The strike at the Cooper Tire & Rubber Co.’s Chengshan plant in China’s Shandong Province has now been underway for more than two weeks, and although Cooper and Apollo Tyres state this industrial action will have no effect on the planned takeover, union officials at the plant are equally adamant it shouldn’t take place.
An insight into the grievances allegedly held by Cooper Chengshan workers was given by China’s Global Times, which spoke to Liang Yitang, purported to be the head of the plant’s labor union. Liang told the publication that Cooper’s acquisition itself isn’t so much the issue; rather, it is the prospect of having Apollo as the company’s new master.
“If the buyer is not Apollo but other companies such as French tire manufacturer Michelin, they (the Cooper Chenshang workers) may agree to it,” said Liang.
So what objections do employees at this joint venture facility have to being an Apollo-owned company? Liang said it’s a lack of confidence in the Indian tiremaker’s management. He told the Global Times that the workers will continue their strike action as “they could not see any future under the leadership of Apollo,” adding that the workforce believes Apollo’s leadership “lacks capability and is full of liabilities.”
Admittedly, Liang seems a hard man to please. In the same Aug. 5 Global Times article reported the plant union leader describes Cooper Chengshan’s first years of operation as less than satisfactory due to frequent changes in “foreign” leadership, different management concepts and language barriers. “Now, we are the biggest and best plant among Cooper's eight plants around the world,” stated Liang. “We do not want to risk our profits again in a mixture of three countries' cultures.”
Armed with such strong opinions and concerns about Apollo’s high debt ratio, the striking workers may pose real difficulties for Apollo and Cooper. Indeed, the Chengshan Group, which holds a 35% stake in Cooper Chengshan, has even suggested buying out Cooper Tire’s share in the plant. It engaged in talks with Cooper management on June 26 and July 10, but reported making no real progress during these meetings. Planned three-party talks to be held in Beijing fell through due to Apollo’s non-attendance.
Under the headline “Bumpy Ride,” here is the entire Global Times story by Zhang Ye, which came complete with the accompanying photo, which was supplied by the union. We are providing this article as a service, but remind that as with any news report in state-owned Chinese media, one has to read with caution.
“Workers at the China plant of a Sino-U.S. joint venture are protesting against an Indian tire company's bid to acquire the U.S. partner of the venture, casting a shadow on the deal.
India-based Apollo Tyres Ltd. announced on June 12 to buy U.S.-based Cooper Tire & Rubber Co for $2.5 billion due to the latter's "particularly robust presence in North America and China."
The acquisition will give Apollo ownership of the stake of the U.S. partner in Cooper Chengshan (Shandong) Tire Co. (CCT), a Sino-U.S. joint venture in Rongcheng, East China's Shandong Province. But the deal is facing opposition by the venture's more than 5,000 Chinese workers, who have been carrying out a large-scale strike since June.
‘Cooper is currently experiencing a temporary work stoppage at our plant in Rongcheng, China…[The company] is continuing to work toward getting the plant operating again as soon as possible… The transaction is on track and expected to close by the end of this year. This issue has no impact on the pending merger,’ Cooper said in a statement e-mailed to the Global Times on Aug. 1. Apollo had not responded to an e-mail request for information from the Global Times by press time.
Cooper also stated that the pending merger will benefit those at the Rongcheng plant, ‘as it will bring together two firms with highly complementary brands, geographic presence, and technological expertise."
However, workers are unwilling to buy it.
Liang Yiting, head of CCT's labor union, told the Global Times on Aug. 1 that all workers will protest against the acquisition till the end, as they could not see any future under the leadership of Apollo, which they believed lacks capability and is full of liabilities.
‘If the buyer is not Apollo but other companies such as French tire manufacturer Michelin, they (workers) may agree to it,’ said Liang.
Deep in debt
Apollo and Cooper are jointly borrowing $2.5 billion in new debt from four investment banks, including Deutsche Bank and Morgan Stanley, Sunam Sarkar, chief financial officer of Apollo, said at an investor conference call on June 12.
Analysts have expressed concerns about the huge debt pile of Apollo.
Given that Cooper's earnings are 2.5 times that of Apollo, ‘the market will not like the huge leverage being taken by the company,’ said Surjit Arora, an analyst for institutional equities at Indian brokerage firm Prabhudas Lilladher. ‘We believe Apollo could have bitten off more than it can chew,’ he wrote in a report on June 12.
And Indian consultancy LKP Securities considered the merger "overambitious", as the combined company is expected to bring $80 million to $120 million to Apollo's revenues annually amid sluggish global demand.
‘Though Cooper seems like a good strategic fit, Apollo is paying a huge price for it, and hence gaining synergies and the timeline of achieving it is important,’ LKP said in a research note on June 14.
The new loans will take Apollo's net debt in India to up to $800 million and the annual servicing cost of the new debt is estimated to range from $6 million to $7 million, media reports said.
The debt-to-asset ratio of Apollo is very high, which is likely to strain the balance sheet if the merger is concluded, Liang said.
‘In addition, Apollo's capability is not strong. We cannot learn too much from the company,’ he said, noting that many of CCT's suppliers have started to urgently demand overdue payments since the disclosure of the deal.
And the company's 131 domestic dealers sent a joint letter on July 1 to Cooper and Apollo protesting against the merger and threatening to stop cooperation with CCT if the deal went through, Liang revealed. ‘Then CCT's sales network will be paralyzed.’
The United Steelworkers, representing Cooper's 2,400 U.S. workers, sent an e-mail to CCT's labor union on July 31 to express their support for its Chinese colleagues' strike.
The CCT workers are also concerned about the cultural conflicts.
Chengshan Group and Cooper set up CCT in 2006, with the former holding 35% stake in the joint venture, and the latter owning a controlling 65% stake.
The cooperation between the two partners in the following seven years has been uneven due to language barriers and different management concepts.
During the first four years, CCT did not have a satisfactory performance, and experienced frequent changes in the foreign leadership of the venture, Liang said.
Data e-mailed to the Global Times by the company indicated that its total net profits recorded $77 million before tax in the duration, while Chengshan Group's tire business, before merger with Cooper, achieved an annual profit of over $29 million.
After a long integration process, CCT finally began to see improvements in its performance in the following three years.
In 2012, the company reported $107 million in net profits before tax.
‘Now, we are the biggest and best plant among Cooper's eight plants around the world. We do not want to risk our profits again in a mixture of three countries' cultures,’ said Liang.
According to a study by global consulting firm KPMG, 75% of the mergers conducted by Indian companies have failed to create value, Indian news portal livemint.com reported on April 7. The study was based on a survey of 750 acquisitions made by listed firms in India during the 2005-11 period.
To prevent the promising joint venture from falling into the possible mires of cultural conflict again, Chengshan Group planned to buy the stake of its U.S. partner.
The group has conducted two rounds of negotiations with the leaders of Cooper on June 26 and July 10, without any substantial progress, according to Chengshan Group.
The two sides agreed that there needs to be a long-term discussion, and therefore it was decided that the heads of Cooper, Chengshan and Apollo should have a three-party talk in Beijing.
But Apollo's president failed to make it and Cooper kept emphasizing the benefits the acquisition would bring. Currently, the negotiation remains deadlocked, with no timeline fixed for the next round.
Once a proposed merger or acquisition triggers labor unrest, then it is hard to be concluded through mediation or negotiation, Zhao Wei, deputy director of the China Labor Studies Center at Beijing Normal University, told the Global Times Thursday.
With a growing awareness of rights protection among the Chinese workers, companies doing business in China need to a have a well-established labor dispute-settlement mechanism to start with, she noted.”