KUKA: When China Bought Germany's Robots - YouTube

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.