In this week’s BusinessWeek magazine, Susan Berfield has a superb – if unsettling – story about the challenges the small town of Moberly, Missouri has been facing regarding a failed investment by the Mamtek Company.  Susan was generous enough to include a quote from yours’ truly after she and I spoke about a piece I had written for Asia Times on the scandal.  The focus of my column was more on how the city and the state’s economic development office could have better evaluated the opportunity and how they could have better structured their risk by getting more people around the table from the Chinese government who had a vested interest in seeing a credible deal go through.

 

What jumps out in my research and Susan’s much more thorough piece, is how little due-diligence was done by those who should have.  It is such a simple insight, but one that bears repeating:  you will never, ever regret spending money up-front vetting a potential partner or running a deeper due-diligence process on a particular fatal flaw in your international strategy.  In the case of this sort of vetting procedure in China, or other emerging economies for that matter, the process you need to go through isn’t as clear-cut as we experience in the developed West.  In emerging economies, you are looking for reputational, not just financial, information.  You might be able to get a D&B or S&P report on the company in question, but in an emerging economy, it probably doesn’t reflect the set of books that you care most about.  A superb piece on this was recently run by Dan Harris over at ChinaLawBlog that goes into more detail on the sorts of operational details that can make a deal that once looked like a great idea instead get passed over.

 

None of this is to say that if the Mamtek deal had been fully vetted the outcome would have been any different:  after all, the city might have looked at all the unknowns and simply said to themselves, “we need the jobs, we have to take this risk, it’s our best shot.”  Sometimes the due diligence process will result in a deal getting killed, and sometimes it will simply illuminate the risks so those making the decision can manage those risks as they move forward.  My guess is that the deep dive on Mamtek would have shown that the technology was not ground-breaking, that the plans they were showing investors were likely plans for a turn-key facility like those already in existence, that the book of business either did not exist at all, or did not exist at the levels the plan projected, and that the financing was not secured.  The very little bit of due diligence that was done showed that Mamtek had moved out of its factory – a factory which it was unclear whether they had ever been manufacturing product from in the first place – and that their only China location appeared to be in an office park.

 

Moberly is out tens of millions of dollars, which is troubling enough; however, I am equally bothered by the potential of a story like this to be perceived by politicians, economic development officers, and the public at large as an indictment either of pursuing Chinese investment into their communities, or of the EB-5 program which played a small – and inconsequential – role in this scandal.  As Mary Poppins said, “a teaspoon of sugar helps the medicine go down.”  The teaspoon of sugar here is to do your due diligence:  bite the bullet and get it done properly and fully.  There really is no way around this.