Takeover Turbulence

Robot maker Kuka feels the squeeze

China International Industry Fair kicks off in Shanghai
Kuka is trying to show strength. Source: picture alliance

Kuka’s factory west of Shanghai produces dozens of robots a day, but if management has its way, workers will soon be producing twice as many. On a recent day, a neon display on an orange and blue factory wall counted the number of machines being made. Two down, 41 to go. Employees swiftly packed them up for trucks bound for Shanghai and beyond. The German robot manufacturer is now under Chinese ownership, and China is where Kuka is focusing on growing its business.

According to CEO Till Reuter, this China-oriented strategy won’t come at the expense of workers in the company’s headquarters in Augsburg, but many employees are skeptical. In late November, Mr. Reuter announced that 250 positions in Kuka Systems – the company’s largest division – would be cut.

The unit employs 5,000 of Kuka’s 13,000 employees around the globe, and is responsible for producing automated solutions for the automotive and aerospace industries. “We don’t understand downsizing on this scale,” said Michael Leppek, head of the Augsburg branch of IG Metall, Germany’s largest labor union. He said talks with management are underway to “get to the bottom of it.”

But Kuka’s problems run deep. As its core systems business struggles, the robot maker is also fighting to fend off low-cost Chinese competitors. It is a test of commitment for China’s Midea, which completed its takeover of Kuka in January. A person familiar with the deal said the appliance maker may have overstretched itself with the €4.5 billion ($5.3 billion) purchase.

In Germany, “cutthroat price competition” is slowing down orders.

In September, the company parted ways with two managers in its systems division. Kuka has also acknowledged “capacity constraints” on some projects in recent weeks, but it appears the company could be facing more serious challenges. “Kuka Systems Augsburg is facing a reorientation with structural changes, which will affect some employees,” a spokeswoman said.

Kuka’s troubles have accumulated slowly but steadily. In addition to costly project delays, an insider said that Kuka is struggling to find enough workers to keep up with demand in the U.S. and Asia, the best markets for its systems products. Meanwhile in Germany, “cutthroat price competition” is slowing down orders. “The division has been a problem child for a while now, not just since (Midea) took over Kuka,” a source said.

In other divisions, such as Kuka Robotics, the company’s second-largest unit, finances are much better – earnings before tax and interest (EBIT) were at nearly 11 percent for the last three quarters, with a 21 percent increase in orders. While Kuka’s systems business is still profitable with EBIT at just under 5 percent, orders are down by 12 percent. Kuka blames a “highly competitive market environment.”

It’s unclear whether Midea was fully aware of these problems prior to its decision to bid for the business. The appliance maker offered €115 per share, a price that no other suitor was willing to match, despite political pressure to keep the robot manufacturer under European ownership.

More than anything, Kuka is a strategic investment for Midea, which is well aware of the tremendous potential for growth of the robotics industry in China. In 2015, there were only 49 robots for every 10,000 workers in China, compared to 301 in Germany, according to the International Federation of Robotics, an industry association.

By 2020, it’s estimated that China will account for 40 percent of all industrial robot sales. China’s government is supporting this expansion, providing subsidies, tax breaks and rent-free land for manufacturers.

So far, Kuka remains a good business for Midea: It’s projecting a 12 percent increase in revenue this year, to €3.3 billion, and new orders have jumped almost 6 percent since September. But sooner or later, it will have to reckon with the unique challenges of the Chinese market.

Georg Stieler, with technology consulting firm STM China, said 2017 would be another record-breaking year for foreign manufacturers, but warned that margins would continue to shrink. ”Competition among the leading robot manufacturers is huge,” he said.

The Chinese market, long dominated by overseas companies, has also seen a new wave of domestic competition. More than 3,000 robotics firms have sprung up in China in recent years. While many of them are fake companies set up to cash in on government subsidies, Mr. Stieler said, Chinese authorities are stepping up efforts to crack down on these scams.

There may be yet an additional challenge for Kuka. Now that the company is under Chinese ownership, some of its most important clients in the automotive industry may be losing trust in the robot maker. Considering the tightening of China’s internet security laws and growing state influence on foreign companies, Kuka’s German automotive partners are rumored to be expressing concerns about keeping research centers in China.

Meanwhile, at Kuka’s production plant outside Shanghai, robots are displayed next to a photo exhibition of the company’s long history. Black-and-white images depict Kuka’s founding as a housing and street light company in 1898. So far, there are no photos related to Midea’s takeover.

This article originally appeared in German business weekly WirtschaftsWoche, a Handelsblatt sister publication. Lea Deuber, Martin Seiwert and Melanie Bergermann are reporters for WirtschaftsWoche. Amanda Price in New York City adapted this article into English for Handelsblatt Global. To contact the authors: unternehmen@wiwo.de, martin.seiwert@wiwo.de, melanie.bergermann@wiwo.de.

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