Cultural divide didn't, shouldn't stop major Chinese acquisition

Don't let a cultural divide derail deal-making.

That's the take-away from a new report on the landmark 2010 acquisition of US parts supplier Nexteer Automotive by China's Pacific Century Automotive Systems.

Coming with the curtain about to go up on what is expected to be another good model year for the resurgent US auto industry, the report from the nonprofit Paulson Institute shows how "firms with very different cultures" worked through complex negotiations to ultimately reach a deal. The resulting $450 million transaction stands as the largest Chinese takeover of a US supplier in automobile history.

The deal went through numerous twists and turns. The saga began when Nexteer's corporate predecessor, Delphi Steering, was put on the block in 2006 by its Michigan-based parent and former General Motors spinoff, Delphi Automotive Systems, as Detroit struggled to compete against leaner overseas producers.

From the story's early days, it was clear that GM, the iconic US automaker, regarded the steering unit's products as too valuable to lose to just any buyer. More than once GM had to step in to move the deal.

In October 2009, to save the steering unit, GM made Delphi Steering a direct subsidiary of the company, renaming it "Nexteer Automotive." Three months later, to placate the United Auto Workers union, GM said it would attempt to sell, not liquidate, Nexteer. That set the stage for Beijing-based private auto-parts maker Tempo Group to enter the fray. With original equipment manufacturing customers in Asia, Europe, North America and the Middle East, Tempo already had an engineering research center in Michigan and a solid working relationship with another Chinese suitor, E-Town. An arm of the Beijing municipal government, E-Town wanted a US auto parts producer to fit with a push by China's National Development and Reform Commission to encourage Chinese automakers to develop their own research and development capabilities and produce vehicles independently of foreign partners. E-Town's proposed investment in the steering unit would offer fast access to technologies necessary to develop a globally competitive Chinese automotive industry.

Thus did Platinum, the Los Angeles-based private-equity firm, E-Town and Tempo join forces to bid together for Nexteer.

Although GM "had reservations" about each of the three potential buyers, "as a combined acquisition group the three-party team nonetheless offered some balance", according to the report. With E-Town on the team, "GM could be relatively assured of Chinese government approval and financing since E-Town had a $15 billion line of credit from the Beijing municipal government".

In the end, both Platinum and Tempo dropped out of the deal - Platinum, due to a lack of alignment with business goals; Tempo, because of financial troubles.

E-Town ultimately brought aboard AVIC Automotive, the autoparts division of the large state-owned China Aviation Industry Corp, which makes both military and commercial aircraft. To win over union officials worried that the Chinese buyers would export Nexteer's technology and then move Michigan jobs to China, the Chinese partners - who had no comparable experience with union bargaining in China - followed the advice of Nexteer's CEO and wrote UAW leaders to guarantee they would allow Nexteer to operate as an independent company and "keep all union jobs in Saginaw."

In 2010, the newly dubbed Pacific Century Motors, a joint venture composed of E-Town and Pacific Century Automotive Systems, acquired Nexteer for about $450 million, although the exact price was not disclosed. In March 2011, AVIC Automotive formally entered the deal, buying a 51 percent controlling stake in Pacific Century, becoming the majority owner of Nexteer.

Three years after the ownership change, the acquisition has given Nexteer much-needed capital to grow. Nexteer "has been able to move forward on factory upgrades it was unable to make under Delphi Automotive's ownership," according to the report. By October 2011, Nexteer had added more than 600 production jobs in Saginaw, Michigan, and increased its global engineering spending by 20 percent, including new technical jobs, the report said.

Chinese ownership also has given Nexteer a chance to expand in China. Today, Nexteer has manufacturing sites in Suzhou, Zhuozhou and Wuhu, and a customer service and engineering center in Shanghai. About 10 percent of Nexteer's $2.2 billion revenue in 2011 came from China - consistent with trends in the auto business, where China has become a major driver of growth.

Nexteer's investments have not been limited to the US and China. The company has announced plans for a new service center in Brazil and a $30 million manufacturing facility in India. "What we are looking for," the company said, "is global growth."

And that is possible, because of companies' unwillingness to let vast cultural differences stop a viable transaction.