The mid-2010s saw a massive buying spree by some of China's biggest multinational companies.
Wielding huge pocketbooks, these companies bought and attempted to buy
some of the world's most valuable assets.
In this video, we look at one of China's most controversial corporate hauls - the
German company of KUKA. This purchase became intensely political and heralded
a new attitude of suspicion towards Chinese money.
I want to start by answering a question. Why should I care?
Why does this matter? Am I being racist, singling out China?
This is what worries policy makers. Large Chinese companies are often perceived as being extensions
of Chinese Communist Party policy. This is the case even when on the surface they do
not seem to be state-owned. As in, their shares are not directly held by the state.
This is for several reasons. For one thing, 5% of Chinese "private" companies
are under the direct control of high ranking Party members.
What "influence" means in China is extremely informal and hard to track.
Additionally, every Chinese company of a certain size is obligated to establish a Communist Party
committee for its members. This is ostensibly for the purpose of organizing social events for the
company's employees who are also Party members. But it’s kind of hard to take that at face value.
And then third, Chinese companies who go abroad need the permission of the
government - and thus the Party - to do so. This is due to China's capital controls on the RMB.
It is extremely difficult to get money out otherwise. These Chinese MNCs started going abroad
at the behest of a stated policy - their "going global" policy.
On the other side, let us look at China's branded 2015 policy "Made in
China 2025" 中国制造2025. Beijing's goal here is to move up the industrial value chain
and own the underlying technologies of doing so. Not that there is anything wrong with them
wanting to do so. It is entirely in their rights to do so. But it is also entirely
within other countries' rights not to help themselves get muscled out of their place.
Based on these publicly announced government policies, it is easy to come to the conclusion
that Chinese companies are acting in service of their foreign policy
by acquiring sophisticated, high-end technology for transfer back home.
Which, if you live in a strictly libertarian, efficiency-only outcome world,
might be perfectly fine for you. Money for tech. A fair exchange made by two consenting parties.
Freedom to buy, sell, and the like. But for a policymaker looking out for their
country's own position (and their own election chances), that's a problem.
German-Chinese relations had been going quite well throughout the 2010s. The weak economic situation
in Europe in 2010 had forced German companies to woo the Chinese as a market for their exports.
The relationship warmed considerably with newly middle-class Chinese consumers
buying German products - especially cars - in large numbers. As the partnership progressed,
Germany increasingly aligned with China's views on certain items and policies.
In 2014, China grew to be Germany's fourth largest export partner and second largest
import partner. The value of goods exported to China from Germany from 2008-2014 was 74 billion
euro, up 118% over the previous years. Imports rose to 80 billion euro, up 34%.
Even though there was a trade deficit, things were going good enough for the government to
brush aside complaints from German companies about the issues of doing business in China.
Especially the technology transfer question.
But as 2015 approached, an ill wind blew through the Chinese-German marital home.
At first, German politicians saw Chinese investments in German companies
as an opportunity. Chinese money can help take over failing companies,
reform them, and bring them up to snuff. In a country with a rather conservative
banking culture, Chinese money could help serve as helpful private equity.
Then in 2014, Chinese investment in Germany suddenly jumped.
Up until 2013, it had been stuck at around 0.6 billion euro. In 2014, it hit 1 billion.
The next year, 2 billion. And this 2 billion figure likely underestimates the actual amount
invested, as Chinese investors prefer to make their buys through Luxembourg shell companies.
But what alarmed politicians was more what that money was going into. Chinese investors were
buying big stakes in Germany's leading technology companies. These companies include Avic group
(aeronautic equipment), Krauss-Maffei (plastic and rubber goods), or EEW Energy (renewable energy).
This is contrast to the struggling laggards that German politicians had at first thought
Chinese money would go for. Considering that China continued to block European investment
in its own leading technology companies, this began to rub people the wrong way.
2016 - the year of Trump's election - would see the start of the investment dilemma.
KUKA was founded in 1898 in Augsburg, Germany. The company started out making
light products and household appliances before pivoting to autonomous wielding products.
Over the years, the company gained a leading position in the industrial robotics space
with a specialty in automotive. It employs over 13,000 people across 25 countries.
KUKA robots are in some of the world's most advanced industrial factories.
Their customers include Boeing, SpaceX, Airbus, GM, Chrysler, Volkswagen, and others. Their robots
are prominent not only in automotive assembly but also aerospace, retail, rail, and more.
The company's robots have been featured in music videos, movies,
and more. One might say that they are somewhat iconic. And that the technology
behind their manufacture and operation is extremely valuable and hard earned.
So is it up for sale? At any price?
KUKA had been one of the companies that had a large stake purchased by Chinese investors.
Guangdong-based Midea Group 美的集團 bought 5.4% of KUKA stock in 2015. Midea makes lighting goods,
laundry and cooking appliances. Their main business is in making air conditioners.
Founded in 1968, it made $21 billion in revenue in 2015. Its cofounder He Xiangjian
today is one of China's richest men, with a fortune of $36 billion.
Midea is publicly listed on the Shenzhen Stock Exchange, and does not appear to have
any direct ties to the Chinese Government. For what it is worth, Chinese Premier Li Keqiang and
Midea Group vice president Andy Gu have emphasized that Midea is a "private company".
Midea bought more of KUKA's publicly traded stock going in 2016 raising its stake to 10.2%.
This made Midea the second largest investor after German industrial group
Voith (25%). They declared that they wanted to invest even more money into KUKA,
with KUKA's advanced robotics and automation technology being their interest.
Then in May 2016, Midea brought out a stunning offer for KUKA - 4.5 billion euro.
This is a big premium over the current market price, 60% higher than the Feb 2016 stock price.
People had concern with this acquisition. KUKA robots are used in the world's most advanced
factories. An acquirer could ostensibly get access to all of its customers' knowledge and know-how.
Midea knew this and unveiled its acquisition plan accordingly.
They acquired shares in KUKA slowly, step by step in order to dissipate public anger. The company's
management and supervisory boards came out in strong support of the deal. Midea had signed
agreements restricting it from "corporate reorganizations" and the such for 7.5 years.
And of course there was the money. 4.5 billion euro is a nice payout.
The offer was so high that when the German government attempted to shop around for an
alternate European buyer from the likes of Siemens or ABB,
they had no takers. European companies simply did not believe that KUKA was worth that much.
In August 2016, Berlin approved the acquisition of 94.5% of KUKA's shares. In the end, even if the
German government wanted to block the acquisition it did not have the legal apparatus to do so.
They could not even do a formal inquiry into the acquisition
unless it touched on sensitive sectors like power and water safety or telecommunications.
In the United States, it was a different story. In my video about Tsinghua Unigroup,
I mentioned the Committee on Foreign Investment (CFIUS). CFIUS is authorized by the law
to investigate acquisitions relating to US interests and if necessary force divestments.
CFIUS had blocked Tsinghua from acquiring major stakes in American semiconductor makers.
KUKA has US subsidiaries so CFIUS got involved. In December 2016, KUKA carved out its US aeronautics
subsidiary and sold it to Texas-based automation firm AIT Inc (not to be confused with the American
Institute in Taiwan). I must note that Chinese law would have also prevented KUKA from holding
this subsidiary anyway as the US subsidiary had close ties to American arms manufacture.
This carve-out sale appeared to satisfy CFIUS and they approved the acquisition in late December.
I will note that this is after Trump's election but before he took office. Considering what
CFIUS has been up to since 2016, I wonder if it would have approved the acquisition today.
The fallout from the KUKA acquisition will last.
On Germany's side, what they saw was a Chinese company acquiring really high-end
technology - technology expertise that had been built up over the course of a hundred years.
In July 2016, KUKA announced a joint venture with a subsidiary of Chinese state-owned
military enterprise China South Industries Group Corp to help manufacturers automate
their operations. Whenever I see the words "China" and "joint venture", I think technology transfer.
From the Chinese perspective, there is a bitter taste left in the mouth by the whole experience.
They bought the company. They own it and everything it makes. They paid hard currency
for it. No German law made it illegal to buy automation and robotics technology.
Why did Midea have to pay so much more than the market price to get this company?
Even the other European companies agree that KUKA was not worth anything
near what China offered for it. You can reasonably argue that Midea was extorted
out of a massive price premium because of a vaguely racist "anti-Chinese mood".
It's a fair argument. Midea went above and beyond what any European,
American or Japanese acquirer would have done so to close on KUKA. It sucks for them
and that sour taste in the mouth - along with a much more significant CFIUS veto
that same month - would deepen the chill between China and the west.
The Chinese acquisition spree would come to an end a year later in 2017
as the Chinese government reimposed stronger currency controls.
Several large multinationals were ordered to dispose of their acquisitions. It is for the
best for everyone, because by then the mood had shifted and the US-China trade war had begun.