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January 11, 2016 01:00 AM

China climbs the high-tech ladder with KraussMaffei deal

Steve Toloken
Assistant Managing Editor
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    Netstal
    Netstal molded a 10.7-gram polyproylene margarine tub through injection-compression molding with a stack mold at Fakuma.

    China has stepped up into the global plastics machinery market in a much bigger way, with the Jan. 10 announcement that state-owned ChemChina is buying Germany's KraussMaffei Group for $1.01 billion.

    Looking back, we may see this as the moment China went from being “only” the world's largest market for plastics machinery to also being a major developer and owner of some of the world's best technology.

    It's a potentially big shift, and I would say a natural evolution for China. The country has become a major market for KM and for other global machinery companies.

    So it would only make sense that China would in time want to take its place owning and developing some of the major technology.

    China has good home-grown technology in plastics equipment, aimed mostly at its more commoditized market.

    But there's always been a gap between what was made in China and what you could call the best in the world, made elsewhere.

    The Chinese industry executives we've talked to about ChemChina's purchase see it as a key move in the internationalization of their industry, and I think they take some pride in that — a move “worth celebrating,” as the head of China's plastics machinery industry association put it.

    For them, it's more than one company buying another company. It has national implications.

    One of the implications for KM is clear — better access to the Chinese market. In spite of the current troubles in China's economy and debates about reshoring of some manufacturing away from China, the trend there has been growth.

    KM CEO Frank Stieler made the point in a call with reporters that China's current troubles are part of a structural adjustment away from low-cost labor, toward higher quality and more automation.

    And in a sense, KM's technology fits well into that adjustment. The business conditions for higher-end global technology can remain stronger than the overall market during an adjustment period like this.

    In Stieler's words, the new owner also opens doors in China: “ChemChina as an owner provides access to customer groups and strategic discussions, which was not available to us before.”

    In 2007, China produced 16 percent of the world's plastics machinery. In 2011, fueled by rapid domestic growth and foreign investment, it produced 30 percent, overtaking Germany as largest maker of such equipment. (Those figures come from China's largest injection machine maker, Haitian International Holdings Ltd.)

    Greater China, which includes places like Taiwan and Hong Kong, accounted for 30 percent of world polymer demand in 2013, compared with 17 percent in the NAFTA region. Greater China also is home to 34 percent of world's plastics processors.

    So the market attraction is clear.

    ChemChina and KM in their news release paint a picture of normal operations continuing for KM.

    They said operating and corporate responsibility will remain in Europe and the company's works council said it welcomed the new owners. They said ChemChina wants to maintain KM's strength in Europe and operate as a long-term investor.

    But a state-owned Chinese firm does represent a new sort of entrant in the global machinery business.

    State-owned companies so far have not played a big role in China's plastics machinery industry. China's government has not been seen plastics machinery as a strategic sector in the way it sees chemicals or automobile manufacturing.

    Most of China's plastics machinery industry is made up of private companies or companies listed in the stock market.

    It's interesting that it's a state-owned firm is making this purchase, not one of China's privately owned plastics machinery firms.

    Most of them are too small to buy KM. But even those that are big enough, like Haitian, have not wanted to make a similar large acquisition overseas. They've not commented specifically on this deal, but in general they see too many risks in integrating operations, and not enough return on their investment.

    Even they admit managing an acquisition like this may not be easy.

    A state-owned firm doesn't have quite the same calculations to return a profit as those private firms, though.

    In the news release, ChemChina's Chairman Jianxin Ren talked about the acquisition helping his company become a “pioneer in achieving the ‘Made in China 2025' program,” to upgrade China's industry.

    That government-led plan calls for more automation and efficiency and moving higher up the value chain. It also includes specific plans for more localized manufacturing content in China's industry.

    I don't know if meeting those goals over time will come into conflict with the needs of running a profitable business in the highly competitive global machinery industry.

    ChemChina has a lot of resources, with 37 billion euros in sales it's the 9th largest global chemical manufacturer.

    It can handle an acquisition of this size, and it's a global company in its own right, with units that manufacture machinery for the rubber and chemical industry. Not a bad pedigree for an owner of an industrial machinery business.

    China is taking a step forward into a larger role in the global industry with this purchase, one more befitting the size of its market.

    Whether this particular acquisition succeeds, it may be too early to say, but it signals again how China is climbing the manufacturing ladder.

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