The Chinese bid for a substantial share of robotics maker Kuka is a serious dilemma for Germany. Chinese acquisitions of global leaders in high-end manufacturing risk hollowing out Germany’s Industry 4.0 strategy.

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The German economy’s innovative strength relies on its “Mittelstand”. Small and medium sized enterprises have helped Germany maintain its leadership in automation and smart manufacturing. Selling these companies to foreign investors would be equivalent to giving up Germany’s grip on the technological future.

This would be the opposite of what German government and industry leaders had in mind when they devised the Industry 4.0 strategy, which is designed to usher in the next revolution in manufacturing through the advanced digitisation of production.

The Chinese bid for German robotics maker Kuka has to be viewed in this light. The Foshan-based household appliance maker Midea intends to increase its ownership of the company from currently 10 to at least 30 percent. At an offering price of 115 EUR per share, Midea’s stake would be worth 1.4 billion EUR, making it the highest-valued Chinese investment in a German company so far. And it would only be the latest in a series of recent Chinese purchases in Germany’s machine tool industry.

Will Germany’s advantage shift to China?

If China’s buying spree in this sector continues at the current speed and volume, Industry 4.0 may end up being China’s and not Germany’s success story.

Midea’s acquisition of a substantial stake in Kuka could be part of such a shift. The Augsburg-based robotics specialist is a global leader in automated manufacturing. The electric carmaker Tesla in California uses Kuka robots in its production. Few other global companies, among them ABB and Fanuc, have reached a comparable technological level. And so far there is virtually no competition from China, at least not in the high-end segment.

The potential Chinese investor hopes to use Kuka’s expertise to upgrade its own facilities to enhance productivity and international competitiveness. In addition, the company sees robotics as a promising new product line in its own right – and as a potential way to offset the lagging profitability in the household appliance sector.

Midea’s partial ownership of Kuka would not trigger an automatic transfer of technology to China. The senior management of both companies stressed that Kuka will remain based in Augsburg and that it will retain its business model and the rights to all of its innovations. Nothing will change, at least for now.

But it would be naïve to take the company’s long-term independence for granted. It is reasonable to expect that Midea would gradually increase its share above 30 percent. How would Kuka keep its technology under wraps once the two sides enter into joint production? Also, there is no guarantee that Kuka’s board and management will remain under German control.

“Made in China 2025” drives Midea’s strategy

Midea’s investments in intelligent manufacturing technologies since 2012 are in line with China’s overall attempts to move up the value chain from low-end to high-end manufacturing – and to control the technologies that enable this shift. “Made in China 2025” is the Chinese variant of Germany’s “Industry 4.0” strategy, and its goals are no less ambitious. First and foremost, they stipulate that China should shift to using homegrown technologies rather than importing its production systems.

As a privately owned company, Midea is not bound by this strategic orientation. But it is nevertheless safe to assume that its management had the government’s priorities in mind when reaching out for Kuka. If Midea gains a reputation as a pioneer in smart manufacturing, it can count on generous subsidies from the state. In this case, it won’t make much of a difference for the German side whether its technology will be transferred to a private or a state-run Chinese company.

The Midea-Kuka deal will be a test case for the German side, which has to prove that it is able to protect its innovations. But even if this is possible, the Chinese acquisition would set a dangerous precedent for Germany’s industry overall. It would encourage further Chinese investments in strategically important medium-sized German enterprises  - from Festo to Phoenix Contact or Trumpf - who are global leaders in their fields. If that happens, Germany’s Mittelstand would risk ceding its technological advantage to ambitious new competitors from China.