripled between 2013 and 2015, surging to $481 billion from $154 billion.

If first-quarter figures carry over through the rest of the year, that would double in 2016. Chinese acquisitions during the first three months of this year accounted for nearly 30 percent of the value of all global takeovers.

“We are experiencing a catching-up process, where ultimately China will take on a status befitting the size of its economy,” said Berthold Fürst, co-head of European mergers and acquisitions at Deutsche Bank.

The changing economic priorities of China’s political leadership have only heightened the appeal of Germany’s Mittelstand.

“Until recently, Chinese takeovers were mostly concerned with securing the supply of raw materials,” said Mr. Fürst. “Now industry is in much sharper focus.”

In 2010, 10 percent of Chinese deals worldwide involved industrial firms. In the first quarter of 2016, that figure increased to 58 percent.

The shift is largely due to the waning effectiveness of China’s traditional growth model. For three decades, the country’s prosperity was built on the backs of young people, who toiled long hours in low-skill jobs for little money.

Today Beijing has different targets. As Premier Li Keqiang told Chinese parliamentarians, “We have to create competitive high-tech companies on an international level.”

The “Made in China 2025” program highlights 10 target areas for the country’s economy in coming years. They include information technology, automation, aeronautics and renewable energies.

As China sets its sights on those industries, the country’s entrepreneurs increasingly look to take over or merge with German companies.

Among them is Liang Yao, deputy director of a semiconductor maker, located four hours from Shanghai. Since his family founded the company 16 years ago, it has grown steadily. Today it employs 1,800 people and is listed on the Shenzhen Stock Exchange.

Mr. Liang has experience with acquisitions: He bought a U.S. firm, for instance, to boost his company’s American sales. And though he doesn’t have a specific purchase in mind, Mr. Liang expressed the desire to acquire a German firm.

“The companies have a high drive for innovation, but they often lack the money,” he said.

If he were to make an offer, Mr. Liang said he would put money into research while maintaining the structure of the company – all while selling his own products using the German brand name.

Attorney Changfeng Tu said many Chinese entrepreneurs have similar plans. Though he is based in Shanghai, Mr. Changfeng works for German law firm Hengeler Mueller, consulting on deals involving Chinese buyers.

“They have recognized that they need not only a company’s technology, but also its people to be successful,” he said.

Part of the reason German firms appeal to Chinese buyers is their management. Even relatively small Mittelstand companies often have experience when it comes to running a company with a global outlook – and Chinese executives are keen to take that know-how on board.

Their own track record in Germany is uneven, however. Chinese takeovers of TV maker Schneider in 2002 and aircraft manufacturer Fairchild Dornier in 2003 were both failed ventures.

And since China’s Meikai Group took a majority stake in Aachen-based machine products firm Schumag two years ago, integration has proven difficult. Meikai’s executives have yet to deliver on the capital increase they promised at the time of the purchase.

A source said communication was a problem from the start. Meikai CEO Miaocheng Guo spoke “neither German nor English” at the first supervisory board meeting after the acquisition, the source said. And a manager who translated for him spoke only broken English.

The source also said there was confusion about Germany’s stock corporation laws, which prohibited Meikai from joining the supervisory board until an elected member stepped aside.

There were far fewer growing pains in the case of ChemChina’s purchase of Munich machine maker KraussMaffei. CEO Ren Jianxin took his time getting to know the company even before the deal was finalized for €925 million in January.

One of his first meetings with KraussMaffei’s CEO, Frank Stieler, took place over beer and pretzels in Munich’s famed Hofbräuhaus.

In November, Mr. Ren led a Chinese delegation on a visit to KraussMaffei’s factory. He wanted details about the production process and turned to one of the company’s workers for answers, after shaking his hand. The encounter appeared to impress both Mr. Stieler and his workers.

How Chinese companies finance their deals is less straightforward.

“Buyers come forward with funds where it’s often not clear where the money is ultimately coming from,” said mergers lawyer Mr. Changfeng.

That support can frequently be traced back to the Chinese government, which allows investors to offer purchase prices that their Western counterparts can rarely match.

How affordable those acquisitions actually are for their buyers is a different question. On average, the ratio of debt to EBITDA (earnings before interest, taxes, depreciation and amortization) is 5.4 to 1 among Chinese buyers. For ChemChina’s takeover of KraussMaffei, it was 10 to 1.

Yet as long as the Chinese government backs those debts, the country’s investors have an advantage on the financing front. And when it comes to naming a price, Chinese buyers often take different factors into account.

“They have a significantly longer timeline and normally don’t have to justify acquisitions on the capital market right away,” said Mr. Fürst of Deutsche Bank.

It seems likely, then, that Chinese buyers will keep their pocketbooks trained on German companies.

Most recently struggling SGL Carbon, headquartered in Wiesbaden, has been in the sights of Chinese investors. Just two weeks ago, metal recycler Chiho-Tiande took control of Essingen-based Scholz Recycling. And Chinese electronics firm Skyworth swooped in to save Bavarian TV manufacturer Metz from insolvency. Even niche players, such as the Berlin maker of Schuke organs, have attracted Chinese investment.

In 2012, Beijing-based automotive supplier Lingyun took over Kiekert, the market leader in automotive locking systems based in North Rhine-Westphalia.

At first, employees expected the worst. But since the takeover, job numbers have gone down only slightly – a welcome turn of events for Kiekert’s staff. “Americans likely would have wiped out production here,” said one manager.

Karl Krause, who has led operations since 2007, said the company has kept its German profile internationally, but that Lingyun has opened doors for Kiekert in China.

The head of the company’s works council, Uwe Höhndorf, also is impressed. “They don’t interfere in daily business at all,” he said.

Instead, there are more subtle reminders of Kiekert’s Chinese ownership.

Out of some 400 workers at the company’s offices in Heiligenhaus, 15 are from China. A translator is present every time the supervisory board comes together. And ever since Lingyun boss Li Xizeng took control of the body, green tea is served at meetings.

 

Cornelius Welp, Melanie Bergermannn and Lea Deuber are editors with business daily WirtschaftsWoche. Rebecca Eisert, Mark Fehr and Max Haerder in Shanghai, and Anke Henrich and Harald Schmacher in Berlin contributed to this article. To contact the authors: wiwo@wiwo.de

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