Mamtek scandal mars
benefits of China's investments
By Benjamin A Shobert
Across the American Midwest, municipal leaders are braving the increasingly
loud anti-China political tide to board planes and head over to the country in
the hopes of finding potential investment opportunities that will create jobs
in their communities. The hopes of these economic development leaders are that
China will be a fount of new jobs and investments in the United States, similar
to Japan in the 1980s.
For these mayors, China remains one of the last groups of opportunities with
the potential of re-igniting their local economies and bringing hope back to
their communities.
As these mayors and heads of economic development agencies
make their way to China, many will be looking at the recent series of events in
Moberly, Missouri, and the problems they are encountering over a proposed
investment by the Chinese firm Mamtek.
A town of approximately 15,000 people, Moberly has found itself in the midst of
a scandal over Mamtek's proposed investment in a new artificial sweetener
facility that was to employ over 300 people within 18 months of its opening,
and over 600 within several years of its being operational.
To secure Mamtek's expansion, Moberly issued US$39 million in bonds in 2010.
Additional incentives from the state of Missouri were supposed to top $17
million, assuming the expansion and job creation went according to plan. Beyond
commitments from Moberly and the state of Missouri, Mamtek also received some
$8 million in private investment.
But in early September, Mamtek said it would miss its first principal payment
of $2.2 million to the city, which caused S&P to promptly downgrade Mamtek
bonded debt from A-minus to CC. (S&P defines an "A" rating as indicating
"Strong capacity to meet financial commitments, but somewhat susceptible to
adverse economic conditions and changes in circumstances," with a "minus" tag
being just below that valuation. A "CC" rating indicates "Currently highly
vulnerable".)
The immediate aftermath of the Mamtek scandal has been twofold: first, around
the state, journalists and community activists are asking questions about the
sort of due diligence that the state's economic development agency pursued
prior to pursuing or announcing the deal. Missouri's attorney general, Chris
Koster, has already announced an investigation into the Mamtek scandal, with
additional possible investigations being hinted at by leaders in the Missouri
statehouse.
Second, the Missouri state legislature has run aground over whether to provide
some $480 million in tax incentives for an air-freight hub in St Louis, called
Aerotropolis, that would have been dedicated to serving China. While some of
the pushback from the statehouse is centered around more general concerns over
the effectiveness of the state's Compete Missouri program (a government
sponsored job-creation plan), there are unmistakable connections that some in
the community will be tempted to draw between two programs both reliant on
trade with China as their justification.
Such connections would be a mistake, as what the Mamtek deal has to offer says
much more about the best practices state-led economic development agencies
should be pursuing, especially - but not only - when they are seeking to
attract investment from China.
It may well be that the Mamtek deal fell apart for reasons that had nothing to
do with its origination from China and everything to do with it being poorly
evaluated due to a rushed political agenda that elevated a new jobs
announcement ahead of focused due-diligence on a prospective company promising
to make a large investment in Moberly.
Kent Kedl, as managing director of Control Risks for Greater China and North
Asia, leads a firm specializing in due diligence for private and public
investors looking at partnership opportunities with Chinese companies.
According to Kedl, the challenge for a municipality like Moberly is to conduct
what his firm calls "reputational due diligence". This is particularly
important in an emerging economy such as China because, as Kedl notes "the
investor cannot rely on the public record. If they are looking at the company's
assets in China especially they cannot rely solely on this. Bloomberg, S&P,
[commercial database company] D&B are not going to give them the sort of
insight they need."
Because the public reporting system in China is still undeveloped and prone to
errors, economic development agencies turn to firms like Control Risks which
specialize in penetrating the fog and getting to the bottom of the potential
partner's reputation. Kedl describes the process as a series of questions: "Who
is this company? Who is this individual? What is this entity?"
For Kedl, based in Shanghai, this "has to be done in China were you go and dig
down into the background: what is this company? Do they have a physical site?
Who are the owners? Where do they come from? What is their reputation in the
market with people whom they've done business with before?" Kedl's team talks
to suppliers, creditors and business partners in an attempt to determine if the
prospective investment partner has the sort of profile and track record that
justifies the municipality extending an offer.
Malcolm Riddell, president of RiddellTseng, a boutique investment bank that
provides, among other things, advice to investors on how to attract Chinese
investments, has been working in the area of Chinese investment for 30 years.
According to Riddell, the sort of problems Moberly has experienced should come
as no surprise. Referencing the reverse-merger scandals from Chinese companies
earlier in 2011, Riddell says, "If you see what has been going on with major
private investment firms and reverse mergers, it is tough to do - even the very
best get tricked." (See, for example,
Another sewer swim for Harbin Electric, Asia Times Online, June 25,
2011.
According to Riddell, even the most sophisticated of investors can make
mistakes and lose money when they pursue these deals; but he believes that the
lesson should be that "you can't protect yourself by due diligence alone".
Riddell believes that the best way for a town or city like Moberly to protect
itself is to structure the deal in such a way that "milestones are met in
bite-sized pieces so that the Chinese have to make something happen before you
take that next step". His reasoning is simple: "You can give all the tax
incentives in the world away and if they don't show up all you have lost is
time. But if one of the results is that you have given the people's money away,
then you have to be sure you are doing this in small steps."
It is not yet clear whether these two best-practices - reputational due
diligence and structuring the deal in small bite-sized pieces prior to the full
investment - were part of the city's analysis.
Perhaps the single-most important thing that American municipalities should
keep in mind as they pursue Chinese investment is to make both the US and
Chinese governments stakeholders in the deal. Beijing remains very committed to
its path of expanding outbound investment, and it has a very strong vested
interest in making sure Chinese firms operate successfully and ethically in
their foreign markets.
As a consequence, Riddell suggests that "the other thing I would do is reach
out to the entities in the Chinese government that focus strictly on the China
'Going Out' program. And, at the same time, bring in early the US government,
through, for example, the Department of Commerce's 'Invest in America'
program."
Riddell's reasoning is straight forward: "If something goes wrong, you want to
be able to bring Chinese government influence on the Chinese malefactor, and US
influence on the Chinese government."
The greater danger in the Mamtek deal is that it somehow adds further fuel to
the fire of US-China economic relations. In the midst of a congressional
session where it appears broad bipartisan support exists to label China a
currency manipulator and slap tariffs on Chinese-made goods, it is critical to
remember that the Mamtek deal is the exception and not the rule to Chinese
outbound investment.
As Kedl stated, "The mistake was not in believing that a Chinese company would
want to invest in the US; it was not doing the necessary due diligence about
this specific company." He added, "This is in no way part of a vast scheme on
the part of Chinese companies; outward investment just surpassed inward
investment - they are serious about this."
Thilo Hanemann, research director for New York-based Rhodium Group, a
consulting firm specializing in tracking outbound Chinese investment into the
US and Europe, echoed Kedl's reminder: "While the Mamtek project is currently
grabbing headlines, it is important to remember that Chinese investors to date
do not have a particularly bad track record with direct investment projects."
As more American mayors and economic development leaders ponder whether to
pursue investment opportunities from China, the lessons from the Mamtek deal
are that they need to make sure they fund the sort of due diligence that will
enable them to determine the quality and truthfulness of their partners, and to
get as many stakeholders in China, including the Chinese government, involved
early before problems occur.
The missed opportunity would be to somehow view Moberly's misstep as a negative
commentary on Chinese investment at a time when America badly needs to view
such investment as a source of opportunities and much-needed capital.
Benjamin A Shobert is the managing director of Teleos Inc (www.teleos-inc.com),
a consulting firm dedicated to helping Asian businesses bring innovative
technologies into the North American market.
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