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Supply Chain News: China Makes Bid to Go Further Upscale in Manufacturing with Bid for Kuka Robotics


Can China Jump from Industry 2.0 to 4.0 through Acquisitions?

May 23, 2016
SCDigest Editorial Staff

China, which continues to try to transition its manufacturing economy away from low-value added products to more sophisticated goods, took another step in that direction with a move to acquire German industrial robotics leader Kuka AG.

Chinese home-appliance maker Midea Group launched a $5-billion-plus bid for Kuka last week. Midea said that it wants to keep Kuka as a public company and doesn't plan a complete takeover, but by saying it was seeking a stake of more than 30%, it is required under German law to make an offer for all outstanding shares.

Supply Chain Digest Says...

Meyer says in effect, China is trying to jump from Industry 2.0 to 4.0, skipping the middle stage. It may see acquisitions of 4.0 technology companies as key to this strategy.

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Midea is primarily a maker of appliances and air conditioners, has a 17.1% appliance share in China, more than double the 7.9% for Haier, according to Euromonitor. Haier made big news earlier in the year by acquiring GE's appliance business for $5.4 billion. But about one-third of Midea's sales are outside of China, and it like other manufacturers there is facing rising labor costs and thus pressure to automate.

Kuka is one of four companies, also including Switzerland's ABB and Japan's Fanuc and Yaskawa Electric, that dominate the market for industrial robots on a global basis.

Meanwhilr, China has emerged as the largest market for such robotics. Robot sales in China rose 16% last year, according to the International Federation of Robotics, which also estimates that by 2018 it will account for more than one third of industrial robots installed worldwide. That compares to an increase in 2015 in robotic sales of just 11% and 9% in North America and Europe, respectively.

One province in China has famously launched a "robots for humans" program to promote factory automation.

In recent years, Kuka has expanded its product line beyond the automotive sector where it sells the majority of its robots to electronics, medical devices and other industries. It's also delivering robots with Internet of Things capabilities and making its machines easier to program.

It has also released a so-called "collaborative robot" called the "iiwa" that can work side-by-side with humans without a safety cage.

Midea is offering €115 a share, or about $130.10, for Kuka, a 60% premium over Kuka's closing price of €72.05 a share on Feb. 3, the day before Midea announced an increase in its stake in Kuka to 10.2%. Midea held a 13.5% stake in Kuka when it launched its broader bid.

It is possible that German and even US regulators will not want a Chinese company to gain access to the sophisticated technology inside the Kuka robots and scuttle the deal. There are also concerns that the Chinese would be able to access data relative to Kuka robots working in the field – fears that would only be increased with IoT capabilities inside the Kuka machines.

Midea says it is committed to keeping Kuka's Augsburg, Germany headquarters and not buying out some of its current top shareholders. It also said it will not try a hostile takeover it Kuka rejects its offer.

"Regulators in Germany and elsewhere will scrutinize the deal," Erik Gordon, a professor at the University of Michigan's Ross School of Business, told the Wall Street Journal. "Washing machines are not considered crucial technology, but robots are."

Kuka has production and engineering facilities in the US and had about $1.13 billion in North America revenue last year.

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The company gets about half of its sales from Europe, and just 15% from China. So the deal makes some strategic sense, as it could lead to market share gains for Kuka in the Chinese market.

The deal would also take the Chinese company right to the heart of Industry 4.0, the German led initiative to digitize factory communications and processes.

In January 2016, ChemChina paid €925 million for Munich-based KraussMaffei machine tools, in part because of its advances into Industry 4.0. Recent smaller Chinese acquisitions in the German machine tool industry, which include the partial acquisitions of H.Stoll by the ShangGong Group and of Manz by the Shanghai Electric Group are, in part, motivated by the objective to partake in the latest Industry 4.0 developments.

Writing in Forbes magazine, global business expert Klaus Meyer notes that "While China's industry has grown largely on the back of low cost labor, German industry has been pushed into advanced automation by high labor costs. Now, China is facing radical demographic changes, and ‘cheap and hardworking' young workers are no longer readily available. Thus, industry must change and develop new and less labor intensive manufacturing practices, and that requires more automated machines and robots."

Meyer says in effect, China is trying to jump from Industry 2.0 to 4.0, skipping the middle stage. It may see acquisitions of 4.0 technology companies as key to this strategy.

It also appears Midea may want to use the Kuka robots to help it make products efficiently in Euro or US markets, where it has little presence currently.

"This partnership is looking for growth in markets abroad," said Paul Fang, Midea CEO.

Manufacturers worldwide should be interested in how this plays out. One possibility is that another Euro manufacturer steps in with a slightly better offer.

What do you think of this move by a Chinese company to acquire Kuka? Should the deal be approved? Can China jump to Industry 4.0? Let us know your thoughts at the Feedback section below.


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