China’s Two Sides (Part II): How Not to Treat a Chinese Partner

Cooper Tire & Rubber Company

Cooper Tire & Rubber Company (Photo credit: Wikipedia)

This is the second article about the stalled acquisition of Cooper Tire & Rubber Co. (NYSE: CTB) (“Cooper”) by India’s Apollo Tyres Ltd. (Bombai: APOLLOTYRE.BO) (“Apollo”). For background information click on to China’s Two Sides.

Anyone doing business in China knows that establishing “mutual trust” with your partners, customers and colleagues is a key success factor in the country. Achieving this objective is all the more difficult when one party is Chinese and the other a foreigner. The cultural differences that exist often create suspicions as to the motives of the other side that can lead to misunderstandings.

The process of establishing mutual trust under such circumstances takes time, but the process cannot even begin unless each party has a fundamental respect for the other side. In my opinion, misunderstandings prevented the establishment of a solid foundation of mutual respect, and this is precisely where Apollo got off to a bad start with Chairman Che of Chengshan Group, the Chinese partner in Cooper’s 65-percent-owned joint venture in Shandong Province (the “Chengshan JV”).

Cooper is attractive to Apollo because the combined company would have access to China and India, as well as the United States market for tires. With the Chengshan JV accounting for approximately 25 percent of Cooper’s global revenues, Apollo understood its importance, which is why it asked Cooper, as part of the due diligence process, to arrange a meeting between Apollo’s vice chairman and Chairman Che. So far, so good. It would be foolish to proceed with such a large merger without first meeting the partner in one of Cooper’s most important assets. Besides, a visit by Apollo’s vice chairman would have been taken by Chairman Che as an indication of respect and a good first step in building a long-term relationship.

The meeting took place on May 15 and, according to Vice Chairman Neeraj Kanwar, managing director of Apollo and son of Chairman Onkar Singh Kanwar, the meeting was cordial. In court testimony, Kanwar said he explained how the parties reached the $2.5 billion price tag and what Apollo’s plans were for China. Kanwar further testified that Chairman Che said that the first four years of his relationship with Cooper were very, very bad, but the last three years were better. After the meeting, Apollo conveyed to Cooper its understanding that the Chinese partner expected to be compensated as part of any transaction between Apollo and Cooper. Despite this initial red flag, Apollo went ahead and announced its deal for Cooper on June 12.

The merger announcement set the stage for the next six months and the total breakdown in communication between Cooper, Apollo and the Chinese partner. On June 18, Chengshan’s union sent an open letter to all Cooper employees, criticizing the merger as being 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 June 13, and the union employees in China went on strike on June 21. The union returned to work on June 28 after meeting with representatives of Cooper, but continued to oppose the deal.

In light of these developments, Apollo instructed Cooper to inform Chairman Che that Apollo wanted to meet with him again, but that Apollo would do so only after the closing in October. Apollo also instructed Cooper’s CEO to meet with Chairman Che and tell him that neither Cooper nor Apollo had anything of substance to offer him, other than wanting to help bridge the relationship between Apollo and the Chinese partner.

Cooper representatives met with Chairman Che on July 10 and conveyed Apollo’s message. Within days, however, it became clear that the message was not well received. On July 11, the union sent a letter to Standard Chartered Bank, one of the banks providing financing for the merger, asking that it reconsider its participation given supposed “significant reputational risks to your bank amid such complex situation!” On July 12, the union sent a second open letter to Cooper’s employees and placed a paid advertisement in The Wall Street Journal criticizing the deal. Also on July 12, the union resumed its general labor strike. Meanwhile, Cooper’s representatives were denied access to the Chengshan JV’s facilities and financial records, and the Chinese partner has filed suit in China to dissolve the joint venture.

What caused such an immediate, comprehensive and ongoing reaction from Cooper’s Chinese partner? First, it could be, as Kanwar said, that the Chinese partner wants something from the deal, and that its resistance to the merger is a way to get a seat at the table. Secondly, it could be that the Chinese partner truly believes that the deal is bad for the joint venture. The Chengshan JV is now implementing a $125 million expansion plan that it expects to result in increased revenues of $640 million after the plan is completed in 2014. A heavily leveraged Cooper/Apollo might put undue financial pressure on the company, forcing a delay or curtailment of this expansion. And finally, the Chinese partner could be miffed that it did not have an opportunity to bid for Cooper itself. The Chinese partner had apparently expressed an interest in doing so, but its offer had not been pursued by Cooper.

All of the above factors have undoubtedly played a role, but I suspect there is a fourth factor at work — Chairman Che does not feel that he was treated fairly and with respect. After the May 15 meeting, he would have expected some type of response to whatever it was that he requested at the meeting. Instead, the merger announcement went ahead without any such response, and he was told that he would not even have an opportunity to meet with his new partner again until after the merger was completed. In China, differences often arise between the foreign and Chinese partners. In most cases, however, no matter how far apart the two sides may seem to be, these issues can be worked out through mutual discussion — if, and only if, the critical ingredient of mutual respect is firmly in place.

I have no doubt that Apollo and its senior management respect Chairman Che and the Chinese partner in the Chengshan JV. Unfortunately, their actions conveyed the opposite impression.

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