Data drain

Drinking Our Milkshake

Sigmar Gabriel, Germany's economy and energy minister, pauses during a news conference following a two-day cabinet retreat in Meseburg, Germany, on Wednesday, May 25, 2016. In the latest response to the refugee crisis that's dogged German Chancellor Angela Merkel since last summer, her cabinet on Wednesday backed legislation that includes stricter requirements for asylum seekers to integrate into German society. Photographer: Krisztian Bocsi/Bloomberg *** Sigmar Gabriel
Let's not leave business to the markets.
  • Why it matters

    Why it matters

    Germany’s Mittelstand has grown strong by providing highly specialized, technical goods but competition from China means they may have to rethink the entire way they operate.

  • Facts

    Facts

    • Midea, a Chinese appliance maker, said it wanted to raise its stake in Kuka, a robotics maker based in Augsburg, Germany, to at least 30 percent from 13.5 percent.
    • The bid values Kuka at €4.6 billion, or $5.2 billion.
    • The German government favors a bid by industrial group Siemens, ABB or a carmaker to prevent technology transfers overseas.
  • Audio

    Audio

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Is there more state socialism in China or in Germany?

Anyone who has observed the German government’s desperate attempts to prevent the planned investment of Chinese electrical appliance manufacturer Midea in Augsburg robot producer Kuka could view Berlin as a larger stronghold of government interventionism than Beijing.

Attempts to stop Chinese, Arabs or Russians from investing in or taking over ailing German companies should be clearly rejected. Mergers and acquisitions are part of the DNA of the market economy.

Takeovers of German Mittelstand companies, which would be unable to continue growing due to insufficient capital, or have failed to resolve questions of succession, have been almost always positive when a Chinese investor is involved.

For many, the resulting access to the enormous Chinese market is like a turbo charger for growth. Besides, Chinese investors have developed a generally reliable sense of which pearl of a Mittelstand company is worth buying. They have also proven that they are better investors than the hedge fund branded as corporate raiders: more reliable, more interested in preserving than breaking apart companies, more committed to reaching settlements with employees and, as a result, more compatible with the German social market economy than with the predatory capitalism of Wall Street.

Still, there is the obligatory note of caution.  Germany cannot be naïve in its faith in saviors from the Far East. In the case of Kuka, the Chinese managers could siphon off the company’s technological edge for its domestic competitors.

An increase in Midea’s share to at least 30 percent suggests that this fear is wrong. It is data protection and its industrial grimace – industrial espionage – that could enter Kuka through the back door. In the era of networked Industrie 4.0, robots, 3D printers and software are ideal vehicles to transfer production secrets into the hands of uninvited rivals.

It is the “key security interests” worth protecting that make an intervention by the German government, under the Foreign Trade and Payments Act, possible in the first place.

The only building block that China is still missing is technological world market leaders like Kuka.

But there are also other reasons it makes sense to scrutinize Chinese attempts to purchase German companies. Profiting from growth in the world’s new power centers will be significantly more complicated than an expansion in our traditional markets. This applies to Africa, but also to the parts of Asia and Latin America that are emerging from years of political paralysis.

Turnkey, complete solutions instead of the delivery of machines and components are increasingly in demand. The German Mittelstand, operating in its niches, will have to rethink its approach. This also creates a completely new rivalry, especially with China.

China is preempting very successful German companies in third markets, partly with the strategy of doing things more cheaply, without reducing technical standards. Beijing’s consortiums – openly and, in some cases, covertly protected by the government – already offer today what German companies must increasingly offer in the future: total solutions.

Not individual X-ray machines, but entire clinics, and not individual hospitals but entire cities or infrastructure projects are in demand. And Beijing also brings along the financing. The only building block that China is still missing is technological world market leaders like Kuka.

Nowadays, the German response to this Chinese challenge can no longer be to tell buyers that although our products are more expensive to buy, they are ultimately more cost-effective, because they last longer. And the argument that we are not bringing along the workers but are creating local jobs is also no longer effective.

In the future, German companies will have to focus much more heavily on forming large consortiums, which offer turnkey, total solutions and include the necessary financing as part of a package deal.

This not only requires a rethinking in companies and banks and among lawmakers. Hermes, for example should not only insure machine exports, but should also safeguard investment risks. What is needed, most of all, is the entire chain of industrial value added – including the Kuka robots and their German developers.

 

To reach the author: brueggmann@handelsblatt.com

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