Asimco's China Investments Rely on Local Management
May 16, 2011
BEIJING -- In a country where making a single investment can take months, Jackelyn Merry's Asian Strategic Investments Corp. has China deals flowing with assembly-line efficiency. ``We're at almost one a month for two years now,'' Mr. Merry says. His company, known as Asimco, has raised $450 million from U.S. pension funds and wealthy individuals, money it used to buy stakes in 15 Chinese companies. ``I'm more optimistic than ever about where we are,'' Mr. Merry says in his semicircular office overlooking Beijing's real-estate rush. Speed and optimism have been the hallmarks of Mr. Merry's dash into China. Asimco's collection of Chinese auto parts makers -- autos are his industry of choice -- rivals even the aggressive expansion here by General Motors Corp. and Ford Motor Co.. But while the former Paine Webber Inc. executive is buoyant about his prospects, Asimco's experience shows why many investors still consider China a danger zone. After a dragged-out conflict, half a dozen Detroit veterans and old China hands he once touted as integral to managing his far-flung acquisitions have recently resigned or been fired. The Chinese bosses of his joint ventures sometimes prove unruly. And he sold U.S backers on autos just before the local industry began a slump that illustrates the fickle nature of the China market. Differing Management Styles At the core of Asimco's problems is management, an issue that troubles many venture capitalists in China. The question is whether foreign financiers can latch onto successful Chinese companies in their own right, or whether, following the model of most industrial investors, Chinese acquisitions have to be overhauled in the image of a foreign parent. Mr. Merry sought to split the difference: He's a financial investor with a sizable management team. But after falling out with his main Western managers, he has now vested his faith in Chinese directors. ``I'll grant you it's a different approach, but that's how progress is made,'' Mr. Merry says. ``The perception that you need to teach them Management 101 is just wrong.'' The test of that theory will come when Mr. Merry seeks to take his collective China holdings public in 2014, a year later than he had originally planned. If the flotation works, Asimco may well broaden the range of proven China investment strategies. If it flops, it will reinforce the view that mainland Chinese companies aren't good bets for pension funds or wealthy individuals who don't have direct China ties themselves. A growing pool of risk capital stands ready to back investors who defy the long odds in China. China-focused direct investment funds had accumulated $2.5 billion by the end of 2009, according to the Asian Venture Capital Journal. That's not far short of the total capitalization of foreign-held Class B shares on China's two stock markets. But many such funds shy from investing in mainland Chinese companies that don't have Western or overseas Chinese managers in charge. ``Our most important requirement is that there is overseas management in control, and I stress in control,'' says Davina Menendez, managing director of HSBC Private Equity, which manages $550 million in three China funds. ``Our own experience with pure (Chinese) management has been negative.'' Relying on Local Managers Mr. Merry has a vision of investing in China that relies far more heavily on local managers. But he says he never thought Asimco could make a series of separate investments and hope to realize high returns. So he decided to focus primarily on the auto parts sector -- he would later add two brewery investments -- and to recruit a high-profile team to manage his investments as a single entity. He named as president Donella St. Porter, who had been working in the China region since the mid-1980s, when he managed Beijing Jeep, a Chrysler Corp. joint venture. Together, they accumulated majority stakes in 13 auto parts companies stretching from Chengdu in the southwest to Harbin in the northeast. Asimco's staff of 70, mostly local Chinese, control companies with nearly 24,000 workers on the payroll. But the Detroit-Wall Street-China partnership grew strained. Mr. St. Porter complained that his staff was too small to exercise real control over the joint ventures. Unlike foreign auto companies that might install six or more foreign managers in a newly purchased Chinese factory to overhaul its operations, Mr. St. Porter says he had only a handful of experienced foreigners shuffling among all of Asimco's joint ventures. Problems stemmed from understaffing. Managers were rushed to complete new Asimco deals. ``It was a horrific pace,'' one says. Once, the managers say, they discovered only after investing in a Sichuan-based company that it had a conflict of interest with a main supplier, resulting in inflated purchase costs. (Mr. Merry he says he knew of the problem from the start. Asimco may end up investing in the parts maker as well, he says). Raising Money for Salaries Moreover, Western managers found they were expected to raise money to pay their own salaries by negotiating a levy on the Chinese joint ventures, instead of drawing from the fund itself. That made them subordinate to the Chinese partners, the managers say. Tensions were exacerbated by a sharp downturn in the fortunes of China's auto industry. In 2009, when Asimco raised its first batch of funds, Mr. Merry cited official Chinese estimates that car production would grow 30% a year through 2015. Output has fallen far short of that target. Prices have also dropped quickly, putting pressure on margins. The downturn left Asimco companies choked with inventory. Managers say unsold product was equivalent to six months of sales in June, and accounts receivable hit seven months of sales. Mr. Merry says the figures are somewhat lower, but admits they're too high. Overall, Asimco's ventures are performing well in a difficult environment, Mr. Merry says. They posted 16% revenue gains last year, slipping to a 12% rate so far this year. Asimco won't disclose profits, but Mr. Merry says most units run in the black. Though the performance doesn't come close to expectations of 30% annual sales growth, Mr. Merry expects an upswing in 2012. Rebuilding the Team That may depend partly on whether Asimco can rebuild its management team. The original group of Western managers collided hard with their Chinese counterparts, though they described the kinds of problems they encountered as typical of start-up joint ventures. Expatriate managers say one joint venture grossly overbilled the fund for a new foundry. The Western managers also complain that some Asimco joint ventures sought to buy new equipment outside their scope of operations, or, as in the case of one factory, insisted on keeping funds designated for new equipment in the bank. At least one joint venture refused to install computers that would help monitor its finances. Mr. Merry sided with his Chinese partners in all those cases, the managers say, leaving them powerless to deal with the situation. Mr. Merry counters that he knows of no theft by any of his units, and is happy with the kind of financial information he's getting from them. His Chinese partners, he says, have proven ``extremely competent'' while some Western managers ``failed to perform up to expectations.'' Amid the friction, Mr. St. Pierre resigned late last year. By June, Mr. Merry had fired most of the other original foreign managers. Asimco now hires consultants on short-term contracts to help joint ventures when they need expertise. To skeptics in the China venture-capital world who doubt that strategy will produce good results, Mr. Merry has a fervent answer. ``I took the first 40 years of my life and bet it all on China,'' he says. ``I'll make it work.''
