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China Investing in Rust-Belt Companies

Auto-Parts Maker Wanxiang Invests in
U.S. Partners As Its Ambitions Expand

By PETER WONACOTT, Staff Reporter, The Wall Street Journal

When Lu Guanqiu, his wife and five others pooled $500 to start a tractor-repair shop in rural China in the late 1960s, local officials laughed off their efforts.

" 'You're a farmer. You should be in the fields,' " he remembers them saying. "People on the street would call us 'tails of capitalist dogs.' "

Today, Mr. Lu is one of China's wealthiest men, founder and chairman of Wanxiang Group Co., that country's biggest auto-parts supplier with $1.8 billion in sales last year and $3 billion expected this year. Now he is setting out to compete with the world's biggest parts suppliers on their home turf in the U.S.

Mr. Lu has assembled interests in more than 30 ventures around the world that make most of the components in the underside of a car. Wanxiang's U.S. sales are expected to grow 60% to about $400 million in 2004, company executives say. Its smaller European division is on pace for a 30% revenue rise this year, they say.
Mr. Lu is helping write a new chapter in the story of China's surging economic growth. Chinese factories have dealt crushing blows to American manufacturers unable to match China's low costs. Now Mr. Lu is swooping into the American rust belt and scooping up investments in hard-hit auto suppliers. Some of them are finding that the remedy for Chinese competition is an infusion of Chinese money, and a timely means to cut costs.

Wanxiang's growth comes amid a wave of global expansion by Chinese companies, backed by low-interest government loans. Last year China was the world's largest recipient of foreign direct investment; now the funds are starting to flow the other way, too.

This month, Shanghai Automotive Industry Corp. announced it was planning a merger with Britain's MG Rover Group. In September, it acquired a controlling stake in Korean car maker Ssangyong Motor Co. China Minmetals Corp. is pursuing a $5.5 billion bid to buy Noranda Inc., Toronto's zinc and nickel miner. Meanwhile, telecommunications giant Huawei Technologies Co. has acquired two U.S. equipment makers and set up research centers in Dallas and Silicon Valley. (See related article1.)

Though still a trickle compared with Japanese investment in the U.S. in the 1990s, Chinese investment is starting to grow. Chinese companies invested $2.9 billion overseas last year, a 5.5% increase from 2002 but still less than 1% of the world's total, according to China's National Bureau of Statistics. China's cumulative overseas investment of $33 billion has reached the level of France -- two decades ago.

Mr. Lu is scouring Europe and the U.S. for auto-parts divisions of major manufacturers that will put him on the road to competing more directly with auto-parts giants DelphiCorp. and Visteon Corp. of the U.S. After preliminary discussions, Wanxiang recently declined to bid for one U.S. parts maker with $3 billion in sales, executives say, but the company has put aside funds for acquisitions of similar size.

In joint ventures in Illinois, Minnesota and Ohio, Wanxiang has sought alliances where it can move into more sophisticated products and pick up big new customers. It has looked for ways to cut costs, including shifting some production of low-end parts to China.

"Wanxiang has been growing like a weed," says Gary Wetzel, chief operating officer for Wanxiang America Corp. In a 1995 meeting at a Chicago Chinese restaurant, a Wanxiang representative sketched for Mr. Wetzel what appeared to be wild sales projections -- only to prove later startlingly on mark. "I didn't think they stood a chance," he says.
Mr. Lu's rise began in 1962, when he was tossed out of his job as a blacksmith's apprentice. The small steel plant he was working in closed down amid the tumult of China's Great Leap Forward, a chaotic campaign to rapidly industrialize the nation. Instead of heading back to the farm, he started repairing bicycles. And despite skepticism in his corner of eastern Zhejiang province, Mr. Lu went on to service tractors as well.

He built a small village commune into something rare for the era: a market-driven family enterprise. Mr. Lu's wife, Zhang Jinmei, became an expert welder and worked through four pregnancies. In 1972, she gave birth to her only son, now Wanxiang's chief executive, Lu Weiding, literally on the factory floor. Three of Mr. Lu's daughters worked at Wanxiang. Mr. Lu keeps a photo of his grandson in his pocket, hoping the 3-year-old will someday run the company.
While private companies were still illegal in China, the nation's political spasms in the 1960s and '70s worked to Wanxiang's advantage. With managers at state-owned companies often tied up in political struggles, Mr. Lu tended to their neglected customers. In 1973, his factory bought 300 tons of cannon barrels from the Chinese army because local authorities kept steel for state enterprises. His wife cut open the cannon barrels with an electric saw and transformed them into brisk-selling tractor blades.

Mr. Lu later used a precious steel quota from the government to begin producing universal joints, a palm-size component that transmits power from the engine and drive shaft to the wheels. Wanxiang, Chinese for universal joint, began to supply tractors, trucks and -- in the early 1980s -- an exploding number of cars.

As more multinationals arrived in China, executives from General Motors Corp., Ford Motor Co. and Volkswagen AG sought out Wanxiang as a supplier. The gregarious but frugal Mr. Lu would entertain the executives in his lunchroom suites -- then pack up the leftovers for his staff, associates say. Wanxiang racked up global orders, many coming from other parts makers such as Visteon, which bought the Chinese company's chassis components.

"Visteon doesn't treat Wanxiang as a competitor," says Robert Marshall, Visteon's director of Asia-Pacific purchasing in Shanghai. "We are clearly treating them as a supplier of components for auto parts."

Indeed, the auto-parts business has fueled extraordinary growth -- and wealth. His single workshop spawned more than 30 factories and 31,000 employees in China. From its whitewashed headquarters in Xiaoshan city, Wanxiang has diversified into securities, banking, property -- and even toothpaste, crawfish and U.S. oil wells. Fields of rice have given way to rows of four-story townhouses topped with gleaming steel lightning rods. Pan Weibo, who started at the commune 34 years ago and now runs a Wanxiang wheel-hub factory, has owned five such houses and his company car is a sleek Volkswagen Passat.

"Mr. Lu looks after average workers," says Mr. Pan.

The 63-year old Wanxiang chairman, his forearms rounded by years of wrench turning, rarely takes a day off and, with most of his family current or former Wanxiang employees, talks of little other than the company, says son Lu Weiding.
"I can't sing, I don't dance," exclaims the elder Mr. Lu. "What am I supposed to do?"

In recent years, Mr. Lu has focused on creating a rival to the world's biggest parts makers. Shifts in global manufacturing have threatened Wanxiang's position at the lower end of the market. Competitors from India, Poland and Romania are crowding into unfinished components and replacement parts. In response, Wanxiang has scouted for manufacturers that supply finished parts and deal directly with big auto companies. Investments in U.S. parts makers buy new technology, bigger customers and wider profit margins.

Wanxiang's U.S. operations, headed by Mr. Lu's son-in-law Pin Ni, grew by offering bargain prices on auto parts. By 1995, it was posting $3.5 million in revenue and had moved into a small warehouse to store the auto parts coming from China.

Like his boss, Mr. Ni pinched pennies to keep costs down as the company grew. He made sure his two other salespeople could drive forklifts so they could help unload container trucks. At night, they frequently slept at their desks to field phone calls from headquarters in China.

In the late 1990s, Mr. Ni began gobbling up American companies. Some of them needed cash because Chinese manufacturers like Wanxiang were eroding their business. It bought five companies making bearings, drive shafts, and other auto parts. In 2001, it spent $2.8 million for a 21% stake in Universal Automotive Industries Inc., a Nasdaq-listed brakes maker. All told, Wanxiang's investments brought close to 1,000 new employees under its umbrella.

An energetic entrepreneur, Mr. Ni sometimes chides U.S. workers as being overly coddled. A 1998 Wanxiang deal in the U.S., to buy a cash-strapped engine-parts maker in Muskegon, Mich., fell apart when its union balked at Wanxiang's lifeline. Wanxiang wanted slimmer benefits, including shorter vacations comparable to its other employees. The engine-parts company, Guidion Manufacturing Co., went bankrupt, dealing a blow to the Muskegon economy, said Guidion's general manager at the time, Roger Malcolm.
"The city leadership was disappointed, as they wanted the Wanxiang deal to occur. It would have preserved jobs," Mr. Malcolm wrote in an e-mail.

As Mr. Ni sees it, Wanxiang is helping the rust belt stay alive. "We are trying to save jobs, grow the company and create more jobs," said the 40-year-old Wanxiang America chief, tucking one recent afternoon into mushroom pasta in a restaurant outside headquarters in Elgin, Ill.

Just west on Interstate 90, on the border of Wisconsin, those efforts are getting a test in Rockford. Since the mid-19th century, this city of neatly trimmed lawns and driveway basketball hoops has churned out much of the country's power tools and lots of auto parts. But lately, small factories that form Rockford's industrial backbone have fallen on hard times.

One was Driveline Systems LLC, an axle maker located just outside Rockford in Loves Park. After years of eroding business, it was in bankruptcy protection in 2002.

Wanxiang, one of its suppliers, came to the rescue. It invested an undisclosed sum to form a joint venture and has reaped the returns of reducing the axle-maker's costs. Executives at both companies say Driveline is profitable again and expects a 30% sales increase next year. What's more, Driveline hasn't lost a worker in the last two years since Wanxiang's investment, says President Richard DiGiovanni.

Nodding to the machinists behind him, he says: "There are 50 jobs out there that wouldn't be there otherwise."
The experience has eased some of his fears that the company won't be able to keep up in the global marketplace. "As long as I can deliver a quality and timely product, I can be competitive with the Chinese," he says.
Across the street from Driveline, Rockford Powertrain is also trying to carve out a global niche with Wanxiang. In October 2003, Wanxiang took a substantial stake in the private company, which supplies drive shafts and other equipment to heavy-equipment makers such as Caterpillar Inc. Powertrain shifted its universal-joint production and other manufacturing to Wanxiang facilities in China.

Powertrain is now expecting a 30% increase in 2004 sales -- its best result in years. "We couldn't reduce our costs without Wanxiang," says Thomas Corcoran, Powertrain's chief executive. "They're an outstanding partner."
Those on the factory floor aren't so upbeat about the relationship. Powertrain workers, who average 50 years in age and $16 an hour, complain they can't hope to compete with low-cost Chinese labor. In the last three years, about one-third of the company's jobs have disappeared. Some components Powertrain gets from China deviate in size and are made with poor quality steel, according to Randy Whelchel, the Powertrain representative to the United Auto Workers union. "Basically junk," he says.

The Wanxiang issues now loom over a bruising battle between workers and management. Three years ago, 280 Powertrain employees walked out amid contract talks and Mr. Whelchel says it's possible it will happen again. "If it comes to that, we can shut the factory down," says Mr. Whelchel, a 31-year veteran of the company. "They're eventually going to shut the doors anyway."

Powertrain's Mr. Corcoran acknowledges "some major quality issues" with Wanxiang products. But he says the Chinese company responded quickly by dispatching engineers and ironed out the problems. He says there is no relationship between continuing labor talks and Wanxiang's investment and doesn't foresee any more job cuts in the near future.

Some of Wanxiang's bigger competitors doubt how quickly the company can break away from its low-cost roots. "The industry requires a very deep knowledge of electronics, a level of engineering talent that examines things such as the interference on satellite radios or airbags that talk to car seats," says J.T. Battenberg III, Delphi's chairman. "It is much more than manufacturing plants."

Mr. Lu is confident he can find the partners he needs to compete. "Foreign companies are watching us, and we are watching them," he says. "When the time comes, we will get together."

ISO/TS 16949:2002

Wanxiang America
Corporation / Contact Info:
Jeff DeWitt
88 Airport Road
Elgin, IL 60123
Phone: 847-622-8838
Fax: 847-931-4838
jdewitt@wanxiang.com

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