CONSUMER: Trustworthy Gestures Need to Salvage Midea-Kuka Deal

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Bottom line: Chinese companies need to demonstrate they are trustworthy and won’t steal their business partners’ IP, or risk seeing continued resistance to cross-border deals like Midea’s planned investment in Kuka.

Trust needed to reduce resistance to Midea-Kuka deal

As European opposition rapidly grows towards China’s latest attempt at major global M&A, many are missing the point when they blame cross-border politics for threatening a proposed deal that would see Chinese appliance maker Midea (Shenzhen: 000333) buy 30 percent of German robotics firm Kuka (Frankfurt: KU2). Politics may be partly to blame for the growing alarm signals in Europe over the deal, since many westerners still worry about ties between Beijing and big companies like Midea, which are private but whose major stakeholders often have government backgrounds.
But the bigger concern is that companies like Midea can’t be trusted to protect the technology and other proprietary information they get access to through such deals. Such mistrust has a deep foundation in past experience, which often sees Chinese companies and individuals steal such intellectual property (IP) from each other with little or no serious consequences.

Midea may indeed have no bad intentions in its pursuit of Kuka, and may simply want to work together to develop industrial robots to automate its production lines to offset rising labor costs. But to change the perception that China is a dangerous place for intellectual property owners, Midea and other Chinese acquirers of foreign technology could take more positive steps to show they’re sincere about wanting to collaborate with these global partners and not simply steal their IP.

Midea’s initial announcement came 3 weeks ago when it said it would buy 30 percent of Kuka, in a deal involving investment of more than $1 billion. (previous post) Kuka’s shares jumped nearly 25 percent afterwards, on investor hopes that the collaboration would bring big new business for the German company in China.

But doubts quickly began to emerge, first with European Union commissioner for digital economy Guenther Oettinger saying that Kuka was crucial for Europe’s future development, and that he would prefer to see a local buyer. (previous post) One of Kuka’s existing shareholders, mechanical engineering group Voith, also criticized Kuka for expressing positive sentiment on the deal while it was still studying the offer. He added that Voith was also studying whether or not to maintain its Kuka stake.

Alarm Grows in Berlin

But the loudest signals of doubt came last week from Berlin, with reports that German government officials were examining how important Kuka’s technology was to local industry. Germany’s economy minister also signaled that the government was trying to line up an alternative investor for Kuka.

Abandonment of the deal would make it the latest in a string of similar collapses, and the first in Europe. Last month Chinese construction equipment giant Zoomlion (HKEx: 1157) abandoned a plan to buy US crane maker Terex (NYSE: TEX) after several politicians expressed opposition. The past year has also seen companies affiliated with the prestigious Tsinghua University abandon bids for US memory chip maker Micron (Nasdaq: MU) and a large stake in US hard disk drive maker Western Digital (Nasdaq: WDC) for similar reasons.

The growing resistance in the Kuka-Midea transaction led a Chinese government official in Beijing to say the deal should not be politicized.

That comment refers to frequent western suspicions that large companies like Zoomlion and telecoms equipment giant Huawei have ties to Beijing, even though such companies are technically private and there’s no evidence they share trade secrets with the government. Huawei in particular has been working hard to demonstrate its independence from Beijing, after Washington banned the sale of its networking equipment in the US 3 years ago.

While these companies’ potential ties to the government may be a concern, a larger issue is how tie-ups with these western companies exposes their technology to IP theft by Chinese partners. Such theft is quite common between Chinese companies, and Huawei and Internet giants NetEase (Nasdaq: NTES) and Tencent (HKEx: 700) are just a few of the names who have taken legal action in the past after accusing former employees of stealing IP to start new companies.

It may be too late for Midea to halt accelerating resistance that could ultimately kill its plans to buy the Kuka stake. But to salvage any chance of success, Midea should consider making high profile moves to demonstrate its commitment to protecting Kuka’s IP, for example by pledging to keep all of Kuka’s product development in Germany and tightly controlling all outsider access to such technology. At the end of the day, suspicion is one of the biggest factor killing many of these sensitive cross-border deals, and Chinese companies need to make more concrete moves to show they are trustworthy business partners.

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