Tuesday, February 23, 2010

Why is this Hummer Deal Taking so Long? (Updated)

Last June, news first surfaced that General Motors (GM) had found a buyer to take its much loved and hated Hummer brand off its hands. The prospective buyer, Sichuan Tengzhong, a maker of heavy equipment came from out of nowhere to make a bid for the Hummer brand. (Please see previous posts on Tengzhong here and here.)



Auto industry related people I spoke with in China at the time told me that the CEO of Tengzhong was friends with the heads of a lot of mining companies who are also customers of Tengzhong's heavy equipment. Most of the miners favored Hummers as their personal vehicles, so Tengzhong's CEO jumped at the opportunity to grab the American icon. Of course, this was only hearsay.

As of today, the Hummer deal still has yet to be approved by China's Ministry of Commerce which has the authority to approve outbound investment by Chinese companies. Why is it taking so long?

This article by Patti Waldmeir of the Financial Times contains a few quotes that very nicely sum up the reason:
Producing the hulking Hummer, with its image of wasteful excess, could hardly be less consistent with Beijing’s pro-green automotive policies, said Mike Dunne of Dunne & Co, an Asia-based automotive consultancy: “For them to approve the Hummer deal would be a big contradiction”.

The deal would violate not just Beijing’s environmental goals but also the government’s insistence on consolidation in the Chinese car industry, which has up to 100 carmakers, according to Yale Zhang of CSM Automotive in Shanghai.
Beijing isn't against purchase of foreign auto companies and assets, as can be seen by its support for Shanghai/Nanjing Auto's purchase of MG-Rover in 2007, and more recently, BAIC's purchase of Saab technology and Geely's (ongoing) attempt to buy Volvo from Ford.

Beijing's problem with the Hummer purchase is very simple: it violates policy. Support, or lack thereof, doesn't appear to stem from whether an auto company is state-owned or private (BAIC and Geely, are, respectively, an SOE and a private company), but from whether a potential deal conforms to central government policy. The current policy in force calls for both improvements in the environmental impact of automobiles and consolidation of China's many automakers into fewer, larger companies that will be more competitive on a global scale.

So that's the end of it, right?

Not quite. Apparently Tengzhong remains so keen to get its hands on Hummer that it will try an end-around. This article from Reuters reports:
"Tengzhong has not given up hope yet to win government approval, but buying Hummer through an offshore investment vehicle could be an option if it can't get the green light," said a source close to the deal, who asked for anonymity due to the sensitivity of the issue.
So Tengzhong could, theoretically, establish an offshore entity to purchase Hummer. And as long as Hummer production isn't brought onshore, there wouldn't be a problem. But then Tengzhong would lose the ability to take advantage of China's lower cost labor force. Tengzhong could also run into issues with a sorely disappointed Central Government when trying to import Hummers manufactured abroad.

Furthermore, the offshore route will probably require the use of foreign exchange (which, again, is controlled by the Central Government) to complete the deal -- that is, unless GM could be persuaded to sell Hummer for non-convertible Chinese Renminbi.

If I had to bet, I'd say this deal isn't going to happen.

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UPDATE: About 24 hours after I posted the above, official word has come from GM. The Tengzhong deal is off, and Hummer will be wound down.

While this may sound like the end for Hummer, there may still be a faint glimmer of hope. GM has previously said the same of both Saturn and Saab after their respective deals fell through. Though Saturn is indeed being wound down, Saab was rescued at the 11th hour by Dutch investor group Spyker Cars.

And now Sichuan Tengzhong can return to the obscurity from whence it came.