German-Chinese M&As: Less Emotion, More Reason

Cooperation between German and Chinese companies—despite the sharp decline in investment from China in recent years—still holds enormous potential. Thus far, business and media have treated the topic too emotionally. On the heels of a euphoric phase over new money from the Far East followed the fear phase of a “sellout” of German technology. Both are uncalled for. Successful (and less successful) examples of German-Chinese partnerships show that it is time for phase three: a rational economic evaluation.

The case of the Chinese utility vehicle manufacturer Weichai and the German forklift truck company Kion shows how it can work. Weichai currently holds around 45 percent of Kion and 70 percent of its former hydraulics division Linde Hydraulics. Thanks to Weichai’s entry, the Aschaffenburg plant not only produces hydraulic technology for German forklift trucks but also for Chinese machines and vehicles. The cooperation in this area has proven to be successful. Since Kion’s IPO in 2013—one year after Weichai bought its first shares—the German company’s share price has roughly doubled.

The example of the German manufacturer of industrial robots KUKA from Augsburg—the former “pearl” of the Industry 4.0 initiative—shows that not every merger makes economic sense. After the KUKA management had already been rebuffed by Bosch and Siemens, the Chinese refrigerator and air conditioning manufacturer Midea invested in the company in 2015. One year later, Midea took over KUKA almost completely. At 115 euros per share, the Chinese offered a whopping 35 percent more than the market value at the time. KUKA shareholders made a huge deal, but the euphoria of that time has now vanished. In the production and sales of industrial robots on the one hand and refrigerators on the other, hardly any synergies have emerged. The market value of KUKA has dropped almost 50 percent since the takeover.

Although investments from China have fallen sharply in the last two years, Chinese investors in Germany are currently viewed with skepticism. While in 2016—at the peak of the investment wave—more than 9 billion euros from China went into the takeover of German companies, last year the figure was just over one billion.[1] Nevertheless, the perceived danger of a sellout of German high tech remains high. We are currently in this second (fear) phase. Cases such as that of the Chinese billionaire Li Shufu contributed to this: After official talks about a stake in Daimler had failed, Li secured around ten percent of the German car manufacturer with the help of stock options. Since then, the German government has raised the legal hurdles for purchases from China.

The emotional roller coaster of recent years should not obscure that the potential for mergers between German and Chinese companies remains enormous. It would be advisable, therefore, to “downshift” and start a new phase: that of economic rationality. Neither Chinese investment is a danger to German industry per se, nor is any sum from China sensibly invested in German companies. We should be guided less by emotions and more on the lookout for possible synergy effects—and enter partnerships where it makes good business sense. The success story of Kion and Weichai shows where the journey can go.

This article was originally published on March 26, 2019 in CONNECT, the publication of the Chinese Chamber of Commerce in Germany.


[1] Source: Bloomberg

 

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