Supplier faces liquidation after losing GM's business, documents show

DETROIT — An auto supplier that opened to great fanfare five years ago in Southwest Detroit is almost certain to close.

Sakthi Automotive Group USA Inc. was the first new automotive parts supplier to open in Detroit in about a decade. The knuckle and steering arm supplier transformed a shuttered ArvinMeritor plant and planned to repurpose a 98-year-old former high school into a training center. It prioritized hiring Detroiters and also gave more than 200 parolees a second chance with employment.

The company even shifted 90 percent of its aluminum castings work to Detroit from overseas.

By 2020, Sakthi Automotive estimated, it would invest more than $100 million in the city. In turn, the state supported its expansion efforts with $5 million in grants, and Detroit waived property taxes and carved out a Renaissance Zone around the nearly 40-acre property to alleviate Sakthi from paying hardly any state or local taxes at all until 2031.

Sakthi Automotive emerged as a keystone to Detroit's manufacturing resurgence — garnering photo ops for executives with Mayor Mike Duggan and Michigan's then-Gov. Rick Snyder.

But behind the scenes, Sakthi Automotive's owners were battling over control while operations stumbled and financials tanked to the tune of about $1 million in losses per week during the spring and summer of this year.

The result was a lawsuit filed by Huntington Bank in March, putting the company into receivership, and the loss of its largest customer, General Motors.

Sakthi Automotive likely will liquidate its assets and shutter operations in the coming months, barring the emergence of a buyer, according to documents filed this month in U.S. District Court in Detroit.

Representatives from Sakthi Automotive did not return phone calls on the matter. Representatives from Duggan's office did not make themselves available to discuss Sakthi Automotive.

Sakthi Automotive was founded as a subsidiary of India-based conglomerate Sakthi Group to strengthen its operations in the U.S. Sakthi is best known for its commercial sugar operations in India as well as a logistics and auto dealership arm.

But Sakthi needed a cash infusion to meet customer demand after securing contracts with GM, Ford Motor Co. and Volkswagen Group. It sought a partner.

In May 2017, Thailand-based Aapico Hitech Public Co. injected $50 million into Sakthi Automotive for a 25.1 percent minority stake in the company and another $25 million in the form of a convertible loan, the Bangkok Post reported.

A year later, Aapico boosted its stake to a majority position of 49.99 percent for $25 million and a $40 million loan personally guaranteed by Sakthi Chairman Manickam Mahalingham and then-CEO Lalit Kumar, who also went by Lalit Verma in previous reports by Crain's Detroit Business, an affiliate of Automotive News.

Under the deal, Kumar's stake was lowered to 10 percent and Mahalingham's to 40.1 percent.

The investment secured greater management oversight over Sakthi Automotive, Aapico CEO Yeap Swee Chuan told the Bangkok Post.

Prior to the deal, Mahalingham terminated Kumar from the CEO position, placing himself as the top executive.

Kumar filed a lawsuit in Wayne County Circuit Court in March alleging shareholder oppression and mismanagement. In that suit, Kumar alleges he was removed as CEO in July 2018 before resigning completely from the company in January.

In the complaint, which is ongoing, Kumar alleges the company performed well, netting a profit of $4.4 million between January 2018 and June 2018 even after discovering "corporate theft" of $4.5 million through a financial review. In a phone interview with Crain's Detroit Business, Kumar said a ring of employees stole equipment from a warehouse and sold it, eventually resulting in an FBI investigation.

Kumar also alleges Mahalingham and Aapico grossly mismanaged the company following his departure, alleging a catastrophic loss of $18.9 million between his termination and the end of 2018.

"The other shareholders didn't understand the business," Kumar said in a call from London. "These guys started making decisions that were not in the best interest of the company. It was a complete mismanagement."

Neither Mahalingham nor Swee Chuan could be reached for comment. Emails to Sakthi Group in India and Aapico in Thailand received no response. Several calls to Sakthi's operations in Detroit went unanswered.

Meanwhile, lenders were not getting paid. In early March, Huntington Bank sent Sakthi Automotive a loan default notice and only weeks later filed its lawsuit in Detroit.

Huntington alleged Sakthi Automotive's losses stem from production inefficiencies, including spending more than $9 million on premium freight to meet customer shipments.

"...the defendants' ability to meet daily operating needs, including payroll is uncertain ... (Huntington's) line of credit to (Sakthi Automotive) is near the maximum permitted available amount ... (and) ... liquidity is impaired due to an inventory theft," the Huntington complaint said.

The complaint also alleges Sakthi diverted collateral obligated to Huntington and submitted inaccurate financial information to the bank.

As of March 22, Sakthi Automotive owed Huntington $19.1 million in loans and fees.

A month later, in April, Mark Fischer, GM's director of supplier financial risk mitigation, began meeting with Sakthi Automotive's COO in an attempt to right the ship.

Sakthi Automotive was projected to lose an average of $877,575 per week between May 3 and July 26, according to financial documents provided by the supplier to Fischer, which were submitted to the court.

Sakthi Automotive told Fischer that the company required a cash infusion of more than $14 million through July 26 to remain operational, according to Fischer's statement in the Huntington case.

GM already had loaned Sakthi Automotive $9.7 million to keep parts shipping.

Sakthi Automotive had secured a lucrative contract to supply parts for GM's next-generation T1XX platform for the Cadillac Escalade, Chevrolet Tahoe and GMC Yukon SUV.

Kumar told Crain's that Mahalingham and Swee Chuan had removed millions of dollars of Sakthi Automotive profits from the firm's holding company in the U.K. at this point, instead of investing in operations in the U.S.

"We needed money to launch the T1XX platform, but instead they took all the money out of the U.S.," Kumar said.

By May, Sakthi had stopped paying vendors, Fischer told the court. A month later, Weihai Bethel-Sakthi Automotive Safety Systems Co., another joint venture of Sakthi Group, threatened to stop shipping castings to Sakthi Automotive until it was paid $6 million in past-due bills, according to court documents.

By the end of June, Sakthi Automotive needed $25 million just to maintain operations, Fischer told the court.

Huntington, GM and other lenders petitioned the court to put the company into receivership.

After months of posturing and legal filings, U.S. District Judge Stephen Murphy appointed a receiver — Kevin English of Lark Advisors LLC — to oversee the finances and operations of Sakthi Automotive in May.

By September, Aapico emerged as the stalking horse bidder to acquire the remaining assets it didn't already own of Sakthi Automotive. A sale was expected to close on or before Oct. 15.

But during the negotiations between Aapico and its customers on how the deal would play out, English attempted to strong-arm GM into more favorable terms. English eventually ordered Sakthi Automotive to stop shipments of parts to GM. It's unclear if that was at the request of Aapico.

English did not respond to a request for an interview for this article.

The gamble went awry and GM pulled its work — representing 70 percent of all work performed by Sakthi Automotive — and resourced the business to Sakthi Automotive's competitors in the U.S. and China, according to a court document filed on Nov. 1.

"GM was forced to move its remaining business from Sakthi Automotive Group USA (SAGUSA) to a new supplier after the court-appointed receiver stopped shipping parts, jeopardizing GM vehicle production and putting additional jobs at risk," Nick Richards, GM's program operations and global purchasing and supply chain communications manager, said in an emailed statement to Crain's Detroit Business.

"This was a difficult decision, as GM has spent several months and considerable funds to try and keep SAGUSA as a viable supplier."

"Honestly, the receiver is not very smart," Kumar said. "If you're smart, you should know that GM was preparing to move its work if you gave them a reason. He gave them a reason and they protected their production. I don't blame them."

Two sources familiar with the situation said threatening GM was a dangerous play.

"Whether he thought he had leverage, I don't know, but that's Defcon 1," a source said. "You just don't do that unless you're prepared to burn it all down. It's a hot mess."

Sakthi Automotive is now largely out of options. With the loss of its largest customer, continuing operations seems impossible.

The receiver will now work with Sakthi Automotive, Huntington and other lenders to "develop a wind-down agreement." It's unclear whether the company will seek to liquidate assets in a Chapter 7 bankruptcy filing.

The common thread to Sakthi Automotive's investment in Detroit was second chances.

A year after opening its urban headquarters in 2014, Sakthi Automotive added a 15,000-square-foot plant to its headquarters to supply Ford. In 2015, Sakthi remodeled an 80,000-square-foot dilapidated city site near its headquarters to supply GM. It planned to redevelop the deteriorating Southwestern High School and its football field.

"We saw that this school closed down in 2012 and was up for sale," Deepak Bhalla, director of purchasing and facilities for Sakthi Automotive, told Automotive News in 2018. "We thought it was a good idea to buy it. It had more than 16 acres of land, and behind it, its football field had almost seven acres, which we could develop as a greenfield for a manufacturing facility."

Its commitment to hiring parolees garnered the supplier ample attention, including at a groundbreaking ceremony for a 60,000-square-foot plant to accommodate manufacturing steering arms for Volkswagen in 2017.

"Another year, another expansion, another 200 jobs — and Lalit, we're going to find you some more room," Duggan told the former Sakthi Automotive CEO.

At that time, Sakthi Automotive told reporters in attendance that it employed 202 parolees. Sakthi Automotive received incentives to hire parolees through a state program called Community Ventures.

"They definitely want a second chance," Bhalla told Automotive News. "They made a mistake in the past for which they were incarcerated, and then they're not getting hired by people. We have found that, given the proper opportunity and training and everything, parolees could be good employees. We believe everybody deserves a second chance."

Those employees will now have to find another second chance elsewhere.

As for the tax incentives Sakthi Automotive received, taxpayers probably won't get a second chance at getting their money back. The state will likely become just another creditor.

Sakthi Automotive received the entire $3.5 million Michigan Business Development Program grant by creating 350 jobs. The MEDC confirmed to Crain's that the grant included a provision to repay the state if those jobs were eliminated.