China’s Two Sides

chip_starnes_AP634316178154_620x350Beijing and Shanghai are two of the most modern cities in the world. Their skylines rival any others; their streets are filled with the latest and most expensive automobiles; and their stores display the logos of the world’s most exclusive and expensive luxury brands. Beyond the physical appearances of the cities themselves, the companies that are headquartered in Beijing and Shanghai include the largest global companies, as well as a new breed of Chinese companies that are quickly asserting themselves on the world stage.

Against this backdrop of modernity, it’s easy to be lulled into a sense of complacency and to come away with the impression that doing business in China today is no different than doing business anywhere else. In fact, many international executives doing business in China state matter-of-factly that the China of today bears little resemblance to the China of the 1990s, when global companies first began in large numbers to establish operations in the country.

However, two incidents that have occurred in 2013 are a reminder that there is another side to China that really hasn’t changed much since then. The first involves an American executive who was “locked in” against his will at his company’s Beijing factory, and the other involves American executives who are being “locked out” of their majority-owned factory in China’s Shandong Province. While the circumstances are different in each case, both demonstrate what can happen when international companies forget the lessons of the past.

Chip Starnes is the 42-year-old CEO of Florida-based Specialty Medical Supplies who was held for six days in June against his will by the workers at his company’s suburban Beijing factory. As is often the case, there is much disagreement about what caused the incident in the first place. The company’s workers say that they took their action because they believed that Specialty Medical was moving the entire factory to India, and that the company was planning to skip out and not make proper severance payments. Specialty Medical, of course, has denied these allegations. During the week that he was held, Starnes appeared on CNBC Squawk Box, Bloomberg and countless other news shows, being interviewed as he looked out through the bars in the factory door. The story of his “detainment” once again raised questions regarding the attractiveness of doing business in China.

Based in Findlay, Ohio, Cooper Tire & Rubber Co. (NYSE: CTB) (“Cooper”) is a $4 billion company that manufactures and markets tires and related products throughout the world. The company is the ninth largest tire company in the world with more than 60 manufacturing, sales, distribution, technical and design facilities located in 11 countries. Cooper Tire ranks among the 350 largest companies in America.

In 2006, Cooper acquired a 51 percent ownership position in Cooper Chengshan (Shandong) Passenger Tire Company, Ltd. (“Chengshan”) in Rongsheng City in China’s Shandong Province. Subsequently, Cooper increased its ownership to 65 percent when one of the original shareholders exercised a put option that had been negotiated as part of the joint venture agreement. Since the joint venture was formed, Chengshan has grown to the point where it now accounts for approximately 30 percent of Cooper’s sales.

The trouble began on June 12th of this year when Apollo Tyres Ltd. (Bombay: APOLLOTYRE.BO) (“Apollo”) of India, the world’s 17th largest tire manufacturer with revenues of approximately $2.5 billion, announced that it had reached an agreement to purchase all of Cooper’s shares at $35 per share, a buyout worth $2.5 billion. The merger agreement signed on that date was very tight with few “outs,” and called for a closing in October. At the time of the announcement, the $35 price represented a 40 percent premium to Cooper’s 30-day volume-weighted average price.

While the Apollo announcement was good news to Cooper shareholders, it was not received well in Shandong Province. The reaction by Chengshan’s labor union was virtually immediate and negative. On June 18th, the union sent an open letter to all Cooper employees criticizing the merger as too highly-leveraged and questioning Cooper’s ability to meet the needs of its workers and customers in light of such new debt. In protest of the Apollo deal, Chengshan stopped making Cooper tires on July 13, and the union employees went on strike on June 21. Meanwhile, Chengshan has barred Cooper’s 10 representatives (mostly in human resources and finance) from entering the facilities.

In large part due to the turmoil at Chengshan, the October closing date for the merger has come and gone, and Cooper has sued Apollo for non-performance. The two companies are now in Delaware court, and no one knows whether Apollo merely wants a reduction of the $35 acquisition price, or whether it intends to walk away from the deal. With so much uncertainty, Cooper’s stock is now trading at $24, after spiking to just over $34 on the day after the announcement.

How can an American executive be held against his will by workers in his company’s wholly-owned factory for six days, and how can a major U.S. company be locked out of its 65-percent-owned factory, in modern day China? Understanding the reasons why these events have occurred is important for every company doing, or planning to do, business in China. Unfortunately, Specialty Medical is a private company, so it is difficult to get a full picture of exactly what happened. However, Cooper is publicly traded and the Apollo deal is a large and visible transaction with important consequences for many. The documents that have been filed in the ongoing litigation provide a fascinating account of the actions that have led to this outcome.

Stay tuned for more on “China’s Two Sides.”

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