In the first half of 2016, there have been a number of large Chinese M&A transactions in Germany. With the possible acquisition of the German manufacturer Kuka by the Chinese investor Midea, there are fears among German politicians and businessmen of the growing influence of China.
M&A activity over the first half of 2016 indicates that 2016 will be a record year for Chinese M&A activity in Germany. To June, the number of transactions increased to 30 and the average transaction value is already more than 3.4 billion euros. Two big deals have supported this increase: EEW Energy (Energy and Environmental sector) at more than 1.4 billion euros and KraussMaffei (Industrial) at 0.9 billion euros. The possible Kuka-deal would increase the 2016 sector transaction value significantly.
In addition to the United Kingdom, Germany has been the main destination of Chinese M&A transactions in Europe. In absolute numbers, total M&A Chinese transactions have ranged between 18 and 36 per year over the last five years. The average transaction volume reached a high of almost 2 billion euros in 2012 and was lower at about 1.2 billion euros last year. Chinese M+A value is expected to amount to around 4.5 billion euros this year.
Most M&A transactions in Germany are still done by US companies with a share of about 25% of total transactions, followed by the United Kingdom, Switzerland and France (each with more than a 10% share). China’s share is 6th, significantly below 10%.
Kuka is seen as one of the German flagship companies in the digital evolution “industry 4.0”, essential for the German key industries. One fear is about the possible takeover of technological know-how by Chinese companies which would significantly improve their non-price competitiveness in global markets.
The international auditing firm PWC analysed the motivation of Chinese companies investing in Germany and found that 62 percent of them see market entrance as the key reason for the acquisition closely followed by gaining technology and expertise (58 percent).
China’s economy is slowing, prompting more local firms to earn yields abroad. Besides, it is easier for Chinese companies to invest abroad because China’s capital account is now relatively more open. Other incentives were Branding (36 percent) and Diversification (17 percent). Direct support by the Chinese government for M&A’s only accounts for 5 percent of Chinese companies doing transactions.
1) One of the most important M&A triggers is to acquire technology and expertise which could harm the competitiveness of other European or German companies in their respective sectors.
2) According to PWC data, only 10 percent of M&A transactions were with listed companies. 27 percent of transactions accounted for family-owned companies
and 27 percent on carve-outs. Chinese M&A transactions even helped to stabilise the German company sector, since 19 percent of the transactions accounted for companies in insolvency proceedings. Therefore, fears and risks seen by increasing Chinese M&A activity seem to be exaggerated.
3) A key risk factor for German and also European companies are the barriers for investments into China. The playing field is not level for foreign companies that wish to invest in China. According to the latest survey of the German Chamber of Commerce (DIHK), China has lost attractiveness as an investment destination.
Besides a slowing down in growth, companies are complaining about China’s increasing protectionism, bureaucratic and legal barriers and currency risks. According to DIHK’s survey, China’s share in foreign investment in German companies will decrease to 37 percent from 45 percent last year. And despite a small improvement, market access barriers and investment restrictions remain one of the top five challenges of European companies engaged in China according to a recent poll of the European Chamber of Commerce in China.