CONSUMER: Midea Shopping Spree Moves to Germany

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Bottom line: Midea should limit its new plan to buy a major stake in Germany’s Kuka to a strategic partnership, and avoid temptation to help Kuka lower costs by moving major parts of its manufacturing to China.

Midea eyes Germany’s Kuka

A recent overseas M&A binge by top Chinese home appliance makers is taking a somewhat unexpected turn, with word that Midea (Shenzhen: 000333) is pursuing a deal to buy a major stake or even outright purchase Germany’s Kuka (Frankfurt: KU2). In this case the deal comes as something of a surprise, since Kuka isn’t an appliance maker but instead manufactures industrial robots that Midea is using to modernize its production lines.

This particular deal could carry a price tag of more than $1 billion, and would come just 2 months after Midea’s smaller deal to purchase the home appliance business of scandal-tainted Japanese electronics giant Toshiba (Tokyo: 6502). (previous post) This latest deal is logical, though could also carry a large degree of risk due to previous poor results for Chinese companies that bought manufacturers in the tough French and German markets.

We’ll return to the risk part of the story shortly, but first let’s review the latest reports that say Midea, best known for its air conditioners, is in talks to buy a significant stake in Kuka. (English article; Chinese article) One report on the talks is a bit unclear, saying Midea would like to acquire Kuka but then specifying the current talks would see it buy just 30 percent, making it the single largest shareholder.

The pair of companies already have a relationship because Kuka has been helping Midea to automate its Chinese factories. They boosted their ties when Midea bought a 5 percent stake in Kuka, and then doubled that to 10 percent earlier this year. Kuka shares shot up 13 percent after the latest reports came out, giving it a market value of nearly 4 billion euros, or about $4.5 billion. That would value Midea’s planned 30 percent stake at about $1.3 billion.

Kuka already operates a small China factory in Shanghai, and is hoping the tie-up will improve its access to more Chinese customers. Its China sales now total about 420 million euros annually, though it hopes to raise the figure to 1 billion by 2020. Midea, meanwhile, has said it has a 70 billion yuan ($10.7 billion) war chest for acquisitions. Its Toshiba purchase in March reportedly cost about $500 million, meaning it still has plenty of cash left for more acquisitions.

In Line with Beijing Directives

The purchase certainly fits nicely with Beijing’s broader goals, which include encouraging outbound M&A in certain strategic areas. One of its key focus areas is robotics, since China realizes its manufacturers will have to upgrade their production lines to remain competitive as the country gradually loses its low-cost advantage.

At the same time, Beijing is also encouraging companies to improve their product designs to make them more competitive and in sync with global consumer demand. That push was a major factor behind Midea’s Toshiba purchase in March, and also was at play earlier this year when domestic rival Haier reached an agreement to buy General Electric’s (NYSE: GE) home appliance unit for $5.4 billion.

Against all that backdrop, this latest deal looks relatively logical and even perhaps smart strategically. But I would caution Midea from becoming too involved in Kuka’s operations, which it might attempt to do with this new equity tie-up. That’s because past Chinese experiences with French and German manufacturers have mostly ended up quite messy due to tough labor laws in those European countries.

Two similar acquisitions that ended badly involved the closely related consumer electronics space, and created financial nightmares for leading Chinese TV maker TCL (HKEx: 1070; Shenzhen: 000100) and Taiwan’s BenQ. In both instances the buyers believed they could simply close down most of their newly acquired European factories and move them to China to save money, though they discovered that wasn’t quite so easy. It’s not yet clear if Midea might have similar plans for Kuka, but I would advise it to proceed carefully with the purchase and limit its role to a simple strategic investor.

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