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Layoffs cloud outlook for Chinese takeovers in Germany

Investors' welcome already dampened by technology concerns

Ledvance workers in Augsburg, Germany protest at a two-hour strike against plans by the company’s Chinese owners to close one of its two factories in the city. (Photo by Jens Kastner)

AUGSBURG, Germany -- In a sign of simmering tensions over Chinese investment in German companies, workers at the Ledvance lamp factory in Augsburg staged a two-hour strike in early January in response to plans by the company's new Chinese owners to close two of its four factories in Germany. The two, in Augsburg and Berlin, employ about 1,300.

MLS, a producer of bulbs and other lighting products based in Guangdong Province, acquired Ledvance from Germany's Osram Licht last March for roughly 500 million euros ($620 million), making the deal one of the most prominent in a wave of Chinese takeovers of German advanced manufacturing companies. In 2016, those acquisitions totaled nearly 13 billion euros, or 5% of all industrial investment in Germany.

The city of Augsburg, with a population of 281,000, has been the scene of another showdown between new Chinese owners and a German flagship company, namely robotics maker Kuka, which in November said it was cutting 250 of its roughly 4,000 positions in Germany.

Kuka was acquired by Chinese appliance-maker Midea Group, the world's largest maker of home appliances, for approximately 4.6 billion euros in December 2016 in a deal widely criticized as a prime example of Germany selling its crown jewels to China.

Midea Group's buyout of robot maker Kuka stirred German worries of losing control of the country’s best companies. (Photo by Jens Kastner)

Kuka Chief Executive Till Reuter in late December told the German daily Handelsblatt that the job cuts were a result of fierce international competition in engineering and not the result of Midea shifting Kuka production to China or clients' distrust of the new owners, as alleged in local media.

There are now concerns that the job cuts have put in jeopardy further deals. Cotesa, a supplier of fiber-reinforced composite materials for Airbus planes and Boeing military helicopters, said in late December that the German economic ministry had put its pending sale to state-owned China Iron & Steel Research Institute Group under review.

Germany's takeover rules were strengthened last July, giving the government the right to veto not only defense-related deals but also those in "critical infrastructure," including electricity and water suppliers, hospitals and transport.

IG Metall, a powerful German union representing metalworkers, said Chinese companies are squandering the goodwill they built up during their acquisitions.

"It has not been a surprise that the lightbulb business has declined, but the news of so many job cuts was totally unexpected, as we had thought MLS acquired Ledvance as a strategic move to become the global market leader," said Angela Steinecker, IG Metall Augsburg's political secretary for Ledvance, on the sidelines of the short strike on Jan. 10. The union warned of more sustained industrial action if MLS did not change course.

She said that employees and IG Metall were convinced of MLS' strong commitment to Ledvance employees after it waived its right to adjust wages and dismissal protections last summer and instead extended those arrangements to the end of 2018.

MLS is also under pressure from local authorities to rethink its plant closures. Steinecker said the Bavarian economics ministry asked the Chinese consulate general in Munich to consider the damage to the reputation of Chinese investors if they close entire factories so soon after taking them over and how that could impact future Chinese investments in the country.

Similarly, Michael Leppek, IG Metall Augsburg's officer in charge at the Kuka factory, a 15-minute walk from the Ledvance plant, said he had warned Kuka's Chinese owners that the job cuts will label them as "bad Chinese investors."

Leppek said it would undo the good that Midea had achieved by offering unusually generous terms to purchase Kuka. Under the investor agreement spanning to 2023, Midea said it would not interfere in management or close any plants and would support Kuka's growth strategies. The agreement also said it would not delist Kuka from the German stock exchange or access Kuka's intellectual property and client data.

“Augsburg fights!” reads a union banner at the Ledvance strike. (Photo by Jens Kastner)

"I sometimes asked myself whether Midea had fully understood what far-reaching concessions the deal entails," Leppek said. "And now they are being made the bogeyman who came only to cut German jobs."

The negative press around the layoffs at Ledvance and Kuka conflicts with a report published in October by the Hans-Boeckler-Stiftung think tank, controlled by the German Trade Union Confederation, on how Chinese-owned companies have been treating German employees.

The report, based on observations made between late 2015 and early 2016 at 42 companies, paints a positive picture of how new Chinese owners had been treating German workers, contrasting these investors' quest for economic sustainability with the capitalistic vulture-fund approach of Western buyers. It found that all the companies in the study have kept jobs in Germany and in some cases added jobs. The acquired German companies had also gained better access to the Chinese market.

"From the perspective of the employees back then, the takeovers by Chinese investors brought mostly advantages, with the German management left untouched and nobody having to fear mass layoffs," said Oliver Emons, who studies foreign investors at Hans-Boeckler-Stiftung.

"However, the recent layoff announcements do raise some doubts as to whether the Chinese will keep their word that they will strive for their German investments' sustainability," Emons said.

Thilo Ketterer, director of the China practice at German audit and consulting company Roedl & Partner, noted that Germany's foreign trade law regulates acquisitions but not management decisions made afterwards.

"The government could only stop the Cotesa deal because it concerns critical technologies, as it had done with Fujian Grand Chip Investment Fund's bid for semiconductor maker Aixtron in late 2016, but this would be unrelated to the layoffs elsewhere," Ketterer said.

Fujian Grand Chip's 675 million euro bid for Aixtron collapsed after the economics ministry withdrew its initial approval and the Committee on Foreign Investment in the United States advised then-President Barack Obama to reject the deal. Both agencies cited national security concerns.

"The layoffs will possibly lead to reviews becoming lengthier, but let's keep in mind that the tone in Sino-German trade relations is more amicable now than last year, when the foreign trade law was strengthened," Ketterer said.

He pointed to a new Chinese rule that came into effect this year, which defers withholding tax on profits used by overseas investors for direct investment back into China, as buoying German business sentiment.

Ketterer said this rule was particularly helpful for small- and medium-size German enterprises in China, as it will allow them to benefit from the mainland's growth potential by making mergers and acquisitions there more affordable.

Another sign of warming bilateral business relations can be seen in the recent announcement by China National Chemical that it will list machinery maker KraussMaffei, which it acquired in April 2016, on the Shanghai Stock Exchange through a subsidiary. KraussMaffei will get a cash injection of 300 million euros if the initial public offering is completed. Its German management has said it will use the proceeds to increase production capacity in Germany.

In view of the warmer investment climate in China, Ketterer said German businesses and politicians are reluctant to rock the boat.

"Access for German companies to the China market is good," Ketterer said. "The M&A playing field for German firms in China is still positive, and the upgrading of China's manufacturing sector needs German technical support, which generates opportunities," he said.

"Under these circumstances, the recently announced layoffs at Chinese-owned firms in Germany is, for now, not large enough to seriously spoil the overall climate," he said.

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