China Ramps up Investments in Foreign Robotics Companies

This year, one of the biggest transactions in the history of the robotics industry took place when Midea Group announced its investment agreement with Kuka. According to several reports, Midea Group secured more than 90% of Kuka’s shares with a multi-billion euro offer. Based in Augsburg, Germany, Kuka is one of the most prominent players in the industrial robotics market, along with Switzerland’s ABB and Japan’s Fanuc, while Midea Group from China is a leader in consumer appliances.

The deal drew public and political attention while creating controversy in Germany about losing control of sophisticated robotics technology to China, as Germany and China are manufacturing-focused nations and are increasingly becoming competitors in similar, high-end production areas. Despite all the concerns, the deal received approval from the German government last month. Midea Group has been active in forming joint ventures, as well. Almost a year ago, the group formed joint ventures with Yaskawa Electric of Japan to build robots with a total investment of $65 million. Midea Group is not the only company from China that is making large investments in the world of robotics; there are many more in the same league such as Alibaba, Agic Capital, WestSummit Capital, Wanfeng Technology Group and Xiaomi. This sudden surge of investments and acquisitions of global robotics companies can be attributed to several key factors.

China’s Growth in Industrial Robotics

The Chinese market for industrial robots has surpassed the markets of South Korea, Japan, the United States, and the European Union with estimated sales of more than 65,000 industrial robots last year. In fact, according to Tractica’s Robotics Market Forecasts report, the global industrial robotics sector will increase at a compound annual growth rate (CAGR) of 9.6% between 2016 and 2021, largely due to China’s aggressive push for factory automation. Tractica forecasts that that sales of industrial robots in the Asia Pacific region, primarily driven by demand from China, will reach $15.0 billion by 2021.

“China is becoming the largest robotics market in the world, and we want to capture that growth potential,” says Midea vice president Andy Gu. “There’s demand not just from us, but from all industries. Kuka is already big in China, with 15 percent of the market, but it wants to be even bigger and having Midea as its owner will help. Given our meaningful footprint in China we can help Kuka accelerate growth in terms of our customer base and supply chain.”

While China is and will remain the largest purchaser of industrial robots in the world, robot density in the nation is still far below the global average of 66 robots per 10,000 workers, which means that there is tremendous opportunity to absorb a huge quantity of industrial robots in a short time period given the enormous size of the country’s manufacturing base. According to Wang Ruixiang, president of the China Machinery Industry Federation, China is moving from heavy industry and toward a more consumer-driven economy, and intends to become one of the world’s top automated nations with plans to increase robot density to several times the current level.

Foreign Robotics Innovations Enable a Domestic Manufacturing Makeover

Chinese manufacturing companies are losing their advantage of being the manufacturing hub of the world due in no small part to poor implementation of cutting-edge robotics technologies. Studies show that a very low percentage of advanced factory automation in key sectors, such as automotive manufacturing and food processing, is impacting the efficiency of overall production in China compared to other world economies. Adding to the problem is the quality of domestic innovations taking place in Chinese industrial robotics, a lack of expertise, and a wave of fraudulently obtained local government subsidies by several domestic companies in the name of advancing robotics technologies. Data from the Ministry of Industry and Information Technology of China reveals how the generous subsidies sparked a big boom in the domestic robotics sector over the past few years, with the number of robotics companies swelling to more than 3,400, but with just a few of those being able to remain profitable while most suffered significant losses.

According to Wang Cairong, executive director at the China Artificial Intelligence Robot Industry Alliance, “The industry is now in a subsidies-driven bubble”.

The absence of domestic industrial robotics companies that can effectively innovate and compete with global brands is the reason that several of the foreign-based robot manufacturers have been successfully supplying more than two-thirds of the industrial robot demand in China. For the time being, acquiring or partnering with the world-class robotics technology vendors seems to be the only strategic solution for many Chinese companies who are desperate to improve their manufacturing efficiency and quality while reducing labor costs. Even though there are new initiatives from the Chinese government, such as Made in China 2025, that focus on modernization of factories with massive investments in robotics and the Industrial Internet of Things, the ground level implementation might take a long time and would not do much to resolve the current manufacturing woes.

Labor Costs and Competition

China’s human workforce is shrinking as the working population ages and loses interest in low-level jobs. This trend is having an inflationary effect on labor costs and it is a matter of serious concern for many manufacturers such as Midea Group, which employs more than 100,000 people and aspires to be a truly global brand. The primary reason Midea Group pursued the investment in Kuka is to address the labor costs over time. It makes a lot of sense for Midea to leverage its ownership of Kuka to establish strong leadership in the industrial robotics sector in China.

According to Midea Group Chairman Paul Fang, “Midea wants to transform its manufacturing line with robot technology and is aiming to cut its workforce by a fifth to 80,000 by 2018. With $10.7 billion in free cash, Midea could do more acquisitions, although it intends to focus on expanding its brand in Europe and America. We are already strong in China but the focus is now on establishing a truly globalized brand.”

Intensifying competition from domestic as well as international players, from low labor cost nations such as Vietnam and Mexico, are forcing rapid investments at large scale. In China, Midea Group faces strong competition from Gree and Haier in air conditioners and refrigerators respectively. The Kuka deal might be a well-timed move to put some distance between Midea Group and its rivals while strengthening its brand recognition globally. Recently, Guangdong Province has announced an estimated $140 billion initiative to replace human labor with robots in nearly 2,000 large plants in the region. This is probably the largest investment initiative of its kind in the world.

As domestic manufacturing growth slows in China, the country’s investors and companies are leaving no stone unturned in looking for ways to invest their cash in foreign targets that could give them competitive technological capabilities in robotics. “Go Out and Invest” is already a massive phenomenon in China in several sectors, a trend that is strongly encouraged by the Chinese government. The phenomenon has just touched the robotics industry recently, and we can foresee much more activity of this sort in the months and years ahead.

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