The solution turned out to be so simple it's almost embarrassing...
I just had to switch from text/value (name/id) pair to text/text and there is no 'blinking' or disappearance issue any more.
Turn:
@(Html.Kendo().ComboBox()
.Name("ProductId")
.DataTextField("Text")
.DataValueField("Value")
into:
@(Html.Kendo().ComboBox()
.Name("ProductName")
.DataTextField("Text")
.DataValueField("Text")
It causes some additional work in the controller but at least works.
I hope it saves time to someone like it could have saved me some...