Paulson Papers on Investment Case Study Series
China Drives into America’s Auto Parts Industry
September 2013 Paulson Papers on Investment Case Study Series
Preface
or decades, bilateral investment sectors, such as agribusiness or has flowed predominantly from the manufacturing—to identify tangible FUnited States to China. But Chinese opportunities, examine constraints investments in the United States have and obstacles, and ultimately fashion expanded considerably in recent sensible investment models. years, and this proliferation of direct investments has, in turn, sparked new Most of the papers in this Investment debates about the future of US-China series look ahead. For example, our economic relations. agribusiness papers examine trends in the global food system and specific US and Unlike bond holdings, which can be Chinese comparative advantages. They bought or sold through a quick paper propose prospective investment models. transaction, direct investments involve people, plants, and other assets. They But even as we look ahead, we also are a vote of confidence in another aim to look backward, drawing lessons country’s economic system since they from past successes and failures. And take time both to establish and unwind. that is the purpose of the case studies, as distinct from the other papers in this The Paulson Papers on Investment aim series. Some Chinese investments in to look at the underlying economics— the United States have succeeded. They and politics—of these cross-border created or saved jobs, or have proved investments between the United States beneficial in other ways. Other Chinese and China. investments have failed: revenue sank, companies shed jobs, and, in some Many observers debate the economic, cases, businesses closed. In this sense, political, and national security past investments offer a rich set of implications of such investments. But lessons to learn. the debates are, too often, generic or take place at 100,000 feet. Investment Damien Ma, Fellow of The Paulson opportunities are much discussed by Institute, directs the case study project. Americans and Chinese in the abstract but these discussions are not always For this case study of Nexteer anchored in the underlying economics Automotive, we are extremely grateful or a realistic investment case. to Nicholas Aeppel, a talented University of Chicago undergraduate, for his The goal of the Paulson Papers on extraordinary research and enthusiasm Investment is to dive deep into various for the project. Paulson Papers on Investment Case Study Series
Case studies are reconstructed on the They aim to reflect a best reconstruction basis of the public record, personal of the case. But they may have gaps and interviews with participants, and other inadequacies where the record is journalistic accounts. incomplete, facts are murky, or players chose not to share their views.
Cover Photo: Reuters/Rebecca Cook Paulson Papers on Investment Case Study Series
Timeline
1906 Nexteer Automotive is founded as Jackson, Church & Wilcox, a maker of manual steering systems.
1909 General Motors purchases Jackson, Church & Wilcox, transforming it into its own auto parts supplier.
1928 Based in Saginaw, Michigan, GM’s young auto parts supplier renamed Saginaw Steering Gear Division.
1999 GM spins off Saginaw Steering and other manufacturing arms to form an independent Delphi Automotive Systems.
2005 Delphi Automotive files for Chapter 11 bankruptcy protection.
2006 Delphi Automotive announces that it will sell its constituent steering unit, Delphi Steering, which is the immediate predecessor to Nexteer.
2007 January: US private equity firm Platinum Equity named as lead bidder for Delphi Steering.
December: Initial deal announced as Platinum agrees to assume $190 million in liabilities.
2009 March: Deal collapses as Platinum grows increasingly uncomfortable with Delphi Steering in the face of the global financial crisis.
June: Platinum proposes to purchase instead Delphi Steering’s parent company, Delphi Automotive, and forms a partnership with Beijing E-Town, a financing and investment arm of the Beijing municipal government.
July: The deal for the parent collapses as Delphi Automotive agrees to a separate deal with its creditors, leaving both Platinum and E-Town empty handed.
October: GM steps in again to purchase Delphi Steering, breaking it off from the parent and renaming it Nexteer Automotive.
China Drives into America’s Auto Parts Industry Paulson Papers on Investment Case Study Series
2010 First Quarter: GM announces its decision to sell Nexteer; Platinum and E-Town, working with another Chinese partner, Tempo Group, jump at the chance to bid; Platinum pulls out of deal due to disagreement over asset pricing with its two Chinese partners.
Summer: AVIC Automotive, subsidiary of a state-owned aircraft manufacturer, joins the Chinese investor team as Tempo sinks into financial straits. AVIC joins but stays largely in the background.
November: E-Town and a newly formed acquisition group, Pacific Century Motors, complete purchase of Nexteer for about $450 million.
2011 March: AVIC Automotive officially enters the deal and buys a controlling stake in Pacific Century, in effect taking ownership of Nexteer.
China Drives into America’s Auto Parts Industry Paulson Papers on Investment Case Study Series
Players
United States
Delphi Automotive Once a GM unit, it is spun off as an independent auto parts supplier.
Delphi Steering A unit of Delphi Automotive that specializes in high-end auto steering technology.
General Motors Leading US auto manufacturer. Wants to spin off its non-core assets after the global financial crisis.
Nexteer Automotive New name adopted in 2009 for Delphi Steering. It becomes target asset of a Chinese acquisition.
Platinum Equity US private equity firm that seeks, first, to acquire Delphi Steering; seeks, second, to acquire its parent, Delphi Automotive; seeks, third, to acquire Nexteer but ultimately drops out of the acquisition team.
China
AVIC Automotive Subsidiary of a major state-owned aircraft manufacturer, becomes late-arriving partner in the acquisition. It eventually takes a controlling stake in Nexteer.
E-Town A financing and investment arm of the Beijing municipal government.
Pacific Century Automotive Joint venture, including E-Town, formed to take over Nexteer after the purchase is approved.
Tempo Group Auto parts manufacturer with global ambitions.
China Drives into America’s Auto Parts Industry Paulson Papers on Investment Case Study Series
Introduction
s the City of Detroit struggles with But rather than exploring the question bankruptcy, broader questions of foreign, including Chinese, capital Aloom about how to revive the injection in the abstract, it is useful to US auto sector. America’s auto industry examine the case history of just such a deal. was once central not just to Detroit’s prosperity but to the economy of In 2010, a Chinese consortium sought Michigan and the US manufacturing to acquire a technologically advanced base writ large. auto parts company in Saginaw, Michigan. The case is instructive Some have argued that tapping foreign because it demonstrates that such capital is part of the solution. And some deals, even when they succeed, are both even look to China, the world’s second- extraordinarily complex and fraught largest economy, with its own ambitions with pitfalls that touch the acquisition of in the automotive US technology. sector, to contribute to the region’s What follows is rescue. Beijing sits the story of how on some $3.4 trillion Chinese entities in foreign exchange acquired Nexteer reserves, with Automotive. about one-third of that invested in US Context was critical. Treasury securities. As the US auto As a matter of industry emerged official policy, China Photo: Flickr/Saginaw Future Inc. from two years aims to diversify these holdings into of crisis in late 2010, China’s Pacific assets in the United States that yield Century Automotive Systems acquired higher returns, in part by actively Saginaw-based Nexteer Automotive, supporting Chinese companies that a leading US high-tech auto parts seek to buy assets across various supplier. At the time, global capital was market segments. scarce, and a Chinese buyer’s purchase of Nexteer extended to it a lifeline to The debates about Detroit’s future are expand into what has become a $2.2 closely linked to this Chinese story. One of billion global business as of 2011. the market segments into which Chinese firms have sought to diversify is, in fact, The deal appeared to be a sound the US auto sector. match because it offered a strong value
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proposition to both parties. For Nexteer, • How a Chinese buyer can adroitly the Chinese capital injection ensured navigate the political shoals upon that it could both save jobs in Michigan which some Chinese acquisitions in and strengthen its international the United States have foundered. footprint, particularly into the expanding • How a sophisticated set of advisors Chinese market for automobile parts. who understand both the buyers’ The Chinese party, meanwhile, acquired desires and the US market can make state-of-the-art automotive technology the difference between success and at a moment when China’s own auto failure for a Chinese investor. industry increasingly demanded such • How investors avoided past mistakes technology. by engaging with Chinese regulators while maintaining open lines of Behind the deal, however, lay complex communication with the seller. dynamics and near failures that almost • How the involvement of a long- derailed it. Among other things, the term strategic partner, rather than Nexteer acquisition demonstrates that a temporary shareholder, can timing matters greatly: a deal that came boost confidence in an investor’s to fruition in the post-financial crisis commitment to the local economy. environment of 2010 might not have • How two firms with very different come about just a few years earlier. cultures—one Chinese, and one And this question of timing may matter American—can work through now as Detroit, in particular, and US complicated negotiating dynamics manufacturing states in general struggle and, ultimately, reach a deal. to come to grips with their future. Who is Nexteer? The Nexteer case illustrates: Nexteer was founded in 1906 as • How the impulse to acquire Jackson, Church & Wilcox, a company advanced technology motivates that produced the “Jacox Gear,” a Chinese investors yet also creates manual steering system that predates synergies between Chinese the electric and hydraulic systems corporate and government goals— commonly used in cars today. General even when the Chinese investors Motors’ (GM) Buick unit purchased are private and have primarily Jackson, Church & Wilcox in 1909 and, commercial aims. by 1917, had transformed it into the • How a Chinese buyer can work GM parent’s first parts manufacturing effectively with US labor unions and division. US sellers to keep jobs in the United States—and grow a target asset’s US Based in Saginaw, Michigan, this division business in the bargain. was subsequently renamed the Saginaw
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Product Company in 1919, and then Nexteer Today the Saginaw Steering Gear Division in 1928. In 1999, GM spun off Saginaw Products: Electric and hydraulic Steering and some other GM auto parts power steering, steering columns, manufacturers to form a new firm— drivelines, and halfshafts. Delphi Automotive Systems.1 But GM did not retain ownership in Delphi Customers: 50+ globally, including Automotive, thus allowing it to freely GM, Ford, Chrysler, Fiat, and Toyota. pursue contracts with other automakers while giving GM the freedom to focus Facilities: 38 throughout North and on its core business.2 South America, Europe, and Asia.
Burdened by high labor costs, the 2011 Revenue: $2.2 billion. entire US auto industry struggled to stay competitive with leaner overseas producers throughout the first part of the 1990s.3 And these struggles had an acute effect on Delphi Automotive’s bottom line: In 2004 alone, Delphi lost $4.8 billion. In 2005, Delphi filed for Chapter 11 bankruptcy protection and announced plans to close most of its US factories and slash thousands of United Auto Workers (UAW) union jobs. As part of its recovery plan, Delphi Automotive announced in March 2006 that it would attempt to sell its steering business, Delphi Steering, which became the immediate corporate predecessor to Nexteer.
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How the Nexteer Deal Almost Unraveled
or this steering business line, which million in cash merely to facilitate the eventually became Nexteer, US- transaction for its steering unit. GM also based private equity (PE) appeared agreed to assume $65 million in other F 7 initially to offer a lifeline. Platinum obligations. And for its part, Platinum Equity, a Los Angeles-based PE firm, would, according to this proposal, announced on January 31, 2007 that it assume $190 million of liabilities under had been selected as the lead bidder in the deal in exchange for the steering the sale of Nexteer’s forerunner, Delphi division’s assets. In December 2007, Steering. Platinum agreed to these conditions and announced the deal. Platinum reportedly offered $560 million in equity, loans, and a revolving Why did GM step in to facilitate the sale credit line for Delphi Steering, beating of Delphi Steering to Platinum? out a competing bid from Cerberus Capital As GM’s main parts supplier for its GM was most likely Management, a New vehicle steering systems, Delphi Steering compelled to do so York-based PE player.4 was important to GM’s own success. because of the unique nature of automotive But problems soon emerged. steering systems. Steering systems are a technologically advanced part of a In the wake of Platinum’s due diligence, car, directly tied to a vehicle’s safety. Delphi Steering’s parent firm, Delphi They require a long process of product Automotive, announced in its first development and testing before they quarter 2007 results that the value of can be used in any vehicle. Unlike other the steering division assets were worth parts, such as tires, which are easily just $380 million, a $152 million and interchangeable, steering systems are 29 percent drop from what had been specific to each particular vehicle type. previously reported.5 Clearly, Delphi They need to be fully integrated into Steering was struggling, having lost $127 the whole product. Thus while GM had million on $2.6 billion in sales in 2006.6 freed Delphi Steering to work with other And this, no doubt, affected Platinum’s customers in the vehicle business, it calculations as it attempted to reassess remained reliant on Delphi Steering’s the value of the business. products and was still a key customer.
GM itself stepped in to steer the As GM’s main parts supplier for its Platinum acquisition back on track, vehicle steering systems, Delphi Steering pledging to pay Delphi Automotive $257 was important to GM’s own success.
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That is because without Delphi Steering, determined to protect its critical steering GM would need to quickly transition to parts supplier, GM announced the same another supplier—a move that would day that the company would itself acquire be costly and time-consuming at a Delphi Steering. time when GM was struggling to cope with declining demand for its low fuel But Platinum decided to make a second economy vehicles. attempt by enlarging the entire deal. Now, it offered a bigger idea. Instead Still, the Platinum acquisition continued of purchasing Delphi Steering alone, to face problems. By 2008, the onset of Platinum and GM would together the global financial crisis compounded acquire the entire parent company, the problems that all parties—Platinum, Delphi Automotive. With the auto GM, and Delphi Steering—faced. market in crisis and GM seemingly Platinum appears to have become desperate to protect its supply chain, increasingly uncomfortable with Platinum sought to induce GM to strike the agreement it had struck via GM, a deal for the parent company. especially as vehicle sales in the United States plummeted. This second play succeeded. In June 2009, Platinum agreed to purchase the bulk By March 3, 2009—more than two of Delphi Automotive’s assets for $250 years after Platinum first emerged as million in cash and a $250 million line of the lead bidder for Delphi Steering— credit. GM would provide the remainder the deal had collapsed. Now, without of a $3.6 billion financing package and Platinum in the mix, GM stepped directly acquire the parent company’s back into a central role. Apparently steering division and four plants.8
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Chinese Buyer Seizes an Opportunity
t was at this point, in the summer of Chinese government had forced foreign 2009, that China entered the Nexteer automakers to establish joint ventures Istory in a concerted way. (JVs) with Chinese partners after China’s economy opened up to foreign Beijing E-Town, an arm of the Beijing investment in the 1980s. Yet domestic municipal government, had also bid on Chinese auto brands still lagged far the parent, Delphi Automotive, before behind foreign brands in domestic Platinum was selected as the buyer in market share and technological June. Who was E-Town? The Beijing sophistication. government had given E-Town 47 square kilometers of land in the south In 2004, then, China’s powerful of Beijing. The firm aimed to develop central government planning agency, this land into a the National local high-tech Development and manufacturing Reform Commission zone.9 E-Town (NDRC), renewed reportedly had its push to build attracted over indigenous industry. 2,000 enterprises The NDRC released from more than the national thirty countries to Auto Industry its development Development Policy zone—including (qiche chanye GM, Nokia, and Photo: Flickr/Saginaw Future Inc. fazhan zhengce), Mercedes-Benz.10 E-Town became which encouraged Chinese automakers interested in Delphi in part because it to develop their own research and sought to have the firm open facilities in development (R&D) capabilities and Beijing as well. produce vehicles independently of foreign partners. To understand why E-Town, as a Chinese municipal financing and investment This sector-specific forerunner of vehicle, wanted to acquire a US auto China’s subsequent national policy of parts producer, it is useful to step back “indigenous innovation” also specified and view the attempt through the lens rules for JVs. The automotive policy of the Chinese government’s push to required foreign companies to transfer transform the domestic auto industry technology to their Chinese partners in into a globally competitive sector. The exchange for continued access to the
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Chinese market.11 In 2009, the NDRC been the founding chairman of the Asia- released a revision of this policy in an Pacific division of Barrington Associates, effort to accelerate the push,12 further a middle-market investment banking focusing attention on developing firm in the western United States. He domestic technology and China-only had also co-founded and acted as chief brands rather than relying too heavily operating officer of Bestone Investment on foreign ones.13 Group, a firm whose deals included taking stakes in Chinese firms, such as In this context, E-Town’s proposed Conch Cement, a multibillion dollar investment in Delphi Automotive cement manufacturer based in China’s not only aligned with the central Anhui province.14 government’s policy goals but would also, in theory, offer a faster way to gain Another player in Chen’s effort was access to technologies necessary to Michael Gisser, a partner at the law develop a globally competitive Chinese firm Skadden Arps, who, splitting automotive industry. his time between Beijing and the United States, had worked on cross- E-Town lost out to border mergers and Platinum in the GM- E-Town’s proposed investment in Delphi acquisitions between brokered deal. But for Automotive not only aligned with the companies in the these reasons, Jack central government’s policy goals but two countries. It was Chen, the California- would also offer access to technologies Gisser who introduced based founder and necessary to develop a globally Chen to Platinum. CEO of Transworld competitive automotive industry. Capital Group, an The subsequent international investment advisor to the discussion gained traction because, at Beijing municipal government, this time, Platinum was interested in suggested that E-Town instead try to teaming up with a Chinese firm with partner rather than compete with strong financing capabilities as an entry Platinum. Chen believed that such a point into the Chinese market. For that relationship could prove mutually reason, Platinum proved receptive beneficial: Platinum could manage to Chen’s approach. It agreed to let Delphi’s US and European businesses, E-Town take an equity stake in Delphi while E-Town could provide financing Automotive once Platinum’s own and facilitate its expansion in China. acquisition was completed.
As a bridge between the Chinese buyers After the Platinum-Delphi Automotive and the US market, Chen thus became deal was announced in June 2009, a player in the Nexteer story. Before executives from Platinum traveled to founding Transworld Capital, Chen had China to launch a new collaboration
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with E-Town. But ironically, the story bankruptcy lenders. So at the end of quickly turned sour for both firms. To the day, both Platinum, the “winning” Platinum’s immense embarrassment, bidder, and E-Town, the “losing” bidder, Delphi Automotive, in late July, elected came away empty handed in their quest to accept a pure credit bid from its for the company.
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The Chinese Party is Blindsided
hat happened? For one, GM and Ford, years to transition to Delphi Automotive’s creditors a different steering system supplier. Whad been outraged by That meant that the automakers had the terms of Platinum’s proposed no immediate alternative to Nexteer acquisition, arguing that they would get and would need time to develop other back only 20 percent of the $2.6 billion supplier relationships. in debtor-in-possession loans they had provided to Delphi. Their solution? But GM alone constituted only half The creditors agreed to exchange $3.5 of Nexteer’s revenue at this point, billion in loans for equity in Delphi, insufficient to assure Nexteer’s long- immediately killing Platinum’s previously term survival. In that sense, Nexteer’s announced deal, as well as Platinum leverage over its non-GM customers and E-Town’s planned post-acquisition kept it functioning in the short run but collaboration. could not ultimately Having acquired the steering unit and guarantee its long- When the creditors renamed it Nexteer, GM considered slowly term success. unexpectedly took liquidating the company and transitioning over the Delphi its own vehicle business to a new supplier. Having acquired the parent, GM stepped steering unit and in to independently save the constituent renamed it Nexteer, GM considered steering unit that it would have slowly liquidating the company and acquired under the deal with Platinum. transitioning its own vehicle business In October 2009, GM completed this to a new supplier. But Robert Remenar, spinoff, making Delphi Steering a direct the president of Delphi Steering who subsidiary of GM and changing its name now became president and CEO of the to “Nexteer Automotive.” new Nexteer (but continued reporting to GM), appears to have held the GM’s likely intent at this point was to conviction that Nexteer should not be be only a short-term owner. Nexteer’s liquidated. Remenar foresaw increased customers included other auto demand for Nexteer’s electric power companies, such as Ford, that would steering (EPS) systems and reportedly not want to buy their parts—especially argued strongly that changing suppliers parts as technologically sophisticated as after the company’s liquidation would steering systems—from a GM subsidiary. be costly and time-consuming for GM. Meanwhile, in the near term, Nexteer had leverage over these existing customers: it Beyond Remenar’s arguments, GM could take the big automakers, including had another reason not to liquidate
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the company: Its relations with the supply efficiencies married to relations UAW, the major US automotive labor with the labor union—prevailed. In union, were increasingly fraught at January 2010, GM announced that it a time of great challenge to the US would attempt to sell, not liquidate, auto industry.15 This combined logic— Nexteer.
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Positioning Nexteer for Sale
ut GM faced a problem. In order The final contract with the UAW took to make Nexteer an attractive the form of a “shelf” agreement. In other Bacquisition target, the company words, the UAW had the power to accept would have to improve its relations with or reject any potential buyer of Nexteer the union. So as GM entered the next and the agreement would only take phase of sale preparations, it moved effect once the UAW approved the buyer simultaneously to renegotiate Nexteer’s of the firm.17 union contracts. Third Time a Charm This would be no mean feat, in part After Platinum failed because the UAW to acquire Delphi was one of the Automotive, Chen parties that had asked if the PE firm acquired a stake knew of other good in GM after it auto assets in the declared Chapter 11 United States that bankruptcy in June might be available 2009.16 for sale. Platinum Photo: Flickr/Saginaw Future Inc. predicted— Union Contract correctly—that Nexteer, Delphi’s erstwhile steering division, would be on The union rejected GM’s first Nexteer- the market soon. And so Chen arranged related offer. But GM warned that it for E-Town and Platinum to sign a would, as a result, simply have to close memorandum of understanding to jointly down Nexteer if a buyer was not found. acquire Nexteer if and when the steering company became available for purchase. The union then passed a second proposal agreement that included When GM announced in January 2010 concessions to GM. Many workers that it would attempt to sell Nexteer, were bought out or were offered early E-Town and Platinum were thus prepared retirement packages. The replacement to jump at the opportunity to bid. workers’ $12.50 hourly wage was just half of what the union had negotiated Tempo Joins the Team a decade earlier. Still, the lower wages helped Nexteer to level the playing field Meanwhile, another Beijing-based with non-union US producers. private auto parts manufacturer, Tempo
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Government Perks Group, had also developed an interest in bidding on Nexteer. Established in 1984, Nexteer’s sale prospects were also Tempo has multiple manufacturing bolstered by state and local tax facilities in China, producing incentives in Michigan and Buena components and modules for chassis, Vista Township. In November 2009, powertrain, and driveline systems. the Michigan Economic Growth Tempo sells to original equipment Authority approved a ten year $71 manufacturers (OEMs) throughout million state tax credit for Nexteer as Asia, Europe, North America, and part of a program established in 1995 the Middle East. As of 2009, the firm that grants tax credits to businesses had approximately 10,000 employees that expand in, move to, or stay internationally and thirty-six affiliates in Michigan. The tax credit helped throughout China. It controlled two persuade Nexteer to invest $400 public companies: Hong Kong-listed million in Michigan instead of opening Norstar Automotive and Shanghai- new sites in Europe and China. listed Songliao Automobile. It had also developed a significant interest in Nexteer announced concurrently that investing in the US auto industry, having it would keep its headquarters in already established an engineering Buena Vista, to which the township research center in Canton, Michigan responded by eliminating the taxes in 2004 and acquired several of Delphi Nexteer would pay to bring in new Automotive’s braking system component equipment for twenty years. This plants in Ohio in 2005. saves the company an estimated $2.3 million per year. “During the Tempo had a solid working relationship Delphi bankruptcy, Nexteer had to with E-Town, Platinum’s existing Chinese become transformed from a money- partner. After Platinum failed to acquire losing operation to something that Delphi Automotive in 2009, E-Town would be valuable and would allow remained interested in acquiring a piece its operations to continue globally,” of the struggling parts supplier if it could said a Nexteer spokesperson in an find the right strategic partner. And interview. “Michigan was very helpful the creditors who finally took over the in getting us to that point.” Delphi parent were open to a deal that might give them a better return than the proposed Platinum bid they had scuttled.
In November 2009, therefore, E-Town teamed up with Tempo and a third Chinese partner, state-owned steelmaker Shougang, to form a JV called Beijing West
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Industries, with the goal of acquiring the Platinum brought Tempo aboard for a Delphi braking and suspension business tri-party attempt to acquire Nexteer for some $100 million. In this Chinese from GM. partnership, E-Town took a 25 percent stake in Beijing West, while Tempo Getting GM’s Nod and Shougang held 24 percent and 51 percent, respectively.18 But GM had, it appears, reservations about all three of these potential buyers. When Platinum and E-Town began Its first source of hesitation was the preparing their bid for Nexteer, Tempo American PE firm, Platinum. Although chairman and CEO Zhou Tianbao external circumstances had been largely approached Chen to suggest that the to blame, Platinum had already failed parties work together with Tempo, twice to acquire Delphi assets. More instead of bidding against each other important, GM was reluctant to sell such as rivals. Chen, who was preparing the an important supplier to a temporary Platinum-E-Town bid, shareholder, such as had advised Beijing Tempo would not contribute substantial a PE firm, and GM West on its purchase capital to the joint purchase but had apparently made of Delphi’s braking and industry experience that both E-Town its reticence clear suspension business, and Platinum lacked. to Platinum. As a so he and Tempo PE player, after all, had a preexisting relationship. He now Platinum intended to exit from Nexteer argued to the Platinum-E-Town partners once it turned a healthy profit. that Tempo could add value to their team as a third acquirer in an expanded But GM also seems to have been unsure partnership. about the two Chinese partners, E-Town and Tempo, partly because of GM’s Tempo would not contribute substantial difficult prior experience with Chinese capital to the joint purchase but had investors. In 2009, GM had agreed to sell industry experience that both E-Town and its Hummer brand to Chengdu-based Platinum lacked. Tempo already owned Tengzhong, a private manufacturer of a facility in Detroit and another in the heavy machinery and trucks. Beijing industrial zone owned by E-Town. It could bring to the group various staff This deal could have been akin to and engineers knowledgeable about the Nexteer: For about $150 million, the steering business. purchase would have saved thousands of Michigan jobs, relieved a struggling Building on the successful Beijing GM of an unprofitable brand, and West acquisition of Delphi’s braking provided a Chinese company with the and suspension business, E-Town and technology and platform to help it
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compete in China. But following a public Nexteer case, the effort appears to have announcement, the deal reportedly provided some reassurance to GM, which failed to receive the necessary regulatory likely appreciated the synergy of the approval from the Chinese government. combined E-Town-Platinum-Tempo team. Chinese regulators at the NDRC and the Ministry of Commerce (MOFCOM) In short, while GM may have had are purported to have never received reservations about each purchaser the required application, leading to individually, as a combined acquisition speculation that the deal floundered group the three-party team nonetheless because it did not fit with the Chinese offered some balance. And with E-Town government’s support for fuel-efficient on the team, GM could be relatively cars, which Hummers were not.19 assured of Chinese government approval and financing since E-Town had a $15 Reflecting on this earlier experience billion line of credit from the Beijing with a Chinese buyer, GM most likely municipal government. As for Platinum, did not wish to see although the PE a repeat failure. While GM may have had reservations about firm had failed in its But Chen, as the each purchaser individually, as a combined prior bids to acquire acquisition team’s acquisition group the three-party team Delphi Automotive advisor, argues that nonetheless offered some balance. and Delphi Steering, he had anticipated its key people knew this concern. He recollects that he GM executives and their business well diligently kept GM abreast of discussions enough to take the lead in negotiations with the NDRC and MOFCOM and eventually oversee Nexteer’s US and throughout this phase of the Nexteer international (non-China) operations. purchase. Finally, with respect to Tempo, its experience in the Chinese auto market This coordination effort with Chinese presumably provided GM a degree of regulators is one of the lessons comfort that it could become a valuable highlighted in the Introduction to this partner as Nexteer looked to expand its case study. Some Chinese investors have foothold into China. foundered on the shoals of their own country’s regulatory process. So in the And so the deal moved forward.
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Chinese Motivations
hy was Nexteer, in particular, government also aims to increase the of strategic value to the two average fuel economy of these vehicles, WChinese bidders, E-Town and pledging to support these production Tempo? With its over 1,000 patents, targets by purchasing electric and hybrid the acquisition of Nexteer would mean vehicles for official use.21 a chance for Chinese auto parts players to establish themselves in the market China’s goals are ambitious and for high-tech electric steering systems aspirational, but the central government at precisely the moment when the is, quite clearly, invested in supporting Chinese government aimed to develop the sector’s development. indigenous EPS technology. Before the Nexteer deal, Chinese EPS and China companies had used EPS only on high- end luxury vehicles. There has been a huge With its over 1,000 patents, the But the government’s increase in global acquisition of Nexteer would mean a backing for electric demand for EPS, chance for Chinese auto parts players to and fuel-efficient including in China, establish themselves in the market for vehicles has, more because it is lighter, high-tech electric steering systems. recently, led to a more reliable, and up wider penetration to 6 percent more fuel-efficient than of electric steering systems among cheaper hydraulic counterparts.20 In Chinese manufacturers. “China has China, government support continues been a price play until very recently,” to drive increased demand for EPS noted Michael Richardson, Nexteer’s systems. The Chinese government has Chief Technology Officer (CTO) identified alternative energy vehicles and China chair, in an August 2012 as a “strategic emerging industry,” one press release. “Now, the [Chinese] in which it hopes China will become automakers are recognizing that there a global leader. In 2012, the State will be domestic legislation that will Council, China’s cabinet, released a Fuel- force them to [adopt] electric power Efficient and New Energy Auto Industry steering … [Thus] for the first time in Development Plan, which aims at a China, they [will] come to us for electric production target of half-million electric power steering across the board.”22 and plug-in hybrid vehicles by 2015, and 5 million such vehicles by 2020, with Taken together, this meant that, from an annual production capacity target the Chinese perspective, acquiring all of of 3 million units by 2020. The Chinese Nexteer’s technology in one swoop and at
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a potential bargain price of less than $500 in a next round of bidding. E-Town and million was an attractive option indeed. Tempo readily agreed, but Platinum, which specializes in purchasing Platinum’s Exit distressed assets, is said to have been unable to accurately assess the added But the underlying Chinese goal of value of the potential increased sales acquiring Nexteer’s EPS technology did in China that Nexteer could achieve. not reflect Platinum’s motivation. As a Platinum was willing to increase the bid PE firm, it sought to earn a return on price, but not as much as its Chinese investment, not to make a long-term partners. technology play. After the first round of bids, GM’s deal advisor informed the When the three parties failed to agree three acquiring partners that they would on a price, Platinum dropped out of the need to raise the price of their collective deal, leaving E-Town and Tempo to bid offer before being invited to participate on their own.
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Steering the Deal Back on Track ... and Building Trust
latinum’s exit created problems for That bid had been unsuccessful but the Chinese parties. For one thing, Moelis had acquired the necessary Pit reignited GM’s concerns about experience of working with GM. And so E-Town and Tempo because Platinum’s hiring Moelis was intended to show GM very presence had served to assuage that E-Town and Tempo were serious GM’s discomfort with Chinese buyers, players with the determination to get despite Chen’s reassurances about both the acquisition done. the Chinese regulatory process and the buyers’ ability to manage a rigorous But the Chinese buyers did not stop bidding process. And GM planned to with hiring Moelis. They also engaged issue its initial public offering (IPO) in other US consulting firms, including AT the second half Kearney, Deloitte, of the year. Thus and Miller Canfield. it aimed to have Chen and two agreements to sell Tempo employees Nexteer and other supervised these non-core assets professionals. They signed by the end of put in grueling hours the second quarter to perform due of 2010. diligence and identify outstanding issues. This time constraint These conclusions pressured the two Photo: Flickr/Saginaw Future Inc. were sent back Chinese buyers into proving that they the same day to the Chinese buyers for could complete the deal swiftly and with overnight review and feedback. certainty. Doing so would demonstrate the good faith of the Chinese buyers. Participants recalled in interviews To prove and reinforce the Chinese that this process worked well, in side’s commitment, Chen began to part because the decision makers in look for an investment bank that had Beijing felt comfortable delegating worked with GM in the recent past. At responsibility to a US-based team that Chen’s urging (and Gisser’s suggestion), included leading professionals, managed E-Town and Tempo hired Moelis & by people who understood China and Company, a boutique investment bank the buyers’ decision-making process. At founded in 2007. Moelis had previously the same time, the buyers’ commitment represented another firm in an and ability to run an efficient process unsuccessful bid for GM assets. seems to have greatly impressed GM.
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The deal team leaders visited top million) in overdue payments for forward executives across GM’s divisions—first, contracts. SIIG filed a claim with Chinese to make sure GM understood the team’s courts to recover the advance payments commitment to continue working it had made to Norstar. Chinese regulators closely with the company after their responded by freezing Norstar’s assets acquisition of Nexteer, but, second, to and, when these were not recovered, the provide GM with assurances and context company was eventually liquidated.24 on the buyers’ thinking. Meanwhile, a second Tempo subsidiary, Drawing a lesson from the Hummer Songliao, which produces automobiles debacle, the E-Town-Tempo deal team and auto body components in China, sought to constantly reassure GM faced similar financial challenges. But that their deal, unlike that previous Songliao fared better than Norstar. After one, would not face similar regulatory halting production in 2009, Songliao snafus in China. Nor did the buyers wait began to recover when E-Town bought for the deal to be completed before a 24.89 percent equity stake in the seeking Chinese government regulatory company, replacing Tempo as Songliao’s approval. Instead, they pursued these largest shareholder. Then, E-Town processes in parallel. provided Songliao Drawing a lesson from the Hummer with 29 million yuan Tempo’s Decline debacle, the E-Town-Tempo deal team ($5 million) in loans sought to constantly reassure GM that their to help it restart But a major wrinkle deal, unlike that previous one, would not production.25 soon emerged that face similar regulatory snafus in China. raised new questions Taken together, about one of the two Chinese buyers. these experiences meant that Tempo’s Even as it sought to acquire Nexteer, management had drastically overspent Tempo faced severe financial troubles of in the run-up to the global financial its own, especially with its two publicly crisis. When the China Banking listed subsidiaries.23 Regulatory Commission reported Tempo’s financial situation to the State One of these subsidiaries was the Chinese Council, 58 percent of Tempo’s loans— auto-parts supplier Norstar, which suffered totaling 3.3 billion yuan ($500 million)— from significant exposure to the sport had gone bad.26 utility vehicle (SUV) market at precisely the moment that demand for that type of Yet Tempo’s ambitious management saw vehicle collapsed during the 2008 global strategic value in the various Delphi assets. economic crisis. By January 2009, SIIG, one So Tempo aggressively pursued them, of Tempo’s strategic partners, had become despite the company’s financial struggles alarmed by Norstar’s HK$44 million ($5.7 with its two Chinese subsidiaries back
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home. Zhou Tianbao, Tempo’s chairman the deal to proceed with all of the and CEO, apparently wanted these Chinese partners, including Tempo, deals badly. He seems to have at least because it appeared determined to shed impressed GM and his Chinese partners Nexteer with its own IPO, slated for the with his dedication to seeing the Nexteer second half of 2010, fast approaching. deal through. What is more, GM had no reason to expect financial hardship from the Indeed, Zhou emerged as the likely driving Chinese side. As noted above, it knew force behind Tempo’s ambitions. For its E-Town could provide the majority of part, his partner E-Town fully understood capital since it could access a $15 billion Tempo’s financial troubles yet had line of credit from the Beijing municipal agreed to a partnership because it also government. saw strategic value to having Tempo as a partner. Why? Unlike E-Town, Tempo had Of course, that meant E-Town could extensive experience in the auto parts afford to buy Nexteer on its own. But market. So for all its struggles, Tempo E-Town had never intended to manage could take a leading role in managing the company. Under the initial threeway Nexteer’s operations in China upon partnership with Platinum and Tempo, completion of a successful acquisition. Platinum planned to take the lead in overseeing Nexteer’s US operations The result was that Tempo’s role evolved while Tempo could focus on managing over the course of the deal from a Nexteer’s growth in China. E-Town’s financial partner into more of a strategic role was simply to provide much of the partner. It soon became clear to Tempo’s financing, ease Chinese government fellow Chinese partners that the firm regulatory approvals, and provide land would not be able to contribute capital in Beijing for Nexteer’s facilities. to the final acquisition. But Tempo did remain involved in the negotiations and So with Platinum out as a partner eventually hoped to buy an equity stake and Tempo in financial straits, E-Town in Nexteer. With its financial situation was forced to reassess its options. unstable and its future uncertain, Its leaders could feel confident that Tempo’s principal value to its partners Platinum was dispensable because they was experience in the auto sector, not its could simply rely on Nexteer’s current ability to contribute capital. management to continue running the company’s post-acquisition US Enter AVIC Automotive operations. There was little need for Platinum on that score. In retrospect, there is little question that GM was aware of—and concerned But with Tempo on the ropes, E-Town about—Tempo’s struggles. Yet it allowed decided to find another, more financially
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stable partner to help Nexteer manage as part of a three-firm Chinese group and grow the business in China. And aiming to purchase Nexteer. from E-Town’s perspective, so much the better if that new Chinese partner Overcoming Union Concerns could also contribute some capital, spreading the financial risks associated With due diligence behind them, the with the acquisition. Chinese partners still had to navigate the complex terrain of American labor E-Town’s solution was to bring aboard union politics before their bid for AVIC Automotive, the auto parts Nexteer could be finalized. Nexteer’s division of the large state-owned China union had the power to reject any Aviation Industry Corporation (AVIC), potential buyer. Its chief concern was which manufactures both military and that the Chinese buyers would simply commercial aircraft. export Nexteer’s technology and then move the Saginaw jobs to China. From a Chinese perspective, AVIC Automotive fit precisely into what “There were a lot of concerns about E-Town was searching for. First, as part the Chinese coming over and packing of a large state-owned this place up,” enterprise (SOE) With Tempo on the ropes, E-Town Matt Beaver, the under the Chinese decided to find another, more financially UAW local 699 vice central government, stable partner to help Nexteer manage president, recalled an AVIC subsidiary and grow the business in China. to the Wall Street could provide reliable Journal after the expertise, managerial know-how, and deal closed. “People were really money. And AVIC Automotive was scared the Chinese would take the already in the market for an auto patents.”28 parts company. It had been looking at options in Japan, Europe, and North For this reason, before AVIC America when, at this juncture, it came Automotive became involved with the across the Nexteer deal. deal, Nexteer’s then-CEO Remenar advised the original two Chinese In fact, AVIC Automotive was attracted partners, E-Town and Tempo, to write to Nexteer for many of the same a letter to UAW leaders guaranteeing reasons that E-Town had found the that they would honor the negotiated company enticing, most notably the shelf agreement and keep all Michigan company’s 1,000 patents, union jobs in Saginaw. The Chinese engineering expertise, and EPS partners, who had no comparable manufacturing.27 In mid-2010, AVIC experience with union bargaining in Automotive joined E-Town and Tempo China, followed this advice.
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They pledged to allow Nexteer to developing new EPS technology were operate as an independent company— almost entirely based in Michigan. and to keep the UAW jobs in Michigan. This helped the Chinese win UAW For the Chinese acquirers, this meant support.29 When AVIC Automotive that so long as Nexteer continued to came aboard as the third Chinese deal invest in R&D, keeping the Michigan partner, it did so with an understanding jobs and targeting GM and other of these previously agreed conditions. US end users as Nexteer’s principal customers made business sense. As it happens, the union’s initial China did not have comparable human concerns may have been somewhat capital or manufacturing capability, misplaced. The vehicle market for EPS much less a comparable end-user EPS systems in China was still small enough market, which was still nascent and at that point that GM and other US mostly concentrated at the higher end. end-users would be a necessary market Steering systems are heavy, difficult to for Nexteer to thrive. ship, and comprised So while China might The Chinese partners pledged to allow of numerous smaller become a future Nexteer to operate as an independent components. It would market, the new company—and to keep the UAW jobs make little economic Chinese owners would in Michigan. sense for GM’s US- nonetheless want to assembled vehicles continue supplying US customers, such to buy their steering systems from a as GM, to make Nexteer profitable and company manufacturing them halfway achieve a return on their investment. around the world.
Nor did they really have the option of Indeed, moving production out of simply shipping the steering piece of the United States is often not so the auto supply chain back to China. easy for suppliers of complex parts, Steering systems are one of the most especially when the parts are essential complex, expensive, and integrated to a machine as complicated as an parts of a vehicle. GM preferred to automobile. Many US customers rely on a local engineering team to demand just-in-time delivery, making it develop its vehicle systems. That is difficult to satisfy them if an auto parts one reason that GM had not already line relies on a manufacturing locale liquidated Nexteer. Transitioning to thousands of miles away. a new supplier would have taken a tremendous amount of time and effort. In short, if the new Chinese owners It might have threatened the safety and hoped to continue supplying GM, they quality of GM’s vehicles. The engineers probably needed to keep Nexteer and experts who understood and were operating in Michigan, not move it to
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China. Supply chain geography still technology was valuable to the Chinese mattered in the auto parts industry. And buyers, but its very complexity also the Chinese acquirers surely understood assured that such systems were not this. The entire Pearl River Delta something the Chinese could easily manufacturing juggernaut in coastal replicate. The Chinese partners needed China had been built partly around Nexteer’s skilled workers, engineers, the principle of agglomeration and and management. supply chain concentration. For certain advanced and technology-intensive In the Nexteer case, the Chinese buyers manufacturers, there are some benefits seem to have realized that the best to locating R&D closer to manufacturing way to capitalize on a US acquisition capacity, thus allowing for rapid was to use the technology to build a design tweaks and troubleshooting of production facility in China to supply engineering problems. the local market with high-quality, low-cost parts while keeping the US But that was not all. operation intact and The Chinese also Moving production out of the United healthy. The Chinese needed the expertise States is often not so easy for suppliers investors’ acceptance of Nexteer’s existing of complex parts, especially when the of these economic and management team if parts are essential to a machine as commercial realities they were to continue complicated as an automobile. probably helped to to expand their newly mitigate a potential acquired company’s activities globally. political backlash by keeping local jobs The Chinese buyers knew China’s own in Michigan. economy and industrial system well. But they were not yet so comfortable Concerns About Chinese SOEs in other parts of the world, a fact compounded by their lack of substantial But the IP issue touched an entirely experience in the steering systems different set of concerns as well. The market. Having American managers who other two Chinese buyers, E-Town and knew how to run Nexteer’s business Tempo, naturally had some concerns globally would be valuable to the new when AVIC Automotive joined their Chinese owners. team. Its parent, AVIC Corporation, is a Chinese defense industry supplier that The Chinese also pledged to keep develops military technology for the the Saginaw jobs in place to prevent People’s Liberation Army Air Force. technology and intellectual property (IP) concerns from becoming a major Acquiring Nexteer, however, did not obstacle during the negotiations and automatically imply a national security obstructing their acquisition. EPS risk because Nexteer did not possess
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sensitive technology with military participation are probably among the applications. But the Chinese buyers did reasons that E-Town initially decided to fear that US opinion—and non-Chinese purchase Nexteer without explicit AVIC competitors, should they emerge— Automotive support. It is not clear from could point to the participation of an the record, or from interviews, just AVIC subsidiary as grounds upon which how large a role these concerns over to block the deal. a possible AVIC-related controversy played in this decision. E-Town’s discussions with AVIC Automotive on its potential entrance What is clear is that E-Town and AVIC began in the spring of 2010. With Automotive reached an understanding GM pushing for a quick sale, it was sometime between the spring of 2010, not clear at that point whether AVIC when both firms clearly understood Automotive would be able to act that AVIC Automotive’s entrance could quickly enough to become involved pose risks to the deal, and November as a direct participant in the initial 2010, when the deal closed. By closing purchase. time, E-Town and AVIC Automotive had agreed that the latter would inject This part of the deal history is murky, capital and ultimately acquire the but the complexities around AVIC majority equity stake in Nexteer.
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The Deal Sealed ... Finally
n November 30, 2010, the newly However, on the day the deal closed, dubbed Pacific Century Motors, Kildee recognized Nexteer in the US Oa JV composed of E-Town and an House of Representatives, going so entity called Pacific Century Automotive far as to “welcome this collaboration Systems (PCAS), officially acquired of ideas [between Nexteer and Pacific Nexteer for approximately $450 million Century].”32 (though the exact price tag was not disclosed).30 The deal represented Clearly, the mood changed in the wake Chinese firms’ single largest investment of the deal. Even former skeptics, in the overseas auto parts industry. such as Kildee and the UAW, seemed to welcome Pacific Century with the The identity of PCAS is murky. Nexteer understanding that it would invest more officially states that PCAS comprises a in Michigan, not move jobs to China. group of private investors but has not disclosed more details. One possibility Pacific Century voluntarily submitted the is that the PCAS stake is a placeholder transaction to the Committee on Foreign for Tempo’s two-year option to buy a Investment in the United States (CFIUS) 24 percent stake in the for review for national JV. (Although Tempo The deal represented Chinese firms’ security purposes. And was unable to provide single largest investment in the in this case, the CFIUS capital at the time of overseas auto parts industry. process proceeded the deal, E-Town still smoothly.33 These wanted to keep Tempo involved and successes speak to how Pacific Century reward their initial dedication to the and its advisory team navigated federal deal.) But Tempo, as is evident now, was and local US politics. unable to exercise this option due to continued financial distress. As the initial purchase proceeded with few snags, E-Town and AVIC Automotive Many in Michigan were skeptical grew confident that, so long as they of the Chinese buyers. But by the remained committed to investing time the deal closed in November in Michigan, the AVIC subsidiary’s 2010, these concerns seem to have entrance would be greeted with similar evaporated. For example, in July 2010, enthusiasm, despite its connection to a US Representative Dale Kildee, the parent engaged in defense production. In Congressman representing Saginaw March 2011, AVIC Automotive formally County, said he “fervently” hoped entered the deal, buying a 51 percent Nexteer had been sold to a US firm.31 stake—the controlling stake— in Pacific
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Century, thus effectively becoming the Delphi braking and suspension deal. majority owner of Nexteer. And Chen then served as an advisor to the deal team, helping to identify the By this time, the deal had received Nexteer opportunity and providing a positive press coverage in the United bridge between GM and Chinese buyers States and China. AVIC Automotive unfamiliar with the US market. clearly helped its cause by pledging that Nexteer’s US operations would continue Having a knowledgeable team in place to support the local Saginaw economy. helped this set of Chinese buyers manage the sometimes politicized The eventual completion of the deal, nature of Chinese direct investment which had appeared at times to be on in the United States. For example, the the rocks, owed much to the efforts of a Chinese side seems to have delayed professional team of deal advisors—one AVIC Automotive’s entrance because that helped to overcome challenges that of their concern about CFIUS approval. have derailed other Chinese acquisitions Chinese buyers face challenges in in the past. investing in the United States. A good business proposition alone is necessary Chen’s role offers an example. He but not sufficient. Savvy legal, gained the trust of the Chinese buyers accounting, banking, and, above all, after successfully closing the previous political advisors can affect outcomes.
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After the Deal
onclusion of the Nexteer purchase gave himself the CEO title at Nexteer; had a number of effects: Chief Operating Officer Laurent Bresson C became Nexteer’s president. Remenar remained on Nexteer’s board of Management/Ownership Interface directors but decided to accept an offer from Platinum Equity, erstwhile member Pacific Century followed through on its of the original Nexteer acquisition promise to keep Nexteer independent. team, to run the PE firm’s recently And Nexteer’s management team also acquired parts manufacturer, Diversified stayed intact through the sale, including Machine, Inc. the retention of CEO Remenar and other top executives. Remenar was joined Nexteer executives argue that these on the company’s Board of Directors changes have altered little at the by three Chinese owners, but the operational level. For instance, CTO and company’s management team argues China chair Richardson says that Zhao’s that it has retained as much autonomy new role has not changed anything. in decision-making as “One bit of evidence is it had before the sale. Today, Nexteer’s growth is being driven we have never taken principally by an increase in global our chairman, Mr. Zhao, Nexteer hired one demand for EPS systems. to a customer,” said Chinese-American Richardson in August and two Chinese nationals into its 2012. “He plays a very strategic role in managerial ranks. These employees are the background. We meet quarterly at in roles designed largely to facilitate the board of directors’ meeting, apprise communication between Nexteer and him of our business and exchange its Chinese owners and, purportedly, thoughts, and he gives direction. But do not hold decision-making power. we have a lot of autonomy, as much According to a Nexteer spokesperson, autonomy as we have ever had in “The only thing that is different now is running the business.”34 that the people who own the company have a different name.” A Nexteer spokesperson adds that this management structure has, in some And yet the extent of corporate ways, improved on arrangements autonomy has become uncertain under GM: “Before, we were asked since Remenar stepped down as to contribute to the growth of a president and CEO in June 2012. AVIC corporation. Now, we’re focused, we’re Automotive’s chairman, Zhao Guibin, stand-alone, and we serve ourselves.”
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Driver of Growth Chinese Investment and US Auto Parts
Today, Nexteer’s growth is being driven Jerry Xu, president of the Detroit Chinese principally by an increase in global Business Association, notes that “a lot of demand for EPS systems. The company [Chinese companies] don’t understand has touted the fuel efficiency of these the challenges they will have here, so they software-driven systems, announcing in end up withdrawing. But of the wave, March 2011 that the 15 million EPS units there are some real jewels that become it had sold worldwide since 1999 had stronger and more competitive.” saved 1.3 billion gallons of fuel globally.35 According to Richardson, “Less One factor supporting Chinese investment than 10 years ago EPS represented 4 in the US auto parts market is the latter’s percent of our annual sales. [In 2010], need for capital. “This is a capital intensive it was nearly 30 percent, and, by 2015, industry,” says Dave Andrea, senior vice we are anticipating that well over half of president of the Original Equipment Nexteer sales will be attributed to EPS.”36 Suppliers Association. “Being able to attract global equity and debt financing Domestic Investment is a major issue that often prohibits smaller firms” from accessing growth Nexteer claims to still operate under capital. Companies in the auto parts an identical business model, albeit industry thrive when they are able to take with one big change: acquisition has advantage of economies of scale, making given it the capital to grow. “Under the capital investments desirable. prior ownership, there wasn’t enough capital to fund the growth opportunities The industry has also been globalizing. that we had,” a Nexteer spokesperson According to Andrea, “The biggest change has argued. Indeed, under Delphi is the additional requirement to support Automotive’s ownership, the steering global customers. To get component business struggled to find capital to contracts with vehicle manufacturers, upgrade technology in its Saginaw plant suppliers are required to support to produce new EPS systems. production in every region [where the manufacturer] produces.” Since the acquisition, Nexteer has announced ambitious plans for domestic This is why Nexteer has ambitious US investment. It has been able to global expansion plans. It is also why the move forward on factory upgrades international expertise of the company’s it was unable to make under Delphi management is especially valuable. Automotive’s ownership. In October 2011, for example, it announced a $150 million investment in the Saginaw plant
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to focus on equipping Nexteer to meet About 10 percent of Nexteer’s $2.2 the growing demand for EPS systems.37 billion revenue in 2011 came from China—consistent with trends in the In some sense, that is an investment auto business generally, where China that appears to be paying off. Between has become a major driver of growth. February 2010 and February 2012, The Chinese market’s growing demand Nexteer reportedly booked over $10 for EPS, as well as China’s current low billion in new business, with EPS capacity for producing such specialized making up 60 percent of new customer technology, have given Nexteer an contracts in 2011.38 opportunity to expand in the country.
Nexteer also announced in February Nexteer aims to reach $4 billion in 2011 that it would open a 30,000 global revenue by 2020, with China square foot customer service center in representing “significantly higher” than Troy, Michigan, with plans to hire fifty 10 percent of the earnings, according engineers to support the facility.39 By to Richardson. He suggests that the October 2011, Nexteer had added over company’s China operations will likely six hundred production jobs in Saginaw see the greatest revenue growth over and increased its global engineering the next year.42 spending by 20 percent, including new technical jobs.40 But Nexteer’s investments have not been limited to the United States and International Investment China. The company announced plans in 2011 for a new customer service But probably most important, Chinese center in Sao Paulo, Brazil and a new ownership has given Nexteer a chance $30 million manufacturing facility in to expand in China. Remenar stated in India. “We’re not just expanding in April 2011 that Nexteer would set up its Saginaw, but globally—in Mexico, in Chinese operational headquarters and Europe, in South America, in India, engineering and manufacturing centers as well as in China,” says a Nexteer in Beijing E-Town, an investment worth spokesperson. “What we are looking about $300 million.41 Today, Nexteer for is global growth.” also has manufacturing sites in Suzhou, Zhuohou, and Wuhan, and a customer service and engineering center in Shanghai.
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Endnotes
1 “2013 Press Kit,” Nexteer Automotive, February 2013,http://www.nexteer.com/wp-content/ uploads/2013/02/PRESS-KIT_Nexteer-Automotive_2013_compressed.pdf.
2 “Delphi Spinoff Completed,” CNN Money, May 31, 1999, http://money.cnn.com/1999/05/31/companies/gm.
3 Schoen, John W., “Auto Industry Rocked by Delphi Bankruptcy,” NBC News, October 10, 2015, http://www. nbcnews.com/id/9644882/ns/business-autos/t/auto-industry-rocked-delphi-bankruptcy/#.UX2kfSvwIlY.
4 Barkholz, David, “L.A. Group Leads Bidding for Delphi Unit,” Automotive News, February 5, 2007 Vol. 81 Issue 6241, p. 16.
5 “After Study, Delphi Drops Value of Steering Unit,” Crain’s Detroit Business, May 14, 2007, Vol. 23 Issue 20, p. 1.
6 Gopwani, Jewel, “A Long-Term Interest in Delphi’s Steering Unit: Platinum Equity Seeking Stability,” Detroit Free Press, December 12, 2007.
7 Spenner, Jean, “Steering Solutions Remains Top Bidder for Delphi Steering,” MLive, December 21, 2007, http:// www.mlive.com/business/index.ssf/2007/12/steering_solutions_remains_top.html.
8 “Tensions Grow Over Delphi’s Platinum Deal,” New York Times, June 24, 2009, http://dealbook.nytimes. com/2009/06/24/tensions-grow-over-delphis-platinum-deal/.
9 Beijing E-Town Economic Development Area, http://www.bdainvest.com/opencms/opencms/en/ABOUT_ BDA/about_dba/index.htmln8735443204.html.
10 “Beijing’s E-town Businesses Continue to Confound Worldwide Downturn,” China Daily, September 10, 2009, http://www.chinadaily.com.cn/cndy/2009-09/10/content_8674227.htm.
11 Haley, Usha, “Putting the Pedal to the Metal,” Economic Policy Institute, January 31, 2012, http://www.epi. org/publication/bp316-china-auto-parts-industry.
12 “Auto Industry Development Policy (2009 Revisions),” National Development and Reform Commission, August 15, 2009, http://www.law-lib.com/law/law_view.asp?id=294980.
13 Wagner, Wieland, “Policy Change: China Puts the Brakes on Foreign Automakers,” Der Spiegel, January 6, 2012, http://www.spiegel.de/international/business/policy-change-china-puts-the-brakes-on-foreign- automakers-a-807582.html.
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14 Chen’s biography at Transworld Capital Group, http://www.transworldgroups.com/whoweare/team/jack.
15 White, Joseph and Norihiko Shirouzu, “In the Heart of the Rust Belt, Chinese Funds Provide the Grease,” Wall Street Journal, February 11, 2012, http://online.wsj.com/article/SB10001424052970203735304577163741272 699930.html.
16 Ibid.
17 Ibid.
18 Tian, Alfred, “Beijing West Acquires Delphi’s Ride Dynamics and Brakes Business,” China Automotive Review, November 3, 2009, http://www.chinaautoreview.com/pub/CARArticle.aspx?ID=4099.
19 “Chinese FDI in the US: Causes, Case Studies, and the Future,” American Chamber of Commerce, Shanghai, June 2010, http://www.amcham-shanghai.org/ftpuploadfiles/publications/viewpoint/vp_financial.pdf.
20 “Nexteer Automotive Ships 15 Million Units of Electric Power Steering,” Nexteer Press Release, March 3, 2011.
21 “State Council Notice on Energy Efficiency and New Energy Auto Industry Development Plan (2012-2020),” State Council, June 28, 2012, http://www.gov.cn/zwgk/2012-07/09/content_2179032.htm.
22 Yang, Jian, “Nexteer Mulls Fifth China Plant to Meet Demand for Steering Parts,” Nexteer Press Release, August 14, 2012.
23 Ding, Wenlei, “Company Profile: Driving Auto Parts Sector,” Beijing Review, December 16, 2010, http://www. bjreview.com.cn/print/txt/2010-12/13/content_318740.htm.
24 “Investment Daily Note,” Sun Hung Kai Financial, January 19, 2009.
25 Ding, Wenlei, “Company Profile: Driving Auto Parts Sector,” Beijing Review, December 16, 2010, http://www. bjreview.com.cn/print/txt/2010-12/13/content_318740.htm.
26 Ibid.
27 White, Joseph and Norihiko Shirouzu, “In the Heart of the Rust Belt, Chinese Funds Provide the Grease,” Wall Street Journal, February 11, 2012, http://online.wsj.com/article/SB10001424052970203735304577163741272 699930.html.
28 Ibid.
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29 Ibid.
30 Ibid.
31 Barber, Barrie. “Kildee ‘Fervently’ Wishes US Firm Had Purchased Nexteer Automotive,” The Saginaw News, July 9, 2010, http://www.mlive.com/news/saginaw/index.ssf/2010/07/kildee_fervently_wishes_us_fir.html.
32 Kildee, Dale, “Recognizing Nexteer Automotive,” Congressional Record, Volume 156, Number 154 (Tuesday, November 30, 2011), http://www.gpo.gov/fdsys/pkg/CREC-2010-11-30/html/CREC-2010-11-30-pt1-PgE2005-3. htm.
33 “Faces of Chinese Investment in the United States,” US Chamber of Commerce, http://www.uschamber.com/ reports/faces-chinese-investment-united-states.
34 Jian, Yang, “Nexteer Mulls Fifth China Plant to Meet Demand for Steering Parts,” Nexteer Press Release, August 14, 2012.
35 “Nexteer Automotive Ships 15 Million Units of Electric Power Steering,” Nexteer Press Release, March 3, 2011.
36 “Nexteer Automotive Announces a $150 Million Investment at its Saginaw Operations,” Nexteer Press Release, October 28, 2011.
37 Ibid.
38 “Nexteer Automotive Expands Michigan Footprint, Opens Customer Service Center in Troy,” Nexteer Press Release, February 7, 2012.
39 Ibid.
40 White and Shirouzu.
41 Qian, Chunxian, “China Auto Parts Industry Succeeds in Largest Overseas Acquisition,” Xinhua, April 8, 2011, http://news.xinhuanet.com/2011-04/08/c_121283512.htm.
42 Yang, Jian, “Nexteer Mulls Fifth China Plant to Meet Demand for Steering Parts,” Nexteer Press Release, August 14, 2012.
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The Paulson Institute’s Program on Cross-Border Investment
There are compelling incentives for the United States and China to increase direct investment in both directions. US FDI stock in China was roughly $60 billion in 2010, yet a variety of obstacles and barriers to further American investment remain. Meanwhile, Chinese FDI stock in the United States has hovered at around just $5 billion. For China, investing in the United States offers the opportunity to diversify risk from domestic markets while moving up the value-chain into higher-margin industries. And for the United States, leveraging Chinese capital could, in some sectors, help to create and sustain American jobs.
As a nonprofit institution, The Paulson Institute does not participate in any investments. But by taking a sector-by-sector look at opportunities and constraints, the Institute has begun to highlight commercially promising opportunities—and to convene relevant players from industry, the capital markets, government, and academia around economically rational and politically realistic investment ideas.
The Institute’s goal is to focus on specific and promising sectors rather than treating the question of investment abstractly. We currently have two such sectoral efforts—on agribusiness and manufacturing.
The Institute’s aim is to help develop sensible investment models that reflect economic and political realities in both countries.
The Paulson Institute currently has three investment-related programs:
US-China Agribusiness Program
The Institute’s agribusiness programs aim to support America’s dynamic agriculture sector, which needs new sources of investment to spur innovation and create jobs. These programs include:
• A US-China Agricultural Investment Experts Group comprised of some of the leading names in American agribusiness. The group brainstorms ideas and helps in the Institute’s effort to develop innovative investment models that reflect economic and technological changes in global agriculture. • Periodic agribusiness-related investment workshops, bringing key players and companies together. The Institute held the first workshop in Beijing in December 2012, whose attendees included numerous CEOs and experts. It has since held smaller, sessions in the United States focused on specific technologies or aspects of agribusiness. Paulson Papers on Investment Case Study Series
• Commissioned studies that propose specific investment models, including for commodities, such as pork, or value chain opportunities, such as collaborative research and development (R&D).
US-China Manufacturing Program
In June 2013, the Institute launched a program on trends that will determine the future of global manufacturing and manufacturing-related capital flows. We aim to identify mutually beneficial manufacturing partnerships that would help support job growth in the United States. The Institute’s principal manufacturing programs include:
• Investment papers that the Institute is co-developing with private sector and academic partners. • Periodic workshops in Beijing and Chicago with Chinese, American and global CEOs and executives, focused on technological change, sectoral trends, and investment opportunities.
Case Study Program
The Institute publishes in-depth historical case studies of past Chinese direct investments in the United States, examining investment structures and economic, political, and business rationales. These detailed studies are based on public sources but also first-hand interviews with deal participants on all sides. They aim to reconstruct motivations and actions, and then to draw lessons learned. Paulson Papers on Investment Case Study Series
About The Paulson Institute
The Paulson Institute, an independent center located at the University of Chicago, is a non-partisan institution that promotes sustainable economic growth and a cleaner environment around the world. Established in 2011 by Henry M. Paulson, Jr., former US Secretary of the Treasury and chairman and chief executive of Goldman Sachs, the Institute is committed to the principle that today’s most pressing economic and environmental challenges can be solved only if leading countries work in complementary ways.
For this reason, the Institute’s initial focus is the United States and China—the world’s largest economies, energy consumers, and carbon emitters. Major economic and environmental challenges can be dealt with more efficiently and effectively if the United States and China work in tandem.
Our Objectives
Specifically, The Paulson Institute fosters international engagement to achieve three objectives:
• To increase economic activity—including Chinese investment in the United States—that leads to the creation of jobs. • To support urban growth, including the promotion of better environmental policies. • To encourage responsible executive leadership and best business practices on issues of international concern.
Our Programs
The Institute’s programs foster engagement among government policymakers, corporate executives, and leading international experts on economics, business, energy, and the environment. We are both a think and “do” tank that facilitates the sharing of real-world experiences and the implementation of practical solutions.
Institute programs and initiatives are focused in five areas: sustainable urbanization, cross-border investment, climate change and air quality, conservation, and economic policy research and outreach. The Institute also provides fellowships for students at the University of Chicago and works with the university to provide a platform for distinguished thinkers from around the world to convey their ideas. Paulson Papers on Investment Case Study Series
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