Midea maladies Kuka cuts costs amid wrangles with Chinese bosses

The interim CEO of robot-maker Kuka has announced a raft of cost-cutting measures, including job losses. The company’s Chinese owner, Midea, made clear it is not happy with Kuka's performance.
Quelle: dpa
Job cuts to come at Kuka.

Kuka's interim boss is caught up in a culture clash with the company's Chinese owners that's complicating deeper questions of power and performance.

It is only two years since the German robot maker was taken over by household goods maker Midea, prompting fears in Germany that China wanted to buy up the country’s advanced technologies.

That was the broader worry; meanwhile, behind the scenes, amid performance worries at Kuka, there's the troubling suspicion that the Chinese paid too much.

Operational problems have now prompted interim CEO Peter Mohnen to write a long letter to staff, seen by Handelsblatt, admitting that things “have not gone so well” recently. Mohnen now plans an immediate round of €300 million ($344 million) in cost cuts, including job losses. It is unclear how many of its 4,000 German employees will be affected by the cuts.

Industry sources say Kuka’s cost control became weak during the economic boom, and must be corrected. But Kuka’s main problem can be summed up in a single word: China. After the company's controversial takeover – Kuka has been called a pearl of German industry – both Berlin and Brussels tightened regulations on foreign takeovers. The government has new powers to veto deals in sensitive industrial sectors amid national security concerns.

Less attention was paid at the time to operational issues, but these are currently the major headache for executives in both Augsburg and in Foshan, China, where Midea is based.

Over-priced, over-complicated, over there

The Chinese company paid €4 billion for Kuka and hoped to incorporate German robots into its own products – Midea makes electrical appliances from refrigerators to commercial air conditioning to industrial automation – as well as selling them to the wider Chinese industrial market. This has proved tougher than expected.

Now, Chinese executives are criticizing Kuka technology as overpriced and over-complicated, with delivery delays also adding to problems. In November, poor performance led to the dismissal of long-serving CEO Till Reuter.

Mohnen, then chief financial officer, was appointed interim successor. He acknowledges that Kuka’s results have fallen short of expectations. “Of course it’s annoying, and that’s why we are determined to change things,” he wrote in his letter.

But he also pointed out that the Chinese economic slowdown is affecting many companies, including competitors.

Chinese concerns about Kuka’s product range appear to have been taken on board: the company says it will develop a range of smaller, simpler robot systems for the Asian market. But whether this can be done with adequate profit margins remains open to question, say industry sources.

Kuka’s problems in China seem to go beyond products and profits. Mohnen has now established an internal taskforce, with “interculturally experienced staff,” intended to smooth relations with its Chinese owners. Since the takeover, there have been struggles; after boss Till Reuter was outsted, five further managers also left Kuka.

Time is tight as operating results underline the need for urgency. At a company town hall meeting on Friday, even labor representatives acknowledged the need for action, sources told Handelsblatt.

Revising targets down

Kuka has already revised targets downwards for operating year 2018. The company initially hoped to achieve €3.5 billion in annual revenue, with operating profit margins of 5.5 percent. Now they hope to achieve €3.2 billion, and 3.0 percent margins.

In the medium-term, the target had been to reach €4.0–4.5 billion by 2020, with 7.5 percent margins. These goals have now been scrapped as unrealistic.

If Mohnen’s restructuring program can turn things around, it could also secure him the CEO post, although he denies this is a major motivation. Sources on the Kuka board say he has good chances of a longer-term contract. But he needs some quick victories.

Given the controversy surrounding the 2017 takeover, Mohnen has to strike a particularly delicate balance. On the one hand, he must improve results and keep his Chinese bosses happy. But he also needs to convince staff and politicians in Germany that Kuka is still properly independent.

This is why Mohnen insisted so strongly that cost-cutting decisions were all made in Germany, without Chinese influence. He pointed out that the takeover deal ringfenced Kuka’s independence for several years. But he knows that only real improvements in performance can safeguard that autonomy.

Axel Höpner is head of the Handelsblatt office in Munich, focusing on the state of Bavaria's companies, including Allianz and Siemens. To contact the author: [email protected]