He is the only German company among the four global leaders in industrial robots. He is one of the few major players in the industrial automation sector that has been acquired by Chinese capital. With a history spanning over a century, he has consistently remained at the forefront of innovation. He is KUKA, a leading global industrial robot manufacturer and regarded as one of the core enterprises of Germany's Industry 4.0.

At the beginning of 2017, KUKA announced the completion of a transaction with Midea, transferring a majority stake, which also became the largest cross-border merger and acquisition case involving Chinese capital in the industrial automation industry to date.

More than a year has passed since both parties reached an acquisition deal in January of last year. At the end of March this year, KUKA released its first annual report after being acquired by Midea. What is the true situation of this company? How have each of its business segments performed this year? And how has KUKA changed in the Chinese market?

With these questions in mind, below we will briefly outline KUKA's history and business divisions, helping you understand the changes KUKA has undergone this year through this latest annual report.

1、Revenue increased significantly

but profit margin declined. According to KUKA's 2017 annual report, the company's total order delivery volume in 2017 was 3.6 billion euros, a year-on-year increase of 5.6%; total sales were 3.5 billion euros, a year-on-year increase of 18%; the EBIT margin was 4.3%, down from 4.7% in 2016; net income was 88.2 million euros, a year-on-year increase of 2.3%.

It can be seen that KUKA has experienced significant growth in total revenue, but its profit margin has declined. Part of this is due to a series of R&D and investments KUKA made in the Internet of Things and 3D software sectors in 2017, as well as a notable increase in selling and administrative expenses. These factors have all impacted the company's profit margin.

KUKA's main business is divided into three segments. Unlike ABB, which is involved in electrical power grids, Fanuc in numerical control machine tools, and Yaskawa in motors and other industrial equipment, KUKA is the only automation company among the four major players that focuses entirely on the industrial robot field.

His main business is divided into: industrial automation mechanical bodies and core components (hereinafter referred to as the 'Robotics Segment'), intelligent factory systems for industrial scenarios (hereinafter referred to as the 'Industrial Integration Segment'), and automation solutions for industries such as healthcare and logistics (hereinafter referred to as the 'Service Integration Segment').

2. Robotics Business: Driven by Electronics, Secures Multiple New Collaborations

Since 2016, the application of industrial robots globally has been gradually shifting from the automotive industry to electronics. KUKA's latest announcement also well illustrates this trend: KUKA's robotics division is primarily benefiting from the growing demand for electronic production lines.

In KUKA robots' application areas in 2017, the share of the automotive sector dropped sharply from 46.4% in 2016 to 35.4%, while the proportion of applications in other industrial sectors surged from 36.6% to 45.3%. The service sector showed little change, rising only slightly from 17.0% to 19.3%.

Overall, KUKA's Robotics segment generated revenue of 1.2 billion euros, representing a year-on-year increase of 20.8% compared to 993 million euros in 2016. The EBIT margin stood at 11.1%, up from 10.1% in 2016. Additionally, it achieved a high ROCE of 50%. As its core business, KUKA had a successful year in robotics in 2017, signing a comprehensive strategic cooperation agreement with Bosch, being awarded GE's Annual Best Supplier for Powertrain and Body Shop Equipment, and obtaining technology authorization from Siemens Medical Solutions in the healthcare sector.

3. Integrated Business: Betting on Healthcare and Logistics, Can It Stand Out Amid Intense Competition

Thanks to the strong demand in the new energy sector, KUKA's industrial integration business in 2017 was mainly driven by battery production, resulting in a certain amount of sales growth, but the net profit was not optimistic. In the fourth quarter, the EBIT of this department was negative 37.32 million euros, and for the full year it was only 17.8 million euros, a sharp drop of 80.5% compared to 91.3 million euros in the previous year. This caused the EBIT margin to fall sharply from 6.5% in 2016 to 1.1%.

KUKA provided two official reasons: one was the impact of several individual projects, and the other was losses caused by the group's revenue-increasing measures. It is not hard to imagine how intense the competitive environment in the industrial systems integration industry must have been, driven by robust demand, to lead KUKA to incur such significant losses on individual projects in order to capture market share. In 2015, to better manage automation solutions for non-industrial application scenarios such as healthcare, warehousing, and logistics—what we previously referred to as the service integration segment—KUKA spun off this business unit and had it managed by its subsidiary Swisslog.

Over the past three years, the sales growth of KUKA's newly invested business segment has been evident: 491 million euros, 624 million euros, and 768 million euros respectively. This business segment primarily targets chain pharmacies as its main sales focus. The EBIT margin of this segment has remained relatively stable with little significant change over the three years.

It is worth noting, however, that this segment has an extremely low ROCE return of only 3%. This indicates that a significant amount of capital costs have been incurred to support the development of this business segment. Compared to other business segments, it also employs a large number of staff. This suggests that KUKA is prepared to engage in a prolonged battle with competitors in new robotic application areas.

Furthermore, from a profitability perspective, KUKA's integration business is still far behind ABB, which also engages in integration, in the short term. However, with the support of Midea, KUKA still has a high likelihood of securing more integration orders in the Chinese market in the future.

4. China Market Performance and Synergies

After briefly outlining KUKA's business segments, let us examine KUKA's performance in the Chinese market following its acquisition by Midea, as well as its future development plans.

At the time of the acquisition deal, both parties were confident and had high expectations for synergies.

As early as 30 years before collaborating with Midea, in 1986, KUKA officially entered the Chinese market. That same year, it presented a robot to FAW Truck, marking the first industrial robot applied in manufacturing within China.

After entering the Chinese market, KUKA successfully made domestic automakers such as Dongfeng and Changan its initial loyal customers.

For KUKA, the Chinese market has always been its primary market and also Midea's stronghold. The entire Chinese robotics market represents a huge opportunity for KUKA. In 2016, KUKA held the second position in China's industrial robot market.

In its 2017 annual report, KUKA stated that its revenue from the Chinese market accounted for approximately 20%. Additionally, benefiting from national initiatives such as 'Internet Plus', the 13th Five-Year Plan, and Made in China 2025, KUKA predicts that the Chinese market will continue to grow at a compound annual rate of 20%, primarily driven by demand from the automotive and electronics industries.

At the same time, KUKA, which has been acquired by Midea, has accelerated the integration of its China business. On March 22 of this year, Midea Group announced that it plans to establish a joint venture with KUKA to take over KUKA's China operations. In this transaction, KUKA intends to merge its business units in China and set up a joint venture with Midea Group to assume these operations, with both shareholders of the joint venture holding a 50% stake each. Concurrently, KUKA will build a new production base at its Shunde Science and Technology Park in China for new product development, aiming to reach an annual robot production capacity of 75,000 units by 2024. Adding this to its existing capacity, KUKA's total annual robot production capacity in China will reach 100,000 units. Ultimately, based on the aforementioned performance and the greater synergies brought about by the integration of the Chinese market, KUKA has projected in its annual report sales revenue exceeding 3.5 billion euros and an EBIT margin of approximately 5.5% for 2018. We believe this investment by Midea will yield long-term returns. KUKA is not only expected to be a major driver for Midea's transformation and upgrading but also has the potential to become the leading robot giant in China's industrial robotics industry in the future.

Extended Reading: KUKA's Centennial History and Technical Overview

Against a century of history, KUKA has created numerous global firsts.

Founded in Augsburg, Germany, in 1898, KUKA initially focused primarily on indoor and urban lighting before soon expanding into other fields.

In 1956, KUKA built the first automatic welding equipment for refrigerators and washing machines and provided Volkswagen with its first multi-point welding production line. In 1971, KUKA constructed Europe's first robot-equipped welding assembly line for Daimler-Benz.

In 1973, KUKA developed the FAMULUS industrial robot, which was also the world's first motor-driven six-axis robot. From this point onward, KUKA embarked on a journey spanning over four decades in the field of industrial robotics.

In 1996, KUKA achieved a breakthrough in industrial robot development. Its first PC-based control system began to be marketed, thereby ushering in the era of \"true\" mechatronics characterized by the perfect integration of software, control systems, and mechanical equipment.

In 2007, KUKA launched the KR Titan, which had a payload capacity of 1,000 kilograms and a reach of 3,200 millimeters, making it the world's largest and most powerful six-axis industrial robot at the time. In 2013, KUKA introduced the LBR iiwa, the world's first collaborative robot designed for industrial applications. Today, with the rigorous spirit and exquisite craftsmanship inherent in German enterprises, KUKA robots are widely used across industries such as automotive, metallurgy, food processing, healthcare, and plastic molding. So why did Midea invest heavily to acquire this German company, and what advantages does KUKA have over other robotics companies? Simply put, compared to its peers, KUKA has three main advantages: simple human-machine interaction operation, fashionable innovation without rigidity, and leading core technology in the industry.

Firstly, one of KUKA's major advantages is its user-friendly operation software. Even novice apprentices can get up to speed with basic operations within a day on their first use. In terms of the human-machine interface, KUKA keeps things simple. By comparison, Japanese brands like Yaskawa and Fanuc have robot control systems with many more keys, making them slightly more complex to operate. Secondly, being innovative and trendy is a hallmark of KUKA. Just by looking at product aesthetics, KUKA's products are far more appealing than those of the other three companies. Moreover, KUKA's approach to marketing does not resemble that of a traditional manufacturing enterprise. This can be glimpsed from a few years ago when KUKA invited renowned table tennis player Timo Boll to star in an advertisement featuring a human-robot table tennis match.

Most importantly, KUKA possesses numerous industry-leading advanced technologies. One of these is its software-based safety controller technology. In the industrial robot field, major manufacturers each have their own safety technologies, such as ABB's SafeMove and Fanuc's DCS. The safety controllers of these companies are implemented using hardware, and a safety control board can be seen inside their control cabinets. There are very strict requirements for the certification of safety controllers. Typically, hardware adopts a dual-CPU configuration, and sometimes it is required that the two CPUs use different chip models, employing a 1oo2 strategy. If the calculation results of the two CPUs are inconsistent, the system stops immediately.

KUKA, however, uses a fully software-based approach. The KRC4 control system runs KUKA & WITTENSTEIN's SafeOS on two different cores of a single x86 CPU, and has passed safety certification with only one CPU.

It is no wonder that industry insiders refer to KUKA as the \"softest\" among the four major manufacturers.

Additionally, it is worth mentioning that KUKA performs well in the heavy-duty robot segment. In robots over 120KG, KUKA and ABB have significant market shares. In the heavy-load 400KG and 600KG robots, KUKA has the highest sales volume.