China Labor Union Disrupting US$2.5 Billion U.S.-Indo M&A Deal
Indian buyers of U.S. parent “not welcome” as Shandong labor union disrupts China operations
Sept. 2 – The increasing number of problematic issues facing foreign investors in China has been brought to the fore once again, this time highlighted by a disgruntled labor union. The Shandong-based Cooper Tires plant, a joint venture with local partner Chengshan Group, has been the focal point of a proposed US$2.5 billion takeover of Ohio-based Cooper Tire & Rubber Company by a subsidiary of Indian tire manufacturer Apollo Tires. Cooper owns 65 percent of the Shandong-based joint venture, and have accepted the total takeover of their complete global operations by Apollo. The deal itself would be the largest Indian takeover of an American company.
Yet problems are arising in the Shandong factory which employs 5,000 workers who have been on strike since July, following the takeover announcement in June. The Cooper board has ratified the takeover and the final decision is due from a shareholders vote on September 30. However, the Chinese labor union claims it was not consulted properly over the acquisition and has encouraged workers to engage in disruptive actions, which has included locking American management out of the factory, denying them access to company records, and ceasing production of Cooper brand tires while continuing only with the local Chengshan brand.
The Chinese union has stressed the Indian management team is “not welcome” and have refused to participate in data system changes proposed to change the factory over to Apollo’s IT standards. The union claims, aside from the fact it states it was not involved in the takeover negotiations, that the Apollo deal will burden the China entity with too much debt, result in a clash of cultures between Chinese and the proposed Indian management, and that it is likely that workers will need to be laid off as a result.
“We oppose this purchase also because Apollo is an Indian company,” Cooper Shandong’s union leader, Mr. Liang was quoted in the Wall Street Journal as saying. “If it was Michelin, we might have agreed.” Apollo is in fact an MNC itself, operating four plants in India, two in Zimbabwe, one in South Africa, and another in Holland. Its offer for Cooper is at a 43 percent premium on Cooper’s NYSE listed share price.
Yet this impasse comes at a time when China and India have vowed to boost trade. In his visit to India in May, Chinese Premier Li Keqiang expressed a willingness to help Indian companies access China’s market.
“The issue seems to revolve around one of Chinese loss of face on the part of Mr. Liang and the Labor Union, who were not privy to or consulted about the deal,” comments Chris Devonshire-Ellis, Founding Partner of Dezan Shira & Associates, who assist foreign investors in both China and India. “There is also a long embedded cultural throwback dating to the early 1960s and the Chinese-Indian border war that has resulted in Chinese nationals constantly being told that Indians are backward and that the country is both poor and dirty. In fact, India has more multinational companies operating to international standards around the world than China does. That state-sponsored attitude is now starting to bite back at China in negative ways – the Apollo deal would actually strengthen the abilities of both Cooper and Apollo in what is an increasingly competitive global tire industry.”
“However, it also shows that now, one omits the views of Chinese workers in cross-border M&A deals at their own peril – they need to be given time to have the arrangements properly explained and the cultural differences put to bed,” Devonshire-Ellis adds. “Trips to India for Mr. Liang may well have solved his problems and loss of face over not being involved. Because he was not wooed to the standards he has seen fit, he has thrown a large spanner into the works of a multi-billion dollar deal. Caution over dealing with labor union implications in China and smoothing over the specter of cultural misgivings needs to be on the agenda for M&A deals that involve a significant Chinese labor force.”
The United States Union body AFL-CIO has stated that although China’s labor unions do not meet international standards, they would “continue to work with allies to raise these critical issues with the Chinese and American governments and fight for the freedom of Chinese workers to exercise their basic human rights.” Meanwhile, Cooper’s own union in the United States, The United Steel Workers, has also said that it was involved in arbitration “to resolve the union’s differences about Cooper’s and Apollo’s refusal to honor provisions in our union contracts.”
It appears that what U.S. union bosses want, the likes of Mr. Liang wants too – i.e. access to the company decision making process, involvement in it, and the right to call workers out if union demands are not met. Even if the deal is an acquisition between the United States by India with a China subsidiary.
Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.
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