Teutonic again: China targets German technology

Twice in the space of a few weeks the record for China's largest direct investment in Germany fell. There was private equity interest in both deals, first as buyer then as seller. While the numbers are unprecedented, the basic trend is not. Three years and two months ago, AVCJ ran an opinion piece under the headline "Teutonic ambitions." The first sentence: "Another week, another Chinese strategic acquisition of a German manufacturing asset."

Indeed, one of the nearly transactions back then became an actual transaction this time around. An unnamed Chinese buyer was reportedly in the running for plastics specialist KraussMaffei Group. Onex Corp. ended up buying the asset, but when KraussMaffei was put up for sale once again, China did not falter. China National Chemical Corporation (ChemChina), Guoxin International Investment Corp. and cross-border PE firm AGIC Capital and, agreed a EUR925 million ($1.01 billion) purchase.

The investment thesis is largely unchanged. KraussMaffei is a global leader in manufacturing machinery and systems used in the production and processing plastics and rubber. There is a strong demand base for this in China, and by owning the technology behind it, local companies can continue to climb the industrial value chain.

The other deals from 2012 told a similar story - see, for example, Sany Heavy Industry's acquisition of concrete pump maker Putzmeister Holding and Weichai Power's EUR738 million investment in forklift truck manufacturer Kion. While CITIC Private Equity participated as a minority investor in the former transaction, the latter deal facilitated a partial exit for KKR and Goldman Sachs.

Fast forward to the present, and EQT Partners has performed the same maneuver, agreeing a full sale of German waste management company EEW Energy from Waste to Beijing Enterprises Holding (BEHL) for EUR1.44 billion. BEHL said that the acquisition represents an opportunity to introduce energy-from-waste technologies and management expertise to the China market.

There is a broader context to the recent activity. Last year, M&A involving Chinese companies reached a record $656 billion and this surge has carried over into 2016, with US and European assets at the top of the shopping list. Announced deals include ChemChina's $43 billion acquisition of Swiss chemicals group Syngenta; Haier Group's purchase of General Electric's appliance unit for $5.4 billion; and Dalian Wanda Group's $3.5 billion acquisition of film studio Legendary Entertainment.

Chinese companies are clearly looking at a wider range of industries than before. While the resources giants have understandably withdrawn, entertainment, consumer technology and food and beverage have come to the fore. Industrial technology - Syngenta's seeds or KraussMaffei's injection molding - is a consistent presence.

Both trends reflect changes in China's economy. On one hand, consumers are becoming more sophisticated; they are willing to pay a premium for quality goods and services. On the other, the traditional industrial sector is struggling; technology is a means by which companies can upgrade their product portfolios and achieve greater efficiency, hopefully addressing profit margin erosion in the process.

For those seeking technology, the Mittelstand - small and mid-size companies in Germany, Switzerland and Austria - remains a rich hunting ground. It is no coincidence that AGIC has launched a fund dedicated to Sino-German investments, or that middle market Chinese private equity firms are reaching out to their European counterparts with a view to sourcing partnership or secondary buyout opportunities.

While Chinese corporates have become more accustomed to international M&A, industrial Europe is a challenging environment, often characterized by tight family ownership. As such, there is every chance private equity firms will continue to feature in these deals: if not as sellers, then as the partners or co-investors that bridge cultural divides, address concerns about legacy pensions and intellectual property, and generally smooth the transition of European technology and expertise to China.

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• Topics
• Europe
• Greater China
• Buyouts
• Industrials
• China
• Europe
• buyout
• manufacturing
• Outbound investment