Examining the effects of China’s Foreign Direct Investment Spree in Germany. Three case studies from the SME sector (“Mittelstand”).

8 min readDec 31, 2019

Mittelstand firms have been the focus of Chinese investments recently. How have the firms profited from the partnerships (if any?)

Over the past 10 years, German manufacturing plants and high-tech industries who have elevated the country to rank among the leading economies, were the subject of political power play with one of its biggest competitors — China. ¹ Germany has benefited tremendously from globalisation and acquiring abroad itself, thus must not be closed for foreign investments into Germany. However, trade experts highlight that China is not playing by international rules: it subsidises and favours Chinese companies f.e. through cheaper interest rates on bank loans, thereby curtailing open competition. Thus, Germany’s stance should be “liberal not naive”, not letting foreign investors on “critical infrastructure”, e.g. energy, defence technology. ² Thus, in 2016, a take-over of semiconductor company Aixtron, was blocked by the German government on security grounds. 2016 marked the climax of the Chinese shopping spree: Transactions with a total value of $10.8bn were announced in the first half of 2016, according to EY, more than all previous years combined. Chinese investors acquired 37 German companies in that period, compared with 39 in the whole of 2015.³

The investments are driven by a strategy, called “Made in China 2025", an initiative adopted in 2011 to comprehensively upgrade Chinese industry. The initiative draws direct inspiration from Germany’s “Industry 4.0” plan. The heart of the “Industry 4.0” idea is intelligent manufacturing, i.e., applying the tools of information technology to production. In the German context, this primarily means using the Internet of Things to connect small and medium-sized companies more efficiently in global production and innovation networks so that they could not only more efficiently engage in mass production but just as easily and efficiently customize products.

The Chinese effort is far broader, as the efficiency and quality of Chinese producers are highly uneven, and multiple challenges need to be overcome in a short amount of time if China is to avoid being squeezed by both newly emerging low-cost producers and more effectively cooperate and compete with advanced industrialized economies. “Made in China 2025” has clear goals, tools, principles and a sector focus:⁴:

Its guiding principles are to have manufacturing be innovation-driven, emphasize quality over quantity, achieve green development, optimize the structure of Chinese industry, and nurture human talent.
The goal is to comprehensively upgrade Chinese industry, making it more efficient and integrated so that it can occupy the highest parts of global production chains. China shall raise domestic content of core components and materials to 40% by 2020 and 70% by 2025.
Although there is a significant role for the state in providing an overall framework, utilizing financial and fiscal tools, and supporting the creation of manufacturing innovation centers (15 by 2020 and 40 by 2025), the plan also calls for relying on market institutions, strengthening intellectual property rights protection for small and medium-sized enterprises (SMEs) and the more effective use of IP, allowing firms to self-declare their own technology standards and help them better participate in international standards setting.
EY’s China Go Abroad report highlights the 9 strategic tasks and 10 priority sectors⁵:

China 2025: 9 Strategic Tasks + 10 Key Sectors

Management consultancy ATKearney summarized the 4 major reasons why Chinese firms pursue M&A deals⁶:

4 Reasons for M&A investments by Chinese firms

Despite criticism, numerous deals still went through.Today, more than 200 German companies are majority-owned by Chinese investors. Among them, many well-known companies in the SME sector (“Mittelstand”): Kuka (industrial robots), KraussMaffei (injection molding machines), Putzmeister (concrete pumps), Kion (materials handling equipment), Kiekert (automotive closure system), Schimmel (pianos), Koki (transmission systems), Hilite (brake system, engine cooling). ⁷

Let’s look how how they developed ever since.

Ca. 200 companies in Germany are majority-owned by Chinese investors

Case 1: Kuka (Midea)

Since 2017, Chinese firm Midea bought 95% of the Bavarian industrial robots manufacturer Kuka, a deal worth € 4.6bn. The biggest fear for the German government was a rumoured layoff of the 12.600 people, Kuka employs. However, Midea contractually assured back then it will not downsize or leave Germany until 2023. Thus, the deal was approved.

On paper, the deal made sense: Kuka — one of the world’s leading robot manufacturers — could help Midea replace labor on the production line. Thus, Midea skipped an entire stage of industrial development — from Industry 2.0 to Industry 4.0; it would mean introducing far more automated machines along with new forms of data-driven coordination.⁸ Midea saw a chance to help expand Kuka’s presence in its home market. Most Chinese factories are not automated: the country had just 36 robots per 10,000 manufacturing workers in 2014. In contrast, average robot density is 85 in Europe and 79 in the Americas.

So far, the acquisition for Midea was not a success: In 2018, revenue and profits shrank substantially, Midea’s market capitalisation is at € 2.1bn. Weaker growth in Asia and recession in the automotive sector was the rootcause. Kuka itself has acknowledged “capacity constraints” on certain projects in China and delays on those projects, along with existing struggles to meet high levels of demand quickly enough, have put the company under pressure. Kuka’s annual sales dropped 7% to 3.2 billion euros for 2018, prompting 350 job cuts.⁹ Midea fired Kuka’s longtime CEO Till Reuter late last year. In early 2019, the new CEO Peter Mohnen had to manage expectations, as expected growth figures for 2020 behind targets.¹⁰

Case 2: Putzmeister acquired by Sany Heavy Industry

In 2012, construction machinery manufacturer Sany spent €360 mm to buy the German engineering firm, Putzmeister, the global market leader for cement mixers and pumps. It was the biggest takover back then. When asked about the reason for the interest in German businesses, Jiang Xiangyang, deputy chairman of the board answered unequivocally:

“It’s the technology. That’s Germany’s main selling point. Sany is glad to have such a highly valuable “made in Germany” brand. It not only sounds good; it also has real value: first class research and development, plus top customer service. Those are qualities still missing from the “Made in China” brand.”

Speed was a key characteristic in this acquisition: It took just 10 days from the arrival of the Sany managers in Aichtal, Putzmeister’ HQ, to the complete takeover¹¹. The rationale was evident: Since more than half of all cement pumps sold in China are made by Sany and 40% of all pumps sold outside of China come from Putzmeister, the two together form an unbeatable combination¹² . In the words of manager Jiang:

“For the very beginning, Putzmeister was our big role model. Now, we have reached a certain size and Putzmeister was available. You just can’t pass up a chance like this. We bought this brand and with it the global market ”

Although Sany followed M&A PMI best practises by ensuring close alignment within the management team by nominating Putzmeister’s CEO to its board of directors, expectations were not met. Deng Haijun, Managing Director of Sany Europe, noted:

“We were betting on leveraging synergies: : 1 + 1 > 2. It didn’t work. The trust of clients, their brand loyalty and personal relationships to suppliers were not easily transferable.

The “one-brand strategy” was one of key factors for the failure: To not cannibalise revenues, they split their markets: Europe, North-America, India, Singapore, Malaysia, Indonesia, South-Africa belonged to Putzmeister, the remaining markets were Sany’s territory . Since the market share of Putzmeister in China was around 1%, it had to retreat, which crashed its hope of conquering giant market. R&D activities moved from Germany to China, reducing the workforce of Sany in Germany from 400 to 52. Sany’s tested Putzmeister’s pumps and found them to be not superior. In fact, Putzmeister profits more from the “Made in Germany” slogan, which enjoys a stellar reputation worldwide. While the Putzmeister top-line did not triple as forecasted during the take-over conference in 2012, revenues grew constantly and Sany guaranteed employment until at least 2020.¹³

Case 3: Schimmel Piano acquired by Pearl River

A different balance of power was in place as Europe’s largest piano maker, German brand Schimmel, was snatched up by Chinese world leader Pearl River. Braunschweig-based and family-run Schimmel had 125 employees and sold 2,200 pianos annually worldwide, a market share of mere 10%. This number is dwarfed by Pearl River’s output: 135,000 pianos per year.

In 2016, Pearl River completed the purchase of Germany’s largest piano maker Schimmel for €24m ($27.1m). The rationale behind the acquisition was twofold: First, the acquisition of the German 130-years-old piano maker helps strengthen Pearl River’s brand image for superior craftsmanship. The Chinese firm doubles down on the premium segment by adding Schimmel ,leveraging its experience from producing pianos for the American luxury brand Steinway already. Second, the Pearl River eyes on expanding globally, especially in European and North American markets, using Schimmel’s existing sales network.

Li Jianning, Pearl River Piano’s vice-chairman, promised operations to kept unchanged, shortly after the acquisition¹⁴:

“The purchase will ensure Schimmel can continue to be independent, and continue to manufacture some of the world’s highest quality pianos.”

Indeed, he kept his words; the factory in Braunschweig is still managed by the Schimmel family. From being battered by the financial crisis of 2008, filing for insolvency, to finding a strategic partner in China; the story of Schimmel has been a remarkable turnaround. In May 2019, the success was underlied by opening up a subsidiary for (after-)sales and marketing activities in China reaffirmed this win-win-situation¹⁵ .