A interview with C. Peter Theut, the President and Chief Executive officer of China Bridge, headquartered in Ann Arbor, Mich.
Gasgoo: As a profound expert in negotiating and documenting complex China related transaction what are the main challenges for the M&A due diligence in automotive industry, such as capital structure, operating control or governance?
Mr. Theut: Your question is very interesting and topical for the global economy. When one talks about due diligence whether it is in the automotive industry or any other global industry the most important thing in buying a company is due diligence. We have had extensive experience in dealing with Chinese companies that have purchased companies in the United States and specifically Chinese companies that have purchased automotive divisions. We find that the most serious problem is the lack on the part of the Chinese companies in understanding the importance of due diligence. Due diligence is the most critical part of any merger or acquisition. In our considered opinion, it requires first of all a business plan on the part of the Chinese company so that they know what they are looking for and how best to go about the search. This requires a great deal of effort on the part of the Chinese company at home, before they even start looking abroad. In doing so it is recommended that the Chinese company have an in-house team of people who understand the company’s history and understand where it would like to go in the future.
Once you have a business plan, and an in-house team to carry out the business plan you then can approach the American automotive industry or any other industry for that matter worldwide. The Chinese company then must have some help on the ground, let us say in the U.S. Your team must work with a U.S. team of accountants and advisors, and it is essential for the Chinese team to expend the resources up front to pay for competent accountants to examine and evaluate the books and records of the company targeted for buying. In the United States, the law is such that corporate books and records are transparent; it only takes someone who knows how to identify and interpret them. This requires a certain amount of sophistication on the part of the U.S. people that are helping you. The biggest mistake that Chinese companies make in conducting due diligence is that they are unwilling to spend the kind of money necessary to properly conduct due diligence. You cannot conduct proper due diligence without significant up-front costs. If you “cut corners” cost-wise, you are likely to buy a company that after the sale you discover risks and expenses far beyond what you would have tolerated had you taken the time to put your team together. Your team working with the U.S. team can provide you with confidence in what you are buying and ensure that what you are shown or perceive is exactly what you are buying.
The automotive industry in the U.S. is a close provincial industry. Similar to China’s pillar industries the U.S. automotive industry has been a pillar industry in the United States. As a pillar industry, it is to some extent government regulated and there are certain unique types of business practices that the automotive industries embrace. If you have someone in China that knows business generally, that knowledge may not apply to the unique way that U.S. automotive companies do business. All the more reason why you must enlist people in the United States that know and understand the industry and can explain the intricacies to you in Mandarin.
Gasgoo: You’ve authored the chapter of practical considerations what to do business in China. Would you please share with us your main opinions on the business development trend, and the cooperation models between China and U.S. in the automotive industry?
Mr. Theut: I did author an article addressing the practical and legal aspects of doing business in the United States by a foreign company. I would recommend that special attention be given in that article to the practical aspects of doing business in the U.S. There have been dramatic recent changes in the world economy. The world economy that existed prior to October 2008 was one economy; the world economy that emerged since October 2008 is quite different. The changes were first reflected in the U.S. banking circles and then the automotive industry and spread rapidly thereafter throughout the world. The business model we were looking at pre October 2008 is quite different from the business model that we are looking at now.
Prior to October 2008, we assisted approximately 165 U.S. companies to do business in China. As we approached the end of October 2008, we assisted 45 Chinese companies to enter the U.S. market. The model that now exists is quite different because the PRC is encouraging Chinese companies to invest in the West. We found that prior to October 2008 Chinese companies were quite excited about investing in the U.S. Since October 2008, companies throughout the world are more reluctant to go abroad and invest anywhere and remain cautious about the United States because of the state of our economy. Chinese companies now are being much more careful about where they spend their cash. There is a general consensus within the world economy that Chinese companies do have cash, perhaps more at this time than any other country in the world. What the world economy does not realize is that it is not easy for Chinese companies to spend that cash abroad. This reluctance has to do, in part, with the complexity of the due diligence process in the U.S. (as discussed earlier) and concern by the Chinese government that cash that goes abroad is well spent and regulated.
It is interesting to us that increasingly U.S. companies are interested in Chinese companies in the interior of China in areas like Chengdu, Chongqing, Nanjing and Xi’an. Interest is increasingly centered upon tier two cities and U.S. companies are finding that the Chinese tier two cities are more open to American investment. Chongqing is especially important because as one of the four municipalities recognized by the PRC it is especially attractive for foreign investment. Although U.S. companies investing in China now are looking more to the tier two cities, Chinese companies appear to be especially interested not so much in establishing a business in the United States, but in acquiring technology from United States companies that they can utilize in China. I feel strongly that the new models of U.S. companies looking at the interior of China and Chinese companies looking for technology to be transferred to China are healthy business models that should serve both countries well as we move forward.
More Chinese companies are beginning to realize that there are real opportunities in the United States to purchase or merge with middle sized companies (companies that range in revenue from 10 million to 150 million). Just as there are bargains in the interior of China and in the West, so too in the United States there are significant bargains available to Chinese companies to purchase and/or JV with a middle sized company.
Gasgoo: You are looking for the advanced technology to be transferred to the Chinese companies, what is the opportunity and challenges for the Chinese auto companies doing the transaction?
Mr. Theut: I think Chinese companies have unique opportunities now because of the restructuring of the U.S. automotive industry. The headquarters of China Bridge is located in Ann Arbor, Michigan. We are particularly aware of the difficulties that the automotive industry has experienced in the United States. We also are aware of the tremendous growth of the automotive industry in China. We feel that there is a special opportunity for the Chinese companies to acquire technology from Michigan and U.S. companies generally that are in need of capital. One of the best ways to take advantage of that opportunity is for Chinese companies to license new cutting edge technology from U.S. companies that have developed such technology for many years in Michigan and elsewhere in the U.S. For the next two or three years this opportunity will exist for Chinese companies to buy or license unique automotive and green technology at a relatively low price.
As mentioned, in the past we assisted many U.S. companies to establish joint ventures in China with Chinese Companies. Many of the Chinese companies involved in such JVs have found that their JV with the American company in China would function better economically if they came to the United States and entered into a U.S. JV in coordination with their U.S. “partner” in China. Our company is called “China Bridge” because we endeavor to form a business “bridge” between the U.S. and China. One of the major advantages for a Chinese company to “travel” the “bridge” over to the U.S. is acquisition of a U.S. distribution system. It is not simply a question of acquiring U.S. technology for China but of exporting components manufactured in China into the United States and acquiring or JVing with a U.S. company that already has a distribution system to facilitate access of the Chinese company to the U.S. market.
I also suggest that Chinese companies as they seek opportunity in the worldwide automotive industry continue to consider Mexico. I believe Chinese companies have outstanding opportunities in Mexico. Mexico has entered into treaties with South America and Europe to which the U.S. is not a party. As a result, European companies are entering the South American and North American markets by headquartering in Mexico. I also believe that Chinese companies should consider Mexico as a potential distribution center for Chinese goods suitable for the South American and North American markets. For that reason, China Bridge soon will open an office in Mexico City. The purpose of that office will be to assist Chinese companies to do business in Mexico and to assist Chinese companies to enter the South American and North American markets.
Gasgoo: It’s well known that Chinese government is promoting the green vehicle; do you think it’s possible for the Chinese companies to gain fast development in electrical vehicle through the global transaction or M&A?
Mr. Theut: It think it is imperative for China to take advantage of the opportunity you just described. China is leading the way in green technology attributable in part to certain obligations imposed upon China by the World Trade Organization. China is leading the way in developing green vehicles. The United States may not be as willing or capable as China to ultimately manufacture a vehicle that utilizes only green technology. It is my considered opinion that China could accomplish that goal more quickly by JVing with U.S. companies that are making green components that must go into any car that is completely energy green. Acceptance by the American consumer of hybrid vehicles in the U.S. has not been as enthusiastic as such acceptance must be in China. China’s middleclass is growing rapidly and that population will be capable of buying more and more automobiles in the very near future. China must create green vehicles or the country’s air pollution may become intolerable. I therefore think it makes good sense for the United States companies and Chinese automotive companies to cooperate in developing green technology for automobiles.
I am not certain that China must or should concentrate totally on large U.S. companies that manufacture green technology or are conducting R&D on hybrid or green technology. There are many nitch or smaller companies in the U.S. that are doing remarkable things. China should not conclude that the only worldwide progress in developing green energy is being made by large companies. In the United States and Europe smaller companies are developing R&D centers and producing outstanding green technology. For example, many small companies in Michigan are doing significant green energy work. Michigan is transforming itself from building automobiles to building green components for the automobile and other energy reliant industries. I respectfully suggest that the China automotive industry may wish to look into not just automotive manufacturing or exporting automotive components but also potential coordination with the many small U.S. companies that are producing green energy components for automobiles.
If you consider a small company in the United States that is working on green technology, it is likely to need cash. It is difficult in the current U.S. economy for small companies to borrow money from U.S. banks. Chinese companies are capable of providing badly needed cash to small U.S. companies struggling to develop cutting edge green technology. A Chinese company can JV with the U.S. company, learn about rapidly developing green technology and ultimately cooperate with the U.S. company to bring that technology to China and elsewhere in the world.
The scenario described above is a great opportunity that has been overlooked. We are not overlooking that opportunity at China Bridge. China Bridge has three pillars: one is automotive which we are discussing; the second is energy and the third is environmental. One cannot deal with the automotive industry in today’s world without dealing with energy and the environment. I again wish to emphasize that Chinese companies cannot just look at the large companies in the U.S. There are few large U.S. companies that Chinese companies can afford to buy. On the other hand, there are thousands of small U.S. companies that would be interested in doing business with a Chinese company. There is a need for Chinese companies and U.S. companies to cooperate and to educate each other. That is what China Bridge is designed to do. Our goal is to visit China regularly to meet with interested and capable Chinese companies and explain to those companies the unique opportunities available in the U.S. automotive industry generally and the green R&D and manufacturing sectors specifically.
Gasgoo: Do you have some suggestions to the Chinese companies’ investment or planning to invest the U.S. market?
Mr. Theut: My suggestion to Chinese companies interested in investing in the U.S. is not to be discouraged by what appears to be troublesome problems in the U.S. economy. Look closer at the U.S. economy and realize that it is still perhaps 10 or 11 times larger than any other economy in the world. There is a reason for this in that the U.S. economy is especially adept at changing. In spite of all the current economic difficulties the U.S. historically can innovate and change rapidly . No country can deal with change as well as in the U.S. I have practiced law for 48 years all over the world and especially in Europe and Asia. In my opinion, there are few cultures better suited to work together in developing technology than the Chinese business culture and the U.S. business culture. That isn’t to downplay the skills or success of Germany, Japan or any other country . We find a unique relationship and business acumen among business people in China that is compatible with the business people in the U.S. Contrary to popular belief, Chinese and U.S. entrepreneurs have much in common, albeit that most of the world doesn’t realize that fascinating phenomenon. I again suggest that China businesses seriously consider the U.S. medium sized market. It is much easier for a foreign business entity to learn first-hand about the Western economy by coordinating with a medium sized U.S. company as distinct from concentrating on a mega-company. I also again emphasize that if China really desires to learn about western business practices, buying or JVing with a small or medium sized U.S. company allows you some room for error. Your risk is not as great and buying a small company allows you to stand side by side everyday with the owners and employees who are the critical core of such companies.
