CONSUMER: Midea, SMIC on European Buying Spree

Bottom line: Midea’s purchase of Germany’s Kuka and Italy’s Clivet, and SMIC’s purchase of Italy’s LFoundry represent a wave of opportunistic buying by Chinese firms in Europe, with more such deals to come under Beijing’s directive to go global.

Midea buys Italy’s Clivet

A sluggish European economy, made worse by last week’s shock Brexit, is providing fertile shopping ground for Chinese firms, with 3 large deals in the headlines as the new week begins. Two of those involve home appliance maker Midea (Shenzhen: 000333), whose controversial and very expensive plan to buy a big stake in German robotics maker Kuka (Frankfurt: KU2G) looks set to reach a final agreement this week. At the same time, Midea has reached another deal to buy an Italian rival in the air conditioner space. Last but not least, faded semiconductor maker SMIC (HKEx: 981; NYSE: SMI) has announced another deal in Italy to buy the smaller rival LFoundry.

The common theme to all 3 deals is that they come in Europe, and represent part of Beijing’s broader directive for Chinese firms to go global by purchasing foreign companies. Such purchases serve two functions, allowing Chinese firms to acquire foreign technology and also sales and marketing channels and skills to sell to overseas markets. Europe is a particularly fertile ground for such purchases these days, since a weak economy has left many companies in need of cash.

One of Europe’s weakest major economies is Italy, which is home to two of the deals in the headlines. The first of those will see Midea purchase 80 percent of Italian air conditioner maker Clivet SpA for an undisclosed sum. There’s not much detail on this particular deal, which was announced on Midea’s website and is expected to close by year end. (English article; company announcement)

It seems fairly evident that this is a relatively minor deal, worth $100 million or less, and Midea probably isn’t very interested in Clivet’s technology or its expensive factories. Instead, I suspect that Midea simply wants Clivet’s sales channels and other local marketing resources to expand its presence in Europe and the US, and will quietly try to shut down all local manufacturing and move it to China. Of course it may find that’s not so easy if Italy’s strong unions complain, but that’s a story for the future.

Automotive Chip Maker

Next there’s SMIC’s Italian deal, which will see it buy 70 percent of LFoundry, a maker of chips used in the automotive industry, for 49 million euros ($54 million). (company announcement) The announcement points out that LFoundry not only designs but also manufactures its own chips, though its foundry must be quite small. By comparison, most major chip makers these days simply design chips and then hire contract manufacturers like SMIC and Taiwan’s TSMC (Taipei: 2330; NYSE: TSM) to do actual manufacturing.

SMIC notes that the purchase marks a baby step in its internationalization, and to my knowledge this may be its largest overseas purchase to date. But like the Clivet deal, I suspect that SMIC will quietly try to close LFoundry’s actual manufacturing facility and move production to its own facilities in China. Like the Clivet-Midea deal, it could also run into trouble if Italy’s tough labor unions resist such a move.

I’m saving the Midea-Kuka deal for last, not because it’s the least important but rather because I’ve already written about it a lot and the latest developments look mostly incremental. New reports say Midea reached a breakthrough with Kuka’s board over the weekend, and a final deal to buy a major stake in the Germany company for up to 4.5 billion euros could be announced this week. (English article)

German leaders had previously opposed a deal, but Midea eased their concerns by saying it would leave the company’s management intact and also not try to move jobs to China. (previous post) Thus this latest development represents finalization of those conditions. Both companies hope to use the deal to modernize Midea’s production lines, and also to expand Kuka’s business more broadly into China. Both goals should be achievable, though I’ve previously said Midea probably could have accomplished its aims far more cheaply by simply forming a China-based joint venture with Kuka.

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