A $5-billion bid by Chinese home appliance maker Midea Group to buy German industrial robot manufacturer Kuka AG poses a dilemma for Angela Merkel.

The conservative chancellor champions domestic innovation of the so-called industrial internet and her ruling coalition has made "Industrie 4.0", the digitization of industry, a core part of its strategy for building Germany's economic future.

Germany also has a lead in the cutting-edge technology that would be passed to Midea if it buys Kuka, but Merkel is loath to meddle in takeovers, even if the suitor is foreign.

"I think the government is concerned about how we can keep this (industrial) leadership, but so far I don't see a very coordinated approach of protecting this leadership because that's not the way we do industrial

policy in Germany," said Mikko Huotari, an analyst at the Mercator Institute for China Studies in Berlin.

"Despite the strategic considerations that might play a role, it's very clear that the German government will continue to be open to Chinese capital or any kind of capital that is flowing into Germany." Merkel has said nothing in public of Midea's bid, which was launched on Wednesday and valued Kuka at around 4.5 billion euros ($5.05 billion).

Michael Fuchs, deputy leader of the coalition group in Germany's lower house of parliament, indicated shortly after the bid was announced that the government would not intervene to stop it.

But government sources also say Berlin will examine how critical Kuka's technology is for the digitization of industry.

MERKEL'S PRAISE FOR KUKA

Merkel praised Kuka as a model for Germany's industrial future as it computerizes manufacturing when she visited its plant in the Bavarian town of Augsburg in March 2015. "I think here is an exciting piece of German production for ‘Industrie 4.0'," she said. "We must develop this further, if we want to stay in front."

Merkel, whose Christian Democratic Union (CDU) and their Bavarian allies govern with the left-leaning Social Democrats (SPD), said a month earlier that the next 10 years would decide "whether we remain a leading industrial nation or whether we perhaps do not make the change."

Both Merkel and SPD leader Sigmar Gabriel are committed to Industrie 4.0, which is being promoted by his Economy Ministry.

The United States leads the field in software and data, but Germany sees China as the leading hardware producer. It believes its industry can retain its prowess only if it fuses IT into manufacturing processes to use data to the greatest effect.

Germany depends on manufacturing for a larger share of the economy than any of its western European neighbours, with tens of thousands of family-owned businesses building the bedrock of its export-driven success.

Along with industrial giants Siemens and Bosch, Merkel's government has seen Kuka with its robot technology as a model for German pioneering in what is known as the fourth industrial revolution.

One of Kuka's strengths is in the communication between robots and people, an area of innovation that will allow "big data" to help generate new products to meet customers' wishes. Kuka Chief Executive Till Reuter has welcomed a pledge from Midea that the company will remain independent.

A reform of Germany's foreign trade law in 2008 gave the government the right of veto to protect strategic companies. But such is Berlin's commitment to free trade that it would have to present grave misgivings to prevent a takeover on such grounds.

When in 2014 Canada-based BlackBerry took over Duesseldorf-based Secusmart, a maker of encrypted communication devices for the German government, Berlin was able to win some guarantees but did not want to endanger the takeover.

In 2012, however, Merkel blocked a merger between BAE Systems and EADS to create a defense giant. Despite Germany's commitment to free market trade, some German business leaders could be concerned that Midea's planned takeover of Kuka will deal a blow to the country's push to develop the digitization of industry.

One executive in the German IT sector, speaking on condition of anonymity because of the sensitivity of the matter, said he was surprised more of a fuss had not been made because Kuka's technology "is core to Industrie 4.0."