When ChemChina purchased Italian tyre maker Pirelli in 2015, there was anxiety in Italy about passing one of its best-known brands into Chinese hands (see WiC275). The fears never subsided. But when ChemChina returned Pirelli to the Milan stock exchange last year, Pirelli’s chief executive said it demonstrated ChemChina’s respect for the company’s Italian management.
In South Korea Kumho Tire is set to become the latest tyre brand sold off to a state-owned firm from China, after news that Qingdao Doublestar will acquire 45% of Korea’s second largest tyre maker for W646 billion ($597 million).
Kumho has been under the control of its creditors, led by the Korean Development Bank (KDB), since 2009, following the implosion of its expansion plans during the global financial crisis. The company was restructured, but has struggled to regain its former standing.
KDB has been looking for a buyer since 2016 and nearly reached agreement with Doublestar last year. The Chinese firm, which also makes shoes, outbid 10 competitors but the deal was rejected in September over disputes on trademark rights and the fact that Doublestar had reduced its initial offer, citing Kumho’s diminishing profits, Reuters reports.
According to China Business News, Kumho lost W50.2 billion ($47 million) in the first half of 2017, following a W37.9 billion deficit in 2016. CBN blames Kumho’s performance in China, where sales have been dogged by product quality concerns, after state television channel CCTV targeted it during its yearly consumer rights campaign (see WiC359).
The CCTV report alleged that a Kumho factory in Tianjin had been using too much “recycled rubber” in its production process, resulting in sub-standard tyres that were more likely to burst. Kumho denied the allegations, but automakers were spooked and distanced themselves. A month later, a chastened Kumho issued a tyre recall, explaining: “China’s quality agency investigated whether these products had any quality issues, but found no serious problems with the quality of any of the tyres… Even though this certification shows these products fully satisfy Chinese quality regulations, Kumho still decided to recall some products produced in the specific time periods in question.”
Bringing Qingdao Doublestar in as a new investor could help repair Kumho’s reputation in the world’s leading car market, although there is still a chance that the deal won’t go through. As Kumho is South Korea’s only manufacturer of military tyres, the takeover is subject to review by Seoul’s Defense Acquisition Program Administration, as well as the Ministry of Trade, Industry and Energy.
But Kim Jong-gi, an industry insider quoted by CBN, said that Kumho’s profits from military sales are negligible and the affiliation shouldn’t be much of a problem.
However, the de facto boycott of Korean giant Lotte organised by Beijing as punishment for its involvement in the THAAD missile deployment has stirred some anti-Chinese feeling (see WiC391). Nikkei reports that when Doublestar was announced as a potential buyer last year, labour unions also protested against a sale to a Chinese company, concerned that it would lead to shifting of jobs to production sites in China and cuts to R&D funding.
While the South Korean government isn’t happy about the sale, it says the alternatives are worse.
“A domestic company’s acquisition of Kumho Tire is best, but no Korean company will consider buying a company with a liquidity crisis,” an official from the industry ministry admitted this week. “Considering the impact on the industry, local economy and jobs, saving the company is better than liquidating it.”
KDB has also defended the deal, saying that the sale will help Kumho grow its sales networks and provide much-needed capital.
Doublestar is also saying that there will be no major staff changes at Kumho for the next three years. But labour unions are unconvinced and 3,500 workers at three of its factories joined a 24-hour walk-out on Wednesday, the Korea Times reports.
© ChinTell Ltd. All rights reserved.
Sponsored by HSBC.
The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.