Paulson Papers on Investment - China Drives into America's Auto Parts Industry
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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
F or decades, bilateral investment
has flowed predominantly from the
United States to China. But Chinese
investments in the United States
have expanded considerably in recent
manufacturing—to identify tangible
opportunities, examine constraints
and obstacles, and ultimately fashion
sensible investment models.
years, and this proliferation of direct Most of the papers in this Investment
investments has, in turn, sparked new series look ahead. For example, our
debates about the future of US-China agribusiness papers examine trends in
economic relations. the global food system and specific US
and Chinese comparative advantages.
Unlike bond holdings, which can be They propose prospective investment
bought or sold through a quick paper 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.
sectors, such as agribusiness or
China Drives into America’s Auto Parts Industry
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 Rebecca Cook/Courtesy Reuters
China Drives into America’s Auto Parts Industry
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 IndustryPaulson 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 Joint venture, including E-Town, formed to take over Nexteer
Automotive after the purchase is approved.
Tempo Group Auto parts manufacturer with global ambitions.
China Drives into America’s Auto Parts IndustryPaulson Papers on Investment Case Study Series
Introduction
A s the City of Detroit struggles
with bankruptcy, broader
questions loom about how
to revive the US auto sector.
America’s auto industry was once
But rather than exploring the question
of foreign, including Chinese, capital
injection in the abstract, it is useful to
examine the case history of just such
a deal.
central not just to Detroit’s prosperity
but to the economy of Michigan and the In 2010, a Chinese consortium sought to
US manufacturing base writ large. acquire a technologically advanced auto
parts company in Saginaw, Michigan.
Some have argued The case is instructive
that tapping foreign because it demonstrates
capital is part of the that such deals, even
solution. And some when they succeed, are
even look to China, both extraordinarily
the world’s second- complex and fraught
largest economy, with with pitfalls that touch
its own ambitions the acquisition of US
in the automotive technology.
sector, to contribute
to the region’s Photo: © Saginaw Future, Inc. Reprinted with permission What follows is the story
rescue. Beijing sits on of how Chinese entities
some $3.4 trillion in foreign exchange acquired Nexteer Automotive.
reserves, with about one-third of that
invested in US Treasury securities. As Context was critical. As the US auto
a matter of official policy, China aims industry emerged from two years
to diversify these holdings into assets of crisis in late 2010, China’s Pacific
in the United States that yield higher Century Automotive Systems acquired
returns, in part by actively supporting Saginaw-based Nexteer Automotive,
Chinese companies that seek to buy a leading US high-tech auto parts
assets across various market segments. supplier. At the time, global capital was
scarce, and a Chinese buyer’s purchase
The debates about Detroit’s future are of Nexteer extended to it a lifeline to
closely linked to this Chinese story. One expand into what has become a $2.2
of the market segments into which billion global business as of 2011.
Chinese firms have sought to diversify is,
in fact, the US auto sector. The deal appeared to be a sound
match because it offered a strong value
proposition to both parties. For Nexteer,
China Drives into America’s Auto Parts Industry
1Paulson Papers on Investment Case Study Series
the Chinese capital injection ensured which some Chinese acquisitions in
that it could both save jobs in Michigan the United States have foundered.
and strengthen its international • How a sophisticated set of advisors
footprint, particularly into the expanding who understand both the buyers’
Chinese market for automobile parts. desires and the US market can make
The Chinese party, meanwhile, acquired the difference between success and
state-of-the-art automotive technology failure for a Chinese investor.
at a moment when China’s own auto • How investors avoided past mistakes
industry increasingly demanded such by engaging with Chinese regulators
technology. while maintaining open lines of
communication with the seller.
Behind the deal, however, lay complex • How the involvement of a long-
dynamics and near failures that almost term strategic partner, rather than
derailed it. Among other things, the a temporary shareholder, can
Nexteer acquisition demonstrates that boost confidence in an investor’s
timing matters greatly: a deal that came commitment to the local economy.
to fruition in the post-financial crisis • How two firms with very different
environment of 2010 might not have cultures—one Chinese, and one
come about just a few years earlier. American—can work through
And this question of timing may matter complicated negotiating dynamics
now as Detroit, in particular, and US and, ultimately, reach a deal.
manufacturing states in general struggle
to come to grips with their future. Who is Nexteer?
The Nexteer case illustrates: Nexteer was founded in 1906 as
Jackson, Church & Wilcox, a company
• How the impulse to acquire that produced the “Jacox Gear,” a
advanced technology motivates manual steering system that predates
Chinese investors yet also creates the electric and hydraulic systems
synergies between Chinese commonly used in cars today. General
corporate and government goals— Motors’ (GM) Buick unit purchased
even when the Chinese investors Jackson, Church & Wilcox in 1909 and,
are private and have primarily by 1917, had transformed it into the
commercial aims. GM parent’s first parts manufacturing
• How a Chinese buyer can work division.
effectively with US labor unions and
US sellers to keep jobs in the United Based in Saginaw, Michigan, this division
States—and grow a target asset’s US was subsequently renamed the Saginaw
business in the bargain. Product Company in 1919, and then the
• How a Chinese buyer can adroitly Saginaw Steering Gear Division in 1928.
navigate the political shoals upon In 1999, GM spun off Saginaw Steering
China Drives into America’s Auto Parts Industry
2Paulson Papers on Investment Case Study Series
and some other GM auto parts factories and slash thousands of United
manufacturers to form a new firm— Auto Workers (UAW) union jobs.
Delphi Automotive Systems.1 But GM As part of its recovery plan, Delphi
did not retain ownership in Delphi Automotive announced in March 2006
Automotive, thus allowing it to freely that it would attempt to sell its steering
pursue contracts with other automakers business, Delphi Steering, which became
while giving GM the freedom to focus the immediate corporate predecessor to
on its core business.2 Nexteer.
Burdened by high labor costs, the
entire US auto industry struggled to Nexteer Today
stay competitive with leaner overseas
producers throughout the first part of Products: Electric and hydraulic
the 1990s.3 And these struggles had power steering, steering columns,
an acute effect on Delphi Automotive’s drivelines, and halfshafts.
bottom line: In 2004 alone, Delphi lost
$4.8 billion. In 2005, Delphi filed for Customers: 50+ globally, including
Chapter 11 bankruptcy protection and GM, Ford, Chrysler, Fiat, and Toyota.
announced plans to close most of its US
Facilities: 38 throughout North and
South America, Europe, and Asia.
2011 Revenue: $2.2 billion.
China Drives into America’s Auto Parts Industry
3Paulson Papers on Investment Case Study Series
How the Nexteer Deal Almost Unraveled
F or this steering business line, which
eventually became Nexteer, US-
based private equity (PE) appeared
initially to offer a lifeline. Platinum
Equity, a Los Angeles-based PE firm,
pledging to pay Delphi Automotive $257
million in cash merely to facilitate the
transaction for its steering unit. GM also
agreed to assume $65 million in other
obligations.7 And for its part, Platinum
announced on January 31, 2007 that it would, according to this proposal,
had been selected as the lead bidder in assume $190 million of liabilities under
the sale of Nexteer’s forerunner, Delphi the deal in exchange for the steering
Steering. division’s assets. In December 2007,
Platinum agreed to these conditions and
Platinum reportedly offered $560 million announced the deal.
in equity, loans, and a revolving credit
line for Delphi Why did GM step in
Steering, beating to facilitate the sale
As GM’s main parts supplier for its vehicle
out a competing steering systems, Delphi Steering was important of Delphi Steering to
bid from to GM’s own success. Platinum?
Cerberus Capital
Management, a GM was most likely
New York-based PE player. 4
compelled to do so because of the
unique nature of automotive steering
But problems soon emerged. 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. Clearly, Delphi
5
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
China Drives into America’s Auto Parts Industry
4Paulson Papers on Investment Case Study Series
was important to GM’s own success. its critical steering parts supplier, GM
That is because without Delphi Steering, announced the same day that the
GM would need to quickly transition to company would itself acquire Delphi
another supplier—a move that would Steering.
be costly and time-consuming at a
time when GM was struggling to cope But Platinum decided to make a second
with declining demand for its low fuel attempt by enlarging the entire deal.
economy vehicles. Now, it offered a bigger idea. Instead
of purchasing Delphi Steering alone,
Still, the Platinum acquisition continued Platinum and GM would together
to face problems. By 2008, the onset of acquire the entire parent company,
the global financial crisis compounded Delphi Automotive. With the auto
the problems that all parties—Platinum, market in crisis and GM seemingly
GM, and Delphi Steering—faced. desperate to protect its supply chain,
Platinum appears to have become Platinum sought to induce GM to strike
increasingly uncomfortable with a deal for the parent company.
the agreement it had struck via GM,
especially as vehicle sales in the United This second play succeeded. In June
States plummeted. 2009, Platinum agreed to purchase the
bulk of Delphi Automotive’s assets for
By March 3, 2009—more than two years $250 million in cash and a $250 million
after Platinum first emerged as the lead line of credit. GM would provide the
bidder for Delphi Steering—the deal remainder of a $3.6 billion financing
had collapsed. Now, without Platinum in package and directly acquire the parent
the mix, GM stepped back into a central company’s steering division and four
role. Apparently determined to protect plants.8
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5Paulson Papers on Investment Case Study Series
Chinese Buyer Seizes an Opportunity
I t was at this point, in the summer of
2009, that China entered the Nexteer
story in a concerted way.
Beijing E-Town, an arm of the Beijing
Chinese government had forced foreign
automakers to establish joint ventures
(JVs) with Chinese partners after
China’s economy opened up to foreign
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 In 2004, then, China’s
square kilometers powerful central
of land in the government planning
south of Beijing. agency, the National
The firm aimed Development and
to develop Reform Commission
this land into a (NDRC), renewed
local high-tech its push to build
manufacturing indigenous industry.
zone. E-Town
9
The NDRC released
reportedly had Photo: © Saginaw Future, Inc. Reprinted with permission
the national Auto
attracted over Industry Development
2,000 enterprises Policy (qiche chanye
from more than thirty countries to its fazhan zhengce), which encouraged
development zone—including GM, Chinese automakers to develop their
Nokia, and Mercedes-Benz.10 E-Town own research and development (R&D)
became interested in Delphi in part capabilities and produce vehicles
because it sought to have the firm open independently of foreign partners.
facilities in Beijing as well.
This sector-specific forerunner of
To understand why E-Town, as a Chinese China’s subsequent national policy of
municipal financing and investment “indigenous innovation” also specified
vehicle, wanted to acquire a US auto rules for JVs. The automotive policy
parts producer, it is useful to step back required foreign companies to transfer
and view the attempt through the lens technology to their Chinese partners in
of the Chinese government’s push to exchange for continued access to the
transform the domestic auto industry Chinese market.11 In 2009, the NDRC
into a globally competitive sector. The released a revision of this policy in an
China Drives into America’s Auto Parts Industry
6Paulson Papers on Investment Case Study Series
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 Another player
would also, in E-Town’s proposed investment in Delphi Automotive not in Chen’s effort
theory, offer a only aligned with the central government’s policy goals was Michael
faster way to but would also offer access to technologies necessary to Gisser, a partner
develop a globally competitive automotive industry.
gain access to at the law firm
technologies Skadden Arps,
necessary to who, splitting
develop a globally competitive Chinese his time between Beijing and the United
automotive industry. States, had worked on cross-border
mergers and acquisitions between
E-Town lost out to Platinum in the GM- companies in the two countries. It
brokered deal. But for these reasons, was Gisser who introduced Chen to
Jack Chen, the California-based founder Platinum.
and CEO of Transworld Capital Group, an
international investment advisor to the The subsequent discussion gained
Beijing municipal government, traction because, at this time, Platinum
suggested that E-Town instead try to was interested in teaming up with a
partner rather than compete with Chinese firm with strong financing
Platinum. Chen believed that such a capabilities as an entry point into
relationship could prove mutually the Chinese market. For that reason,
beneficial: Platinum could manage Platinum proved receptive to Chen’s
Delphi’s US and European businesses, approach. It agreed to let E-Town take
while E-Town could provide financing an equity stake in Delphi Automotive
and facilitate its expansion in China. once Platinum’s own acquisition was
completed.
As a bridge between the Chinese buyers
and the US market, Chen thus became After the Platinum-Delphi Automotive
a player in the Nexteer story. Before deal was announced in June 2009,
founding Transworld Capital, Chen had executives from Platinum traveled to
been the founding chairman of the Asia- China to launch a new collaboration
Pacific division of Barrington Associates, with E-Town. But ironically, the story
China Drives into America’s Auto Parts Industry
7Paulson Papers on Investment Case Study Series
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.
bankruptcy lenders. So at the end of
China Drives into America’s Auto Parts Industry
8Paulson Papers on Investment Case Study Series
The Chinese Party is Blindsided
W hat happened? For one,
Delphi Automotive’s
creditors had been outraged
by the terms of Platinum’s
proposed acquisition, arguing that they
existing customers: it could take the
big automakers, including GM and
Ford, years to transition to a different
steering system supplier. That meant
that the automakers had no immediate
would get back only 20 percent of the alternative to Nexteer and would
$2.6 billion in debtor-in-possession need time to develop other supplier
loans they had provided to Delphi. relationships.
Their solution? The creditors agreed to
exchange $3.5 billion in loans for equity But GM alone constituted only half
in Delphi, immediately killing Platinum’s of Nexteer’s revenue at this point,
previously announced deal, as well as insufficient to assure Nexteer’s long-
Platinum and E-Town’s planned post- term survival. In that sense, Nexteer’s
acquisition collaboration. leverage over its non-GM customers
kept it functioning
When the in the short
Having acquired the steering unit and renamed it Nexteer,
creditors GM considered slowly liquidating the company and run but could
unexpectedly transitioning its own vehicle business to a new supplier. not ultimately
took over guarantee its long-
the Delphi term success.
parent, GM stepped in to independently
save the constituent steering unit that Having acquired the steering unit and
it would have acquired under the deal renamed it Nexteer, GM considered
with Platinum. In October 2009, GM slowly liquidating the company and
completed this spinoff, making Delphi transitioning its own vehicle business
Steering a direct subsidiary of GM to a new supplier. But Robert Remenar,
and changing its name to “Nexteer the president of Delphi Steering who
Automotive.” now became president and CEO of the
new Nexteer (but continued reporting
GM’s likely intent at this point was to to GM), appears to have held the
be only a short-term owner. Nexteer’s conviction that Nexteer should not be
customers included other auto liquidated. Remenar foresaw increased
companies, such as Ford, that would demand for Nexteer’s electric power
not want to buy their parts—especially steering (EPS) systems and reportedly
parts as technologically sophisticated argued strongly that changing suppliers
as steering systems—from a GM after the company’s liquidation would
subsidiary. Meanwhile, in the near be costly and time-consuming for GM.
term, Nexteer had leverage over these
China Drives into America’s Auto Parts Industry
9Paulson Papers on Investment Case Study Series
Beyond Remenar’s arguments, GM industry.15 This combined logic—supply
had another reason not to liquidate efficiencies married to relations with the
the company: Its relations with the labor union—prevailed. In January 2010,
UAW, the major US automotive labor GM announced that it would attempt to
union, were increasingly fraught at a sell, not liquidate, Nexteer.
time of great challenge to the US auto
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Positioning Nexteer for Sale
B ut GM faced a problem. In
order to make Nexteer an
attractive acquisition target,
the company would have to
improve its relations with the union. So
The final contract with the UAW took
the form of a “shelf” agreement. In
other words, the UAW had the power to
accept or reject any potential buyer of
Nexteer and the agreement would only
as GM entered the next phase of sale take effect once the UAW approved the
preparations, it moved simultaneously buyer of the firm.17
to renegotiate
Nexteer’s union Third Time a Charm
contracts.
After Platinum failed
This would be no mean to acquire Delphi
feat, in part because Automotive, Chen asked
the UAW was one of if the PE firm knew of
the parties that had other good auto assets
acquired a stake in in the United States
GM after it declared that might be available
Chapter 11 bankruptcy for sale. Platinum
in June 2009. 16 Photo: © Saginaw Future, Inc. Reprinted with permission predicted—correctly—
that Nexteer, Delphi’s
Union Contract erstwhile steering division, would be on
the market soon. And so Chen arranged
The union rejected GM’s first Nexteer- for E-Town and Platinum to sign a
related offer. But GM warned that it memorandum of understanding to
would, as a result, simply have to close jointly acquire Nexteer if and when the
down Nexteer if a buyer was not found. 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
retirement packages. The replacement prepared to jump at the opportunity to
workers’ $12.50 hourly wage was just bid.
half of what the union had negotiated
a decade earlier. Still, the lower wages
helped Nexteer to level the playing field
with non-union US producers.
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11Paulson Papers on Investment Case Study Series
powertrain, and driveline systems.
Government Perks Tempo sells to original equipment
manufacturers (OEMs) throughout
Nexteer’s sale prospects were also Asia, Europe, North America, and
bolstered by state and local tax the Middle East. As of 2009, the firm
incentives in Michigan and Buena Vista had approximately 10,000 employees
Township. In November 2009, the
internationally and thirty-six affiliates
Michigan Economic Growth Authority
throughout China. It controlled two
approved a ten year $71 million state
tax credit for Nexteer as part of a public companies: Hong Kong-listed
program established in 1995 that grants Norstar Automotive and Shanghai-
tax credits to businesses that expand listed Songliao Automobile. It had
in, move to, or stay in Michigan. The tax also developed a significant interest in
credit helped persuade Nexteer to invest investing in the US auto industry, having
$400 million in Michigan instead of already established an engineering
opening new sites in Europe and China. research center in Canton, Michigan
in 2004 and acquired several of Delphi
Nexteer announced concurrently that it Automotive’s braking system component
would keep its headquarters in Buena
plants in Ohio in 2005.
Vista, to which the township responded
by eliminating the taxes Nexteer would
pay to bring in new equipment for Tempo had a solid working relationship
twenty years. This saves the company an with E-Town, Platinum’s existing Chinese
estimated $2.3 million per year. “During partner. After Platinum failed to acquire
the Delphi bankruptcy, Nexteer had to Delphi Automotive in 2009, E-Town
become transformed from a money- remained interested in acquiring a piece
losing operation to something that of the struggling parts supplier if it could
would be valuable and would allow its find the right strategic partner. And
operations to continue globally,” said a the creditors who finally took over the
Nexteer spokesperson in an interview. Delphi parent were open to a deal that
“Michigan was very helpful in getting us
might give them a better return than
to that point.”
the proposed Platinum bid they had
scuttled.
Tempo Joins the Team In November 2009, therefore,
E-Town teamed up with Tempo and
Meanwhile, another Beijing-based a third Chinese partner, state-owned
private auto parts manufacturer, Tempo steelmaker Shougang, to form a JV
Group, had also developed an interest in called Beijing West Industries, with the
bidding on Nexteer. Established in 1984, goal of acquiring the Delphi braking
Tempo has multiple manufacturing and suspension business for some $100
facilities in China, producing million. In this Chinese partnership,
components and modules for chassis, E-Town took a 25 percent stake in
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12Paulson Papers on Investment Case Study Series
Beijing West, while Tempo and Getting GM’s Nod
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 an important supplier to a temporary
the Platinum-E-Town bid, had advised shareholder, such as a PE firm, and GM
Beijing West on its purchase of Delphi’s apparently made its reticence clear
braking and suspension business, to Platinum. As a PE player, after all,
so he and Tempo had a preexisting Platinum intended to exit from Nexteer
relationship. He once it turned a
now argued to healthy profit.
Tempo would not contribute substantial capital to the
the Platinum-E- joint purchase but had industry experience that both
Town partners E-Town and Platinum lacked. But GM also
that Tempo could seems to have
add value to their been unsure
team as a third acquirer in an expanded about the two Chinese partners, E-Town
partnership. and Tempo, partly because of GM’s
difficult prior experience with Chinese
Tempo would not contribute substantial investors. In 2009, GM had agreed to sell
capital to the joint purchase but its Hummer brand to Chengdu-based
had industry experience that both Tengzhong, a private manufacturer of
E-Town and Platinum lacked. Tempo heavy machinery and trucks.
already owned a facility in Detroit and
another in the Beijing industrial zone This deal could have been akin to
owned by E-Town. It could bring to Nexteer: For about $150 million, the
the group various staff and engineers purchase would have saved thousands
knowledgeable about the steering of Michigan jobs, relieved a struggling
business. GM of an unprofitable brand, and
provided a Chinese company with the
Building on the successful Beijing technology and platform to help it
West acquisition of Delphi’s braking compete in China. But following a public
and suspension business, E-Town and announcement, the deal reportedly
Platinum brought Tempo aboard for a failed to receive the necessary
tri-party attempt to acquire Nexteer regulatory approval from the Chinese
from GM. government. Chinese regulators at the
China Drives into America’s Auto Parts Industry
13Paulson Papers on Investment Case Study Series
NDRC and the Ministry of Commerce the combined E-Town-Platinum-Tempo
(MOFCOM) are purported to have team.
never received the required application,
leading to speculation that the deal In short, while GM may have had
floundered because it did not fit with reservations about each purchaser
the Chinese government’s support for individually, as a combined acquisition
fuel-efficient cars, which Hummers were group the three-party team nonetheless
not.19 offered some balance. And with E-Town
on the team, GM could be relatively
Reflecting on this earlier experience assured of Chinese government
with a Chinese buyer, GM most likely did approval and financing since E-Town had
not wish to see a $15 billion line
a repeat failure. of credit from the
While GM may have had reservations about each
But Chen, as purchaser individually, as a combined acquisition group Beijing municipal
the acquisition the three-party team nonetheless offered some balance. government. As
team’s advisor, for Platinum,
argues that although the PE
he had anticipated this concern. He firm had failed in its prior bids to acquire
recollects that he diligently kept GM Delphi Automotive and Delphi Steering,
abreast of discussions with the NDRC its key people knew GM executives
and MOFCOM throughout this phase of and their business well enough to take
the Nexteer purchase. the lead in negotiations and eventually
oversee Nexteer’s US and international
This coordination effort with Chinese (non-China) operations. Finally, with
regulators is one of the lessons respect to Tempo, its experience in
highlighted in the Introduction to this the Chinese auto market presumably
case study. Some Chinese investors provided GM a degree of comfort that
have foundered on the shoals of their it could become a valuable partner as
own country’s regulatory process. So in Nexteer looked to expand its foothold
the Nexteer case, the effort appears to into China.
have provided some reassurance to GM,
which likely appreciated the synergy of And so the deal moved forward.
China Drives into America’s Auto Parts Industry
14Paulson Papers on Investment Case Study Series
Chinese Motivations
W
hy was Nexteer, in particular, of 3 million units by 2020. The Chinese
of strategic value to the two government also aims to increase the
Chinese bidders, E-Town and average fuel economy of these vehicles,
Tempo? With its over 1,000 pledging to support these production
patents, the acquisition of Nexteer targets by purchasing electric and hybrid
would mean a chance for Chinese auto vehicles for official use.21
parts players
to establish China’s
With its over 1,000 patents, the acquisition of Nexteer would
themselves goals are
mean a chance for Chinese auto parts players to establish
in the market themselves in the market for high-tech electric steering ambitious and
for high- systems. aspirational,
tech electric but the
steering central
systems at precisely the moment when government is, quite clearly, invested in
the Chinese government aimed to supporting the sector’s development.
develop indigenous EPS technology.
Before the Nexteer deal, Chinese
EPS and China companies had used EPS only on
high-end luxury vehicles. But the
There has been a huge increase in global government’s backing for electric
demand for EPS, including in China, and fuel-efficient vehicles has, more
because it is lighter, more reliable, and recently, led to a wider penetration of
up to 6 percent more fuel-efficient than electric steering systems among Chinese
cheaper hydraulic counterparts. In 20
manufacturers. “China has been a price
China, government support continues play until very recently,” noted Michael
to drive increased demand for EPS Richardson, Nexteer’s Chief Technology
systems. The Chinese government has Officer (CTO) and China chair, in an
identified alternative energy vehicles August 2012 press release. “Now, the
as a “strategic emerging industry,” one [Chinese] automakers are recognizing
in which it hopes China will become that there will be domestic legislation
a global leader. In 2012, the State that will force them to [adopt] electric
Council, China’s cabinet, released a Fuel- power steering … [Thus] for the first
Efficient and New Energy Auto Industry time in China, they [will] come to us
Development Plan, which aims at a for electric power steering across the
production target of half-million electric 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
China Drives into America’s Auto Parts Industry
15Paulson Papers on Investment Case Study Series
of Nexteer’s technology in one swoop offer before being invited to participate
and at a potential bargain price of less in a next round of bidding. E-Town and
than $500 million was an attractive Tempo readily agreed, but Platinum,
option indeed. which specializes in purchasing
distressed assets, is said to have been
Platinum’s Exit unable to accurately assess the added
value of the potential increased sales
But the underlying Chinese goal of in China that Nexteer could achieve.
acquiring Nexteer’s EPS technology did Platinum was willing to increase the bid
not reflect Platinum’s motivation. As a price, but not as much as its Chinese
PE firm, it sought to earn a return on partners.
investment, not to make a long-term
technology play. After the first round of When the three parties failed to agree
bids, GM’s deal advisor informed the on a price, Platinum dropped out of the
three acquiring partners that they would deal, leaving E-Town and Tempo to bid
need to raise the price of their collective on their own.
China Drives into America’s Auto Parts Industry
16Paulson Papers on Investment Case Study Series
Steering the Deal Back on Track ... and Building Trust
P latinum’s exit created problems
for the Chinese parties. For one
thing, it reignited GM’s concerns
about E-Town and Tempo because
Platinum’s very presence had served to
That bid had been unsuccessful but
Moelis had acquired the necessary
experience of working with GM. And so
hiring Moelis was intended to show GM
that E-Town and Tempo were serious
assuage GM’s discomfort with Chinese players with the determination to get
buyers, despite Chen’s reassurances the acquisition done.
about both the Chinese
regulatory process But the Chinese
and the buyers’ ability buyers did not stop
to manage a rigorous with hiring Moelis.
bidding process. They also engaged
And GM planned to other US consulting
issue its initial public firms, including AT
offering (IPO) in the Kearney, Deloitte,
second half of the year. and Miller Canfield.
Thus it aimed to have Chen and two Tempo
agreements to sell employees supervised
Nexteer and other non- Photo: © Saginaw Future, Inc. Reprinted with permission these professionals.
core assets signed by They put in grueling
the end of the second quarter of 2010. hours to perform due diligence and
identify outstanding issues. These
This time constraint pressured the two conclusions were sent back the same
Chinese buyers into proving that they day to the Chinese buyers for overnight
could complete the deal swiftly and with review and feedback.
certainty. Doing so would demonstrate
the good faith of the Chinese buyers. To Participants recalled in interviews
prove and reinforce the Chinese side’s that this process worked well, in
commitment, Chen began to look for part because the decision makers in
an investment bank that had worked Beijing felt comfortable delegating
with GM in the recent past. At Chen’s responsibility to a US-based team that
urging (and Gisser’s suggestion), E-Town included leading professionals, managed
and Tempo hired Moelis & Company, a by people who understood China and
boutique investment bank founded in the buyers’ decision-making process. At
2007. Moelis had previously represented the same time, the buyers’ commitment
another firm in an unsuccessful bid for and ability to run an efficient process
GM assets. seems to have greatly impressed GM.
China Drives into America’s Auto Parts Industry
17Paulson Papers on Investment Case Study Series
The deal team leaders visited top Tempo’s strategic partners, had become
executives across GM’s divisions—first, alarmed by Norstar’s HK$44 million
to make sure GM understood the team’s ($5.7 million) in overdue payments for
commitment to continue working forward contracts. SIIG filed a claim
closely with the company after their with Chinese courts to recover the
acquisition of Nexteer, but, second, to advance payments it had made to
provide GM with assurances and context Norstar. Chinese regulators responded
on the buyers’ thinking. by freezing Norstar’s assets and, when
these were not recovered, the company
Drawing a lesson from the Hummer was eventually liquidated.24
debacle, the E-Town-Tempo deal team
sought to constantly reassure GM that Meanwhile, a second Tempo subsidiary,
their deal, unlike that previous one, Songliao, which produces automobiles
would not face similar regulatory snafus and auto body components in China,
in China. Nor did faced similar
the buyers wait financial
Drawing a lesson from the Hummer debacle, the
for the deal to be E-Town-Tempo deal team sought to constantly reassure challenges.
completed before GM that their deal, unlike that previous one, would not But Songliao
seeking Chinese face similar regulatory snafus in China. fared better
government than Norstar.
regulatory After halting
approval. Instead, they pursued these production in 2009, Songliao began to
processes in parallel. recover when E-Town bought a 24.89
percent equity stake in the company,
Tempo’s Decline replacing Tempo as Songliao’s largest
shareholder. Then, E-Town provided
But a major wrinkle soon emerged that Songliao with 29 million yuan ($5
raised new questions about one of the million) in loans to help it restart
two Chinese buyers. Even as it sought production.25
to acquire Nexteer, Tempo faced severe
financial troubles of its own, especially Taken together, these experiences
with its two publicly listed subsidiaries.23 meant that Tempo’s management had
drastically overspent in the run-up to
One of these subsidiaries was the the global financial crisis. When the
Chinese auto-parts supplier Norstar, China Banking Regulatory Commission
which suffered from significant exposure reported Tempo’s financial situation to
to the sport utility vehicle (SUV) market the State Council, 58 percent of Tempo’s
at precisely the moment that demand loans—totaling 3.3 billion yuan ($500
for that type of vehicle collapsed million)—had gone bad.26
during the 2008 global economic
crisis. By January 2009, SIIG, one of
China Drives into America’s Auto Parts Industry
18Paulson Papers on Investment Case Study Series
Yet Tempo’s ambitious management Enter AVIC Automotive
saw strategic value in the various
Delphi assets. So Tempo aggressively In retrospect, there is little question
pursued them, despite the company’s that GM was aware of—and concerned
financial struggles with its two Chinese about—Tempo’s struggles. Yet it allowed
subsidiaries back home. Zhou Tianbao, the deal to proceed with all of the
Tempo’s chairman and CEO, apparently Chinese partners, including Tempo,
wanted these deals badly. He seems because it appeared determined to shed
to have at least impressed GM and his Nexteer with its own IPO, slated for the
Chinese partners with his dedication to second half of 2010, fast approaching.
seeing the Nexteer deal through. What is more, GM had no reason to
expect financial hardship from the
Indeed, Zhou emerged as the likely Chinese side. As noted above, it knew
driving force behind Tempo’s ambitions. E-Town could provide the majority of
For its part, his partner E-Town fully capital since it could access a $15 billion
understood Tempo’s financial troubles line of credit from the Beijing municipal
yet had agreed to a partnership government.
because it also saw strategic value
to having Tempo as a partner. Why? Of course, that meant E-Town could
Unlike E-Town, Tempo had extensive afford to buy Nexteer on its own. But
experience in the auto parts market. So E-Town had never intended to manage
for all its struggles, Tempo could take the company. Under the initial threeway
a leading role in managing Nexteer’s partnership with Platinum and Tempo,
operations in China upon completion of Platinum planned to take the lead in
a successful acquisition. overseeing Nexteer’s US operations
while Tempo could focus on managing
The result was that Tempo’s role evolved Nexteer’s growth in China. E-Town’s
over the course of the deal from a role was simply to provide much of the
financial partner into more of a strategic financing, ease Chinese government
partner. It soon became clear to Tempo’s regulatory approvals, and provide land
fellow Chinese partners that the firm in Beijing for Nexteer’s facilities.
would not be able to contribute capital
to the final acquisition. But Tempo did So with Platinum out as a partner and
remain involved in the negotiations and Tempo in financial straits, E-Town was
eventually hoped to buy an equity stake forced to reassess its options. Its leaders
in Nexteer. With its financial situation could feel confident that Platinum was
unstable and its future uncertain, dispensable because they could simply
Tempo’s principal value to its partners rely on Nexteer’s current management
was experience in the auto sector, not to continue running the company’s post-
its ability to contribute capital. acquisition US operations. There was
little need for Platinum on that score.
China Drives into America’s Auto Parts Industry
19Paulson Papers on Investment Case Study Series
But with Tempo on the ropes, E-Town Automotive joined E-Town and Tempo
decided to find another, more financially as part of a three-firm Chinese group
stable partner to help Nexteer manage aiming to purchase Nexteer.
and grow the business in China. And
from E-Town’s perspective, so much the Overcoming Union Concerns
better if that new Chinese partner could
also contribute some capital, spreading With due diligence behind them, the
the financial risks associated with the Chinese partners still had to navigate the
acquisition. complex terrain of American labor union
politics before their bid for Nexteer
E-Town’s solution could be finalized.
was to bring Nexteer’s union had
With Tempo on the ropes, E-Town decided to find
aboard AVIC another, more financially stable partner to help the power to reject
Automotive, the Nexteer manage and grow the business in China. any potential buyer.
auto parts division Its chief concern was
of the large that the Chinese
state-owned China Aviation Industry buyers would simply export Nexteer’s
Corporation (AVIC), which manufactures technology and then move the Saginaw
both military and commercial aircraft. jobs to China.
From a Chinese perspective, AVIC “There were a lot of concerns about the
Automotive fit precisely into what Chinese coming over and packing this
E-Town was searching for. First, as part place up,” Matt Beaver, the UAW local
of a large state-owned enterprise (SOE) 699 vice president, recalled to the Wall
under the Chinese central government, Street Journal after the deal closed.
an AVIC subsidiary could provide reliable “People were really scared the Chinese
expertise, managerial know-how, and would take the patents.”28
money. And AVIC Automotive was
already in the market for an auto parts For this reason, before AVIC Automotive
company. It had been looking at options became involved with the deal,
in Japan, Europe, and North America Nexteer’s then-CEO Remenar advised
when, at this juncture, it came across the original two Chinese partners,
the Nexteer deal. E-Town and Tempo, to write a letter
to UAW leaders guaranteeing that
In fact, AVIC Automotive was attracted they would honor the negotiated shelf
to Nexteer for many of the same agreement and keep all union jobs in
reasons that E-Town had found the Saginaw. The Chinese partners, who
company enticing, most notably the had no comparable experience with
Michigan company’s 1,000 patents, union bargaining in China, followed this
engineering expertise, and EPS advice.
manufacturing.27 In mid-2010, AVIC
China Drives into America’s Auto Parts Industry
20Paulson Papers on Investment Case Study Series
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 US end
of these previously agreed conditions. users as Nexteer’s principal customers
made business sense. China did not
As it happens, have comparable
the union’s initial human capital or
The Chinese partners pledged to allow Nexteer
concerns may have manufacturing
to operate as an independent company—and to
been somewhat keep the UAW jobs in Michigan. capability, much less
misplaced. The a comparable end-
vehicle market user EPS market,
for EPS systems in China was still which was still nascent and mostly
small enough at that point that GM concentrated at the higher end. Steering
and other US end-users would be a systems are heavy, difficult to ship,
necessary market for Nexteer to thrive. and comprised of numerous smaller
So while China might become a future components. It would make little
market, the new Chinese owners would economic sense for GM’s US-assembled
nonetheless want to continue supplying vehicles to buy their steering systems
US customers, such as GM, to make from a company manufacturing them
Nexteer profitable and achieve a return halfway around the world.
on their investment.
Indeed, moving production out of
Nor did they really have the option of the United States is often not so
simply shipping the steering piece of easy for suppliers of complex parts,
the auto supply chain back to China. especially when the parts are essential
Steering systems are one of the most to a machine as complicated as an
complex, expensive, and integrated automobile. Many US customers
parts of a vehicle. GM preferred to demand just-in-time delivery, making it
rely on a local engineering team to difficult to satisfy them if an auto parts
develop its vehicle systems. That is line relies on a manufacturing locale
one reason that GM had not already thousands of miles away.
liquidated Nexteer. Transitioning to
a new supplier would have taken a In short, if the new Chinese owners
tremendous amount of time and effort. hoped to continue supplying GM, they
It might have threatened the safety and probably needed to keep Nexteer
quality of GM’s vehicles. The engineers operating in Michigan, not move it to
and experts who understood and were China. Supply chain geography still
China Drives into America’s Auto Parts Industry
21Paulson Papers on Investment Case Study Series
mattered in the auto parts industry. And assured that such systems were not
the Chinese acquirers surely understood something the Chinese could easily
this. The entire Pearl River Delta replicate. The Chinese partners needed
manufacturing juggernaut in coastal Nexteer’s skilled workers, engineers,
China had been built partly around and management.
the principle of agglomeration and
supply chain concentration. For certain In the Nexteer case, the Chinese buyers
advanced and technology-intensive seem to have realized that the best
manufacturers, there are some benefits way to capitalize on a US acquisition
to locating R&D closer to manufacturing was to use the technology to build a
capacity, thus allowing for rapid design production facility in China to supply
tweaks and the local market
troubleshooting with high-quality,
of engineering Moving production out of the United States is often low-cost parts
not so easy for suppliers of complex parts, especially
problems. when the parts are essential to a machine as
while keeping the
complicated as an automobile. US operation intact
But that was not and healthy. The
all. The Chinese Chinese investors’
also needed the expertise of Nexteer’s acceptance of these economic and
existing management team if they commercial realities probably helped to
were to continue to expand their newly mitigate a potential political backlash by
acquired company’s activities globally. keeping local jobs in Michigan.
The Chinese buyers knew China’s own
economy and industrial system well. Concerns About Chinese SOEs
But they were not yet so comfortable
in other parts of the world, a fact But the IP issue touched an entirely
compounded by their lack of substantial different set of concerns as well. The
experience in the steering systems other two Chinese buyers, E-Town and
market. Having American managers who Tempo, naturally had some concerns
knew how to run Nexteer’s business when AVIC Automotive joined their
globally would be valuable to the new team. Its parent, AVIC Corporation, is a
Chinese owners. Chinese defense industry supplier that
develops military technology for the
The Chinese also pledged to keep People’s Liberation Army Air Force.
the Saginaw jobs in place to prevent
technology and intellectual property Acquiring Nexteer, however, did not
(IP) concerns from becoming a major automatically imply a national security
obstacle during the negotiations and risk because Nexteer did not possess
obstructing their acquisition. EPS sensitive technology with military
technology was valuable to the Chinese applications. But the Chinese buyers did
buyers, but its very complexity also fear that US opinion—and non-Chinese
China Drives into America’s Auto Parts Industry
22Paulson Papers on Investment Case Study Series
competitors, should they emerge— to purchase Nexteer without explicit
could point to the participation of an AVIC Automotive support. It is not clear
AVIC subsidiary as grounds upon which from the record, or from interviews, just
to block the deal. how large a role these concerns over a
possible AVIC-related controversy played
E-Town’s discussions with AVIC in this decision.
Automotive on its potential entrance
began in the spring of 2010. With GM What is clear is that E-Town and AVIC
pushing for a quick sale, it was not clear Automotive reached an understanding
at that point whether AVIC Automotive sometime between the spring of 2010,
would be able to act quickly enough to when both firms clearly understood
become involved as a direct participant that AVIC Automotive’s entrance could
in the initial purchase. pose risks to the deal, and November
2010, when the deal closed. By closing
This part of the deal history is murky, time, E-Town and AVIC Automotive
but the complexities around AVIC had agreed that the latter would inject
participation are probably among the capital and ultimately acquire the
reasons that E-Town initially decided majority equity stake in Nexteer.
China Drives into America’s Auto Parts Industry
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