One of my favorite things about writing this blog are the emails I get from readers. Many many months ago, I got a quasi-anonymous email from someone in Moberly, Missouri. The mail dealt with a plan by the City of Moberly and the “show me” State of Missouri to bring in and heavily subsidize a Chinese company to build, own and run a plant to make a sweetener that would be called Sweet-O. The email set out some facts about the Chinese company and the overall deal and then asked me what I thought.

A series of emails followed between us and by the time they had finished, I was pretty certain that the wool was being pulled over the politicians eyes (imagine that?) and that the odds were that this deal would prove disastrous.  I do not remember what all it was that caused me to so clearly conclude this, but as I best recall, I think it tied in to the fact that the Chinese company involved in the deal just seemed so improbable for it. If I recall correctly, another aspect of the deal that troubled me was how little was known about the Chinese company and its owner and how quickly everything was happening. More than anything, it just didn’t seem right to me. I have been “doing deals” for a long ime and I was not getting a sweet scent from this one. I also sensed that my e-mailer was a down to earth common-sense Midwesterner (maybe I watch too many movies?) and his methodical dislike of the deal no doubt influenced me as well.

I wanted to write something on the deal at the time, along with my prediction that these politicians were being taken for a ride, but I was not able to come up with any real facts to back me up and politicians being taken for a ride is hardly news in any event.

I am writing this post today because I got an email today from the same person, with the usual economy of speech. It says, in full, as follows:

Mr. Harris,

Mamtek International defaulted on its first payment to the City of Moberly (Missouri). It seems they left their Moberly offices over a month ago. Apparently Mamtek has named a new interim president who is a “restructuring” attorney known for liquidations, Peter Kravitz.

Construction is nearly complete on the facility.

Wow.

I again go to the Internet for the back-story. This time there is real news.  The Columbia, Missouri, newspaper has a story, entitled, “Sweet-O deal going sour? Moberly on hook if firm defaults,” and in plain talk it makes clear that the news ain’t good:

A company that promised 600 jobs and drew Gov. Jay Nixon to Moberly to announce $17.6 million in state aid is in financial trouble and could potentially stick the city with payments on a $39 million bond deal.

Mamtek International Ltd., a company with Chinese and American ownership, planned to make sucralose, a zero-calorie sweetener at the facility. The $65 million deal, ballyhooed at the start by former Gov. Bob Holden, chairman of the Midwest U.S.-China Association, was put together in 73 days last year and was supposed to include $8 million in private investment.

Moberly issued $39 million in bonds to build the Mamtek factory, buy and install the equipment and take care of other items necessary for the company to begin production. It was supposed to have put 116 people to work — perhaps as early as late last year, according to early reports — and double that employment within 18 months.

Mamtek was supposed to make payments to Moberly so it could in turn pay the bondholders.

“I found out today that they are apparently in default and it is a serious issue for the state of Missouri and the city of Moberly, and I intend to find out how that happened and what can be done about it,” Sen. Kurt Schaefer, R-Columbia, said yesterday afternoon. Schaefer’s district includes Randolph County.

Moberly City Manager Andy Morris would not confirm that the city is stuck with bond payments. But the company has troubles, he said. “The company is going through some financial reorganization, and we are trying to work with them to help them along,” Morris said. “That is really about all I can tell you.”

So why am I writing about this and how is this relevant to you?

I am writing about it because it appears (having only “seen” this from afar I do not know) that the government fell into three classic traps. First, it appears that various governments got overly excited about the possibility of getting Chinese money. It appears it fell prey to the classic “China is rich. We want money. Therefore this is a good deal” syndrome. Second, it appears nobody conducted adequate due diligence. Were the very valid suspicions of my e-mailer ever checked out? I doubt it. I have no idea if my e-mailer ever raised her/his suspicions with City Hall, but having dealt with governments, I can only imagine how they were treated. Can you say groupthink? Third, the deal was rushed. The Columbia paper noted how it all went through in “73 days, far less than the six months or more usually needed to conclude such a deal.” Rushing a deal does not mean it will fail, but it certainly increases the chances.

Seems there are some lessons to be learned.

What do you think?

For some serious and fascinating background on this story [link no longer exists], I urge that everyone check out this article by Janet Morales, of the now defunct (and there is a story behind that too) Moberly Mirror. I do not know what happened in Moberly, but i have spent enough of my life dealing with governments to know that the Moberly Mirror’s description sounds spot-on.

  • John Heath

    73 days to close? I wonder what their budget for diligence was. I wonder what their budget for diligence will be for transactions in the future.

  • TLD

    Fascinating post. I am always hearing of small town mayors going off to China and I have always wondered what they come back with. I just assumed it was nothing. It just never occurred to me that it might be less than nothing.

  • As you are aware, most individuals not experienced with business in Asia fall into the same traps. I have too many clients that seem to prefer the game more than the win.
    This is more often the case, when someone is only spending other people’s money.
    Sad story.

  • SteveLaudig

    I look forward to the usual dance of no responsibility that almost always takes place in the U.S. when these execrable events occur. There is a Kabuki-style, pass-the-buck, [the buck never stops here, to paraphrase a famous Missourian], no-one-will-be-held-accountable, theatre that will play out. It causes me to wonder what would happen should this con have taken place in China with all the roles reversed. I suspect some malefactors would be in prison already and perhaps some on their way to the “gallows”. I’ve changed my opinion regarding executions. Formerly an abolitionist I am of the opinion now that for some crimes [those of sufficient magnitude in terms of $, or RMB] that take a lot of planning that executions may well have a deterrent effect and that Americans [for reasons of race and class] cannot be trusted to even-handedly apply the punishment. I once had dinner with a middle-class Chinese family and during dinner the discussion turned to the recent news that a thieving Chinese mayor had been executed. The wife, a school teacher, shrugged her shoulders and said words to the effect “What’s one corrupt bureaucrat, more or less? After all he stole from all of us” indicating her approval of executions. That started me thinking. Imagine the cooperation Madoff would be providing in locating missiing assets should he be under a suspended death penalty as is done in China?

  • William

    So if the Chinese side never had much interest in making this deal work, what did they stand to gain from letting it proceed? Were they too polite to tell the overeager Moberly folks they weren’t very serious about the venture? Were they letting the American side take all the risk and do all the work on the off chance that everything would all work out somehow, leaving them with part ownership of a profitable enterprise?

  • Having, lived an hour from Moberly for most of my life, this both disappoints me, yet doesn’t shock me at all. Us MidWesterners are too trusting at face value. I do notice though in my time in China there seems to be a lack of China professionals from the MidWest (not counting Chicago). This seems like a great case study for Midwestern states to start recruiting China experienced people. I hope other companies there can learn from this, but as this case pointed out (with the lack of Due Dilligence), I doubt it

  • JS

    According to IndustryWeek, “Mamtek sought to expand its operations from Fujian, China, into the United States to capitalize on America’s reputation for manufacturing quality.” First of all, any business that operates principally in Fujian should be immediately suspect, as that is the number one shadiest province in China. Second, you can find Mamtek’s Chinese name from their patent filings and HK company registration (瑪特科國際有限公司 or 玛特科国际有限公司). A quick search of this company in Chinese yields some information: the company may have invested in a sucralose venture in Changsha in 2007 and is described as “Canadian.” In 2008, they may have invested USD 20 mm in a Fujian production base in Wuyishan, Fujian. Unfortunately, there is no information to indicate that either of those planned investments actually occurred, which would have been fairly critical for the folks in Moberly to look into. I’m guessing they didn’t… There is even less information available about “武夷山市玛特科食品有限公司” in Fujian. The company obviously has patents for some sort of sucrolose extraction process and has trademarks for “Sweet-O” in the U.S. and China, but it sure seems like a couple of guys are running around peddling their sucralose extraction patent into some lucrative financing opportunities.

  • Concerned Citizen

    Thanks for pointing out the lessons to be learned. I am on the city council of a much bigger city and I fear we are about to do the same thing. I am going to use your article as further evidence as to why we need to bring in experts.

  • Thank you for bringing this important but localized story to attention. This story should be shared with every economic development agency in the US. It is not the only time this has happened.
    Did the State of Missouri check with the US Embassy in Beijing or use the US Commercial Service to run a background check on the Chinese company?

  • Sohna McCartney

    @JIm Box. That’s a good call. The US Commercial Service website for China is http://export.gov/china/

  • Two Questions:
    – Where is Moberly?
    – Do they have a Monorail yet ( http://www.youtube.com/watch?v=AEZjzsnPhnw )?

  • Alan

    I read that article on the Moberly local government. Doesn’t sound all that different from the way government is done over here in China and it sure sounds like that was part of the problem.

  • John Yang

    Many things are unclear. But there are a few things for sure:
    Moberly didn’t do their due diligence. And they don’t understand how to work Chinese.
    Media have limited information and don’t really know what’s going on behind. I do think folks in Moberly are stupid enough to be simply cheated. There are also Americans listed as owners (Ely Malkin) and CEO (Bruce Cole) for Mamtek, no single Chinese is mentioned.
    Mamtek International is not a recognizable name in sucralose industry. There only two possibilities:
    1. It’s a fake company.
    2. It is shell company. I can not believe anyone would invest in such a big project without sucralose background. It is quite likely a shell company registered by a sucralose manufacturer (the Mirror don’t know who is behind Memtek). Of course, the Mirror and CCM won’t find the company registration in China since usually these type of companies are registered in some offshore tax heaven such as Virgin Islands.
    It is critical for Americans to understand how Chinese think. They have cash but they not just a rich dude. It is not easy to get them spend the money. There cheaters in China; there are companies manufacture dangerous products, but they not mainstream either.

  • Ticktocklh

    Who will pay the many $$$$$$ the contractors are owed on this project.  Some may go out of bussiness due to this.  What a shame.