Double Star and Kumho – Why it matters to you

Once the final bidders for the stake were announced, the name of the winner was no real surprise. In fact I predicted it in the email I sent last week to subscribers to our weekly China Tire Intelligence report.

Even if Kumho Asiana Group is unable to raise the rumoured USD850mn to out-bid Double Star, and Double Star wins the prize, I remain a little skeptical of this deal.

Lack of international deal-making experience

Neither side in the arrangement has sufficient experience at making cross-cultural deals or integrating international operations.

That does not mean the deal will fail; just that the Double Star managers will have to work extra hard to bring the various Kumho operations into line.

Comparisons with ChemChina-Pirelli

Comparisons with ChemChina and Pirelli are inevitable. Both of the acquiring companies are State-owned Chinese corporations with relatively small tire-making operations among a range of other activities. Both target companies are internationally-based tire-making specialists.

But the are few other similarities.

ChemChina senior management had wide experience of international deals and cross-cultural integration. The chairman of ChemChina, Ren Jianxin (任建新) is something of a maverick, willing to do things differently from the Party line. He is an independent businessman as well as a senior politician within China’s ranks. Within Pirelli there is a great deal of pragmatism, management flexibility and openness to change.

So far, it looks to me as though the Pirelli integration process is going well – especially in the truck tire side. I look forward to the re-launch of the Aeolus brand powered by Pirelli marketing and manufacturing expertise. I expect it to be something of a game-changer in the truck- and off-road industries.

Kumho, Double Star are both less flexible

Unfortunately, I cannot be as kind to either Double Star or to Kumho. All the non-Koreans I have met within Kumho observe that their jobs are restricted by Korean management who make sometimes rather odd decisions, against the advice of their more experienced Western colleagues.

This is not unusual among organisations whose culture is based in Korea, Japan or China. No-one is allowed to challenge the boss’s decisions, so decisions get made sometimes on the basis of incomplete, or even mistaken intelligence.

The same appears to be true within Double Star. I have only visited that company once, last December when I toured their latest factory. However, I’ve discussed the company extensively with peers, with customers and with suppliers.

Double Star is best-known in China for its sports shoes. It has something of the reputation of Nike or Adidas in China.

Despite undergoing a certain amount of restructuring since 2013 under new Chairman, Chai Yongsen (柴永森) (Pictured), the company still has the reputation of an unreconstructed Communist manufacturing operation. That means decisions are made to please the boss, often without too much thought or analysis behind them. Double Star is not quite as bad as some highly authoritarian tire makers I could mention where senior executives are too scared to switch on the heating without the agreement of the boss, but it is not a place where managers can demonstrate initiative and empowerment.

This leaves me with an impression that neither company is especially flexible or pragmatic nor is experienced at finding workable solutions to difficult situations within complex constraints.

If you have a different view, please add your comments below.

On the positive side, Double Star’s Qingdao headquarters lies just across the Yellow Sea from Kumho’s Gwangju headquarters. Having said that, the flight patterns look terrible, with flights requiring two or even three changes to travel between the two cities.

Facilities match

Ignoring the issues of culture and management integration, this is a highly desirable deal for Double Star. They are getting a series of factories and facilities around the world at a good price. If the rumoured bid of KRW1 million million (USD850mn) is accurate, then the price appears to be something of a bargain. Eight factories including a brand new one in the USA and another new plant in Vietnam; three tech centres; OE customers and experience. Sounds like a bargain to me.

Kumho has tech centres around the world, a modern manufacturing operation in the United States and access to a range of customers in the vehicle domain and also in the tire distribution domain that Double Star has been struggling with.

Kumho’s PCR factory in Macon, Georgia opened only in May 2016 following a USD450mn investment. It has capacity for 4mn UHP tires annually with a clear upgrade path to 10mn units/year. It matches all the Industry 4.0 buzzwords that have been sweeping through China’s tire industry over the last 18 months: Laser guided vehicles; RFID tracking of semi-finished components; Automated production units and so on.

More significantly the factory is geared up to making tires in the high-added-value segments of 17-inch rim sizes and upwards in the UHP performance segments.

Even more important, perhaps, Kumho has been developing its OE relations with Korean vehicle makers including Hyundai and Kia, both of which have vehicle manufacturing plants within 200 miles of the Kumho factory.

The Macon factory was set up with the specific intent to supply those factories, and has technical support from Kumho’s tech centre located in Akron.

The factory was planned in 2008, but put on hold while Kumho went through its financial restructuring.

Along with the Macon factory, Kumho comes with three tire factories in China: in Tianjin, Nanjing and Changchun. These have struggled since 2011 when CCTV exposed a scandal in which Kumho was using greater amounts of process scrap than permitted. The subsequent row pushed Kumho from No.1 market share to below Hankook and even below some of the Western tire makers (see below).

Kumho has three further factories in Korea; in Pyeongtaek, Gokseong and at the headquarters in Gwangju. The flagship Gwangju factory also houses Kumho’s global Tech centre.

Kumho also opened a USD200mn factory in Vietnam’s Binh Duong Province in 2008. Initial capacity was 3.15mn passenger car tire (PCR) tires per year, with scope to increase to 13mn units.

That expansion has not gone as expected and actual production is estimated at 4mn units in 2016. The plant currently employs 2000, according to an interview with Mr Kang Young Kyu, Deputy General Director of Kumho Tire Vietnam Co., Ltd., published in a Vietnam newspaper in December 2016.

Kang said 90 percent of output from the Vietnam factory is exported to the United States.

As a final bonus, Kumho makes tires for the Korean military aircraft fleet as well as commercial airlines in Korea.

Benefits to Double Star

If the purchase goes through, it launches Double Star from nowhere into the second-rank of global passenger car tire manufacturers, and wins it immediate OE fitments on Korean vehicles, together with OE design experience and roadmaps for future rolling resistance and wet grip expectations.

Double Star has historically focussed on truck tires, so this would be a radical change for the Chinese management. It is possible they would copy the Pirelli model, splitting off the PCR activities into a separate company for re-launch on a stock exchange, but then I fail to see any synergies outside the PCR activity.

Aircraft tire capability

A second bonus would be to bring aircraft tire manufacturing to Double Star. China’s government is keen to develop a domestic aircraft tire industry to supply its military. Bringing that technology into State-owned Double Star would be seen as a substantial strategic benefit, no matter how old the Korean aircraft tire technology might be.

But the real bonus for Double Star and therefore the Chinese government, is to gain a global position. Kumho delivers this and without the same global brand reputation enjoyed by Pirelli.

As with Pirelli, we expect that a certain amount of the technology and marketing expertise will find its way into other Chinese tire makers with close links to the government.

Benefits to Kumho

At first sight, Kumho has little to gain, except the potentially deep pockets of a Chinese State-owned parent.

However, as noted above, the CCTV scandal of 2011 hit Kumho very hard in China. Prior to the scandal breaking in March 2011, Kumho had an estimated 20% market share for passenger car tires in China.

In the immediate aftermath, sales fell by 30 – 40 percent. The company fell into loss in China, and this exacerbated the financial challenges facing the Korean parent.

Many in the industry believe that the scandal was engineered by China State TV in an effort to rap the knuckles of a foreign-owned enterprise that was being too successful in the Chinese market.

It is hard to imagine a State-owned enterprise being subject to such public humiliation on Chinese TV. Under Double Star, Kumho stands to re-gain its strong sales position in China.

Meanwhile, (Macon factory aside) Kumho has suffered from lack of investment in recent years. Double Star, through government support could reverse that position and build the Kumho brand into a major tire maker once more.

It also stands to gain a truck tire business that can be used to build its portfolio of products around the world.

In Conclusion

I think that there is certainly potential for strong synergies in the two businesses. However, I have doubts about the abilities of the two managements to effectively merge the operations. There is, as they say, history between Korean people and the Chinese. Neither company has a track record in cross-cultural cooperation or a reputation for flexible, pragmatic management. On the contrary, both are seen as relatively rigid top-down management structures.

Overall, then, I first expect Kumho Asiana to find the money and acquire the shares. If that does not work out, I have some significant reservations about the success of the DoubleStar-Kumho merger, with the proviso that there are strong opportunities for both companies if they can make a success of this merger.

I would love to be proved wrong in the above analysis. If any reader has better insights, I would welcome the opportunity to discuss.

–David Shaw

This analysis is published in the current (20 January) edition of our weekly China Tire Intelligence newsletter.  Anyone interested in the China Tire industry should seriously think about subscribing.

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