reflections

Jun 2, 2016 | 02:40 GMT

5 mins read

China Looks to Europe to Feed Its Appetite for Technology

Germany's Kuka AG is the world’s largest manufacturer of robotics for the automobile industry.
(SEAN GALLUP/Getty Images)
It can be difficult to separate the important from unimportant on any given day. Reflections mean to do exactly that — by thinking about what happened today, we can consider what might happen tomorrow.

China's Midea Group offered a $5.1 billion bid to take over German industrial robot maker Kuka AG on May 18, but now German Economy Minister Sigmar Gabriel and his ministry are trying to organize a European consortium to block and counter the bid. Kuka, the world's largest manufacturer of robotics for automobile manufacturing and one of the top manufacturers for general industry, is a strategic asset for China and Germany.

If the deal goes through, it would be the largest takeover of a German firm by a Chinese firm ever. It would also be the second major acquisition by a Chinese firm this year, the first being ChemChina's $1 billion acquisition of plastics machinery maker KraussMaffei in March. Both deals fit into China's Internet Plus and Made in China 2025 strategies, which together are meant to modernize China's industry by adopting advanced manufacturing technologies and by merging robotics with emerging digital technologies to revolutionize manufacturing, through, for example, the Internet of Things, a network of interconnected devices. 

Advanced robotics designs linked to the internet are key to the modernization process. More intelligent and perceptive robotics enable more complicated installations, such as wiring, assemblies and closer integration in an assembly line between humans and automated service robots. Kuka is one of the world's leading robotics companies in this field and counts most of Europe's car manufacturers among its customers, as well as Samsung, Roche, BASF and Airbus. And the attempted acquisition of Kuka is not happening in isolation. Chinese electronics firm Xiaomi announced June 1 that it had acquired nearly 1,500 patents, some of which relate to cloud computing, in a comprehensive deal with Microsoft.

China's broad strategy mirrors those of Japan and South Korea, which used low-end manufacturing and the licensing of foreign technology as a growth model for several decades before leapfrogging other competitors and jumping to the forefront of heavy industrial manufacturing and electronics. Though China has yet to make this jump, it hopes that by prioritizing tech acquisition, mastery and development, it can surpass Japan and South Korea in those areas within a decade. Beijing is certainly not there yet, and it may ultimately fail, but such mastery can happen quickly, as both South Korea and Japan can attest.

What Germany Has to Lose

Berlin's concern, which is shared by EU Digital Economy Commissioner Gunther Oettinger, should come as no surprise. Germany, and more broadly all of northern continental Europe, has based its economy largely on heavy industry and high-end manufacturing exports. Berlin has in fact been promoting its tech-centric goals in what it calls Industry 4.0, which has ironically formed the basis of China's model. Kuka has been an instrumental part of Industry 4.0, and at the 2016 Hannover Messe fair, the world's largest industrial fair, Kuka's showcase, "Hello Industry 4.0 – We go Digital," was used to launch its latest line of industrial robotics marketed specifically for the electronics industry.

Any future loss of competitiveness by Germany or its neighbors in these areas would severely undermine the competitiveness of the European Union's northern bloc. Germany and its neighbors have come to rely on industrial exports in large part because of their inability to develop other aspects of a more modern, diversified tech sector. This is a structural problem due partly to Europe's cumbersome regulatory and labor environment, which has stifled the development of a Silicon Valley-like high-technology sector. Simply put, Kuka is the bedrock of Germany's future competitiveness, and if it were acquired by a Chinese company, it would crush Germany's export competitiveness abroad. The importance of the issue is only heightened now that Germany — and to a lesser degree, Europe as a whole – is attempting to diversify its exports into other markets beyond the weak European economies and compensate for long-term demographic decline.

Berlin's Options

Berlin's ability to actually block China's moves is limited, and while it is trying to drum up support for a German or European consortium — possibly from the automobile sector or from a national champion such as Siemens — to counter China's bid, it remains to be seen how such a consortium would be organized, if it can be at all. Midea's bid for Kuka was 36 percent over the market cap of the firm at the time, which means that it may not be economical for such a consortium to develop. Berlin's best chance may be to use the 2013 German Federal Act on Foreign Trade and the revisions to the German Foreign Trade Ordinance to attach conditions to, or to reject, foreign takeovers of companies with more than 25 percent German ownership for strategic reasons.

Germany's response to the proposed Kuka acquisition is reminiscent of General Electric's takeover of France's Alstom's energy unit last year. France's economy minister at the time, Arnaud Montebourg, and later President Francois Hollande rejected the deal, citing the company's strategic importance, and even tried to convince Germany's Siemens to bid on it to form a French-German engineering conglomerate similar to Airbus in aerospace. The plan fell short, and General Electric did in fact acquire the unit. Similarly, it is unlikely that Germany will actually be able to block the Chinese deal, but it could succeed in imposing strict conditions on the acquisition.

However it plays out, the controversy highlights Europe's core problem. Though it has been working toward building a unified economic bloc, its divisions run deep, past the political and financial levels to the corporate and sectorial levels. This has hindered the development of regional conglomerates, limiting their development to a select few, such as Airbus. And as China grows, the amount of money it can spend on technological modernization will increase and so, too, will its appetite for that technology. Europe will be a prime target for China's technological ambitions: Though there is some political controversy over the attempted acquisition, it is far less than would be encountered in Japan, South Korea or the United States, which have long viewed Chinese mergers and acquisitions with caution.

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