In the Heart of the Rust Belt, Chinese Funds Provide the Grease
Joseph B. White and Norihiko Shirouzu, Wall Street Journal
February 11, 2012
(PDF version available here)
SAGINAW, Mich.—This struggling city, staggered by a flurry of blows during the recession, is getting a lift from an unlikely place.
Nexteer Automotive, Saginaw's biggest remaining industrial employer, was on the verge of closing less than three years ago, its 3,000 or so jobs in danger of evaporating, when the Chinese showed up. "If their money helps rebuild the community, I'm cool with it," says Mayor Greg Branch.
In 2010, Pacific Century Motors, controlled by Aviation Industry Corp. of China and Beijing E-town International Investment Co., an investment arm of the city of Beijing, bought the money-losing auto-parts maker from its corporate parent, General Motors Co., for about $450 million. With that, this city went from being an exhibit of America's industrial decline to a case study in the impact of Chinese investment money on U.S. communities.
"There were a lot of concerns about the Chinese coming over and packing this place up" and moving the jobs to China, says Matt Beaver, a vice president of United Auto Workers Local 699. "People were really scared the Chinese would take the patents."
Today, few people in town are wringing their hands about the Chinese. Inside a 59-year-old factory at Nexteer's sprawling complex, contractors are ripping out antiquated machine lines and installing new equipment to produce an electronic steering system for the next generation of GM's large pickup trucks and SUVs. The company, for years known as Saginaw Steering Gear, has hired more than 100 engineers in Saginaw last year and is looking for 80 more this year.
Nexteer is one of the largest U.S. industrial investments by a Chinese company. Chinese delegations are scouring the Midwest for more automotive deals. "We're pretty close to seeing a flood of deals," says Richard Walawender of Miller Canfield Paddock and Stone, a Detroit law firm that worked with Nexteer's buyers.
Chinese state-owned and private enterprises are pouring investment money into the U.S., into industries such as auto parts, real estate, and oil and gas. Besides giving Chinese buyers a foot in new markets, the deals are giving them access to American technology and management techniques—know-how that, in some cases, they can use in Chinese markets.
Chinese direct investment in the U.S. is a fraction of what it is from many other nations, but it is growing rapidly. According to New York consulting firm Rhodium Group, which tracks Chinese investment in U.S. companies and real estate, such investment exceeded $5 billion in 2010, up from $146 million in 2003. Thilo Hanemann, Rhodium's research director, says he expects Chinese investment to continue increasing.
Still, Chinese investors and managers may encounter obstacles as they learn how to do business overseas, Mr. Hanemann says. "The single biggest impediment to Chinese firms investing in the U.S. is the lack of capacity to operate in sophisticated and highly regulated economies," he says.
The investments have raised concerns in some quarters about threats to U.S. jobs, American technological advantages and national security. U.S. regulators blocked a bid by China's Huawei Technologies Co. to acquire 3Com Technologies in 2008 after lawmakers raised questions about whether the deal posed a security threat. Huawei has said it will cooperate with U.S. officials to allay concerns.
Monday's U.S. visit by Xi Jinping, who is expected to become China's next leader, is likely to focus attention on China's complex financial relationship with the U.S.
The perceived economic threat posed by China remains a hot political issue, both in Michigan and nationally. Last month, lawmakers in several industrial states, including Sen. Debbie Stabenow, a Michigan Democrat, accused auto-parts makers operating in China of unfair trade practices that could threaten U.S. jobs. A Republican candidate for Sen. Stabenow's seat aired a controversial ad during the Super Bowl, featuring a young Asian woman speaking broken English, which implied that Sen. Stabenow's fiscal policies had allowed China to take American jobs.
Nevertheless, many politicians in the industrial Midwest are focusing on the potential upside of direct Chinese investment. In Michigan, which has lost tens of thousands of jobs as auto makers and parts suppliers shrank or moved operations to lower-wage countries, Gov. Rick Snyder and other officials are courting Chinese investment. So are Governors Scott Walker of Wisconsin and Jay Nixon of Missouri. Ohio Gov. John Kasich has said his state will help train workers for Chinese employers if they invest in a pharmaceutical operation in Toledo.
The Saginaw area, about 100 miles north of Detroit, was hit hard by the decline of Michigan's auto industry. Saginaw County's population fell 4.7% between 2000 and 2010, to just over 200,000. The median household income of $39,364 was 13% below the statewide average in 2009. Unemployment during the recent recession peaked in July 2009 at 13.4%.
Downtown Saginaw has suffered a long decline. Today it is a mix of stately old homes, many built during the city's heyday as a lumbering center, and dilapidated houses and empty storefronts.
The roots of Nexteer, which assembles systems that connect the steering wheel to the front wheels, reach back to 1906 and a company called Jackson, Church and Wilcox Co. That company was purchased by Buick in 1909. By 1917 it had become GM's first stand-alone parts-making division, and in 1928 it was renamed Saginaw Steering Gear. Saginaw and other parts-making operations were spun out of GM in 1999 as Delphi Corp.
In 2005, as problems mounted for the U.S. car industry, Dephi sought Chapter 11 bankruptcy protection and began a restructuring that called for slashing its U.S. manufacturing and shedding thousands of UAW union jobs.
Robert Remenar, who had led Nexteer since 2002, says Delphi management was determined to be rid of the operation. Mr. Remenar said he saw that as an opportunity. He says he anticipated a surge in demand for the company's electronic-steering technology. Nexteer just needed to survive long enough to benefit.
That nearly didn't happen. A planned sale to a private-equity group fell through. By 2009, Nexteer was back under GM ownership—part of a complex deal involving Delphi and the UAW. GM planned to either sell Nexteer or close it.
That September, Mr. Remenar met with GM's senior management. He says he argued that liquidating Nexteer would cost GM money, weaken its access to technology and undercut relations with the UAW. Selling to one of Nexteer's competitors, he said, would leave GM with fewer steering suppliers to choose from. Private-equity buyers also presented risks, he said.
At the bottom of a chart summarizing GM's options, Mr. Remenar recalls, he highlighted a new idea: Sell to a "Chinese industrialist." Mr. Remenar says he had no particular buyer in mind.
At the time, AVIC Auto, the auto-parts arm of state-owned Aviation Industry Corp. of China, was intent on breaking into the top ranks of global automotive-technology suppliers. It was in the market for a "high-end auto component company to acquire," according to AVIC Auto Chairman Zhao Guibin. AVIC Auto hired investment banks and law firms and "sifted through some 50 potential targets in Japan, Europe and North America," he says.
By mid-2010, Nexteer had emerged as a target. AVIC Auto knew "GM had to sell," Mr. Zhao says.
The negotiating terrain was complex. GM had itself sought bankruptcy protection, and in the reorganization both the U.S. Treasury and the UAW had wound up with GM stakes. The White House was pushing to finish the GM overhaul and have an initial public offering of new GM stock by the end of 2010, the first step in ending government involvement.
To make Nexteer more attractive to potential buyers, UAW leaders already had agreed to labor concessions. Buyouts and early-retirement packages were offered to many workers. Nexteer then began hiring younger, replacement workers at a new starting wage of $12.50 an hour, less than half the level that prevailed a decade ago. That made labor costs competitive with nonunion shops in the U.S.
In exchange for the concessions, GM and the U.S. Treasury gave the UAW effective veto power over any buyer.
Selling union workers on the concessions hadn't been easy, recalls Mike Hanley, a former UAW Local 699 president. "I had members say, 'they'll never shut this place down,'" he recalls. "I'd say, take a ride down M-46." That road runs past a spot where 5,000 people used to work for Eaton Manufacturing. Those jobs are gone, and the factory was demolished in 2008.
In the end, two potential buyers surfaced: the Chinese group led by AVIC, and a Korean supplier, Mando Corp., allied with Hyundai Motor Co.
"We were really concerned about the Chinese at first," says Cal Rapson, who was the UAW's top negotiator at GM. The union worried that the Chinese would take Nexteer's technology and eventually move jobs overseas. But the UAW also was wary of the Korean bidder.
Representatives of the two finalists approached Mr. Remenar with the same question: How do we win over the union? Mr. Remenar says he advised them to write letters to UAW leaders promising to honor the existing labor agreement.
The Chinese bidders responded that they were prepared to abide by the labor deal and to maintain Nexteer as an independent company and not move the work to China, according to Mr. Remenar. The Korean group never sent a letter, he says. A Mando representative declined to comment.
Mr. Rapson and other UAW leaders threw their weight behind the Chinese bid.
"We found the labor union to have a very long-term view," says Mr. Zhao. "If you don't work together to make a company more competitive, the company won't have any future at all."
GM announced in July 2010 that it was selling Nexteer to the Chinese group. The news release identified Mr. Remenar as president, leaving unclear who would be Nexteer's chief executive officer.
Mr. Remenar hoped to continue running the company. But an aide to the new owners explained that wouldn't happen immediately because he hadn't met all of the new board members.
On a warm evening shortly after the deal was announced, Mr. Remenar and his new Chinese bosses gathered for a celebratory dinner at the Pine Lake Country Club in the northern suburbs of Detroit. The Chinese board members showed up with a box of wine and several bottles of moutai, a potent sorghum liquor that lubricates business dinners in China.
After rounds of wine and moutai—and very little talk about the business—Mr. Remenar excused himself. When he returned, he recalls, the Chinese directors greeted him with shouts of "Bob-O! You CEO! You do double!" He downed two shots of moutai.
The new owners had taken over the company as the global auto industry was gravitating to higher-tech steering mechanisms. Under pressure from consumers and government regulators to boost fuel economy, car makers were shifting from steering systems that use pulleys and hydraulic pumps to electronic power steering—more efficient software-driven systems that sell for as much as $400 apiece.
Under its former owners, Nexteer's efforts to retool facilities to build the new systems were hobbled by a lack of capital, says Mr. Remenar. Under the new owners, that isn't a problem. "They said, we have $15 billion to invest and grow in this space. Go grow," he recalls.
The factory upgrades are intended to enable the company to supply electronic-steering systems for GM pickups and SUVs for years to come. A new contract with GM, announced after the company changed hands, could be worth about $1.9 billion over its life, and support about 1,000 production jobs, Nexteer says. The company also is pursuing new business with existing customers such as German luxury car maker BMW AG, Ford Motor Co. and Italy's Fiat SpA.
Mr. Zhao says he is optimistic about Nexteer's prospects for global growth. The Chinese car market is the world's largest, and is growing. Mr. Zhao said Nexteer is "definitely winning more clients and contracts in China compared with its past performance."
Nexteer's revenues increased by about 10% in 2011, to $2.2 billion, Mr. Remenar says, and the company is profitable, although he won't say how profitable. Yet a slump in vehicle sales in Europe, he says, or a slowdown in U.S. or Chinese vehicle demand could trip up growth plans.
The company's Chinese directors are keeping a close watch. Mr. Remenar says they challenged him on what they saw as overly conservative growth plans, which he says are prudent given the industry's recent volatility. The language barrier, he says, is a constant challenge. When board discussion gets bogged down rehashing issues, he says, he tries to prod things along with an expression borrowed from a Chinese associate: "We're frying the same rice."
Mr. Zhao says Nexteer is considering a new factory in Beijing. He says the ownership group has assured U.S. employees it doesn't plan to take the jobs and intellectual property to China and leave a shell in Saginaw.
"It's all about growth," he says. "We told them we would not give up the U.S. market, so how could we cut or move jobs?"
Nexteer has added more than 600 jobs on the factory floor since July 2010. The hiring and new investment has won over many workers initially suspicious of Chinese ownership. "They followed through with what they said they were going to do," says Mario Gonzales, a team leader for workers who assemble hydraulic steering pumps for GM pickups. Says Troy Newberry, president of UAW Local 699: "This place went through two different bankruptcies. With the Chinese owning us, we won't see a third."
Still, some longtime workers remain skeptical, and there is lingering tension over concessions agreed to by union leaders. Tool-and-die maker Brian Bolter, a 17-year veteran, says he doesn't see much evidence of new investment in his part of the factory complex.
For beleaguered Saginaw County, Nexteer's revival and the resurgence of the American auto industry overall have provided an economic jolt. Saginaw County's unemployment rate, as of December, had dropped to 8.6%, far below the county's 2009 peak.
"Everybody was afraid [Nexteer] would just get liquidated, and the place wouldn't exist any more," says Jerry L. Seese, superintendent of schools in Saginaw Township. "It's kind of a blessing" that the Chinese bought it.
To be sure, many of the new Nexteer jobs don't pay the kind of wages that the company offered before the recession, and about 90% of Nexteer's hourly workers have five years or less of seniority, UAW officials say. But county officials hope Saginaw County has positioned itself to compete for new investment more effectively.
In brochures aimed at Chinese investors, economic-development officials in Saginaw and neighboring Midland and Bay City are promoting the beauty of the Great Lakes and the affordable housing in the area. Officials at economic-development group Saginaw Future are courting Chinese solar-panel makers to invest in a new industrial park situated close to a large manufacturer of the raw materials used in solar power panels.
Mr. Zhao says AVIC Auto is scouting for more deals. "If there is a good opportunity," he says, "we will consider a second acquisition and more."