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To check out the companies’ announcements on this deal, I visited the website of the Chinese company, Sichuan Tengzhong Heavy Industrial Machinery Co., located in China’s Sichuan province. I found only a brief announcement: “Industrial machinery company to invest in growth and global expansion of premium off-road vehicle brand; deal is expected to secure over 3,000 U.S. jobs.”
This sketchy description raises a number of confusing questions.
First, why did GM choose Tengzhong? It is a private enterprise that produces equipment for road, bridge and building construction, and for the energy industry. It is not a professional automotive company. Then why did GM “marry off” the Hummer brand to a non-automotive manufacturer? Although GM has declared bankruptcy, which lowered the brand’s value, wouldn’t it be easier to get a professional Chinese or Middle Eastern automotive company?
Second, what does Tengzhong gain from Hummer? According to Tengzhong, it will own the right to use this brand and acquire Hummer’s top management and operations team. Besides, Tengzhong will take over all current contracts with dealers in the Hummer’s sales network. On the other hand, as part of the deal, Tengzhong will be able to discuss and negotiate with GM long-term contracts in terms of assembly, components and materials supplies.
Note that “using” the Hummer brand is not the same as “owning” this brand, to say nothing of gaining the Hummer’s production technology. The automobile industry involves a long production chain, from manufacturing parts to assembly to sales. Each link in the chain is significant. Having the right to use the brand name Hummer does not mean you have bought the Hummer. It appears that Tengzhong is playing with words.
Third, what is the price of this deal? Two figures have been reported – one is US$100 million, the other is $500 million. If Tengzhong bought the Hummer brand for $100 million, it’s a more reasonable price. But if the price was $500 million, then Tengzhong is just squandering money.
In April, the international market evaluated the Hummer’s value at less than US$200 million. So logically, only a very high bid price would justify GM’s decision to cooperate with an unknown Chinese enterprise.
Fourth, how does this purchase relate to China’s automotive industry? As is widely known, the Hummer’s high-powered engine requires high energy consumption, which is one factor that contributed to GM’s bankruptcy. Like the dinosaur in prehistoric times, the Hummer is bound to perish in the energy-saving era. The vehicle does not comply with the Chinese government’s policy of encouraging energy conservation. Therefore, the Hummer purchase is off track in relation to China’s auto industry.
Fifth, did this deal have government approval? According to reliable information, Tengzhong did have support from a certain level of government. But if this is true it is confusing, as the Hummer does not comply with the development trends of China’s auto industry or the energy and environmental protection trends the world car industry is promoting.
The bankruptcy of GM in the United States is reshuffling the holdings of every player in the world auto industry. The Chinese automotive industry could gain by purchasing some technology, component production lines or even some brands – but not by purchasing the Hummer.
Sixth, if this deal succeeds, will it be financially worthwhile? There are many moneybags in China without much education. Therefore a showy brand like the Hummer could have decent sales in China, and in the Middle East, where the biggest markets exist. At least the business is unlikely to lose money.
The world’s biggest market for luxury cars has recently shifted to China, where the newly rich are fond of showing off their wealth. Tengzhong has a good eye for this.
Finally, I am led to two simple conclusions about this purchase.
First, Tengzhong has not really purchased the brand Hummer. It is in reality just a matter of buying shares and making an investment, since the headquarters and production lines of the Hummer will both remain in the United States.
More directly speaking, this is nothing but a publicity exercise for Tengzhong. Its connection with Hummer has made people around the world aware of this Chinese company, which was originally unknown even at home. Even if this deal falls through later, Tengzhong will still have won a big name.
Second, Tengzhong’s Hummer deal should not become a model for the Chinese auto industry to imitate. In its efforts to gain a bigger share of the world auto industry, China should not simply buy rejects from the U.S. industry. Even if the city of Detroit, capital of the U.S. auto industry, were moved to China, it could not meet world standards of auto production.
Rather than trying to copy the U.S. model, the Chinese auto industry should strive to develop new energy-saving vehicles. In this area every player in the world is standing at the same starting line.
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(Ma Guangyuan is a senior lawyer in Beijing. He holds a PhD in economics, and his expertise is in capital markets, listed companies and public policy. His commentaries are published in several Chinese newspapers. This article is translated and edited from the Chinese by UPI Asia.com; the original can be found at http://blog.sina.com.cn/s/blog_558acfe80100ejde.html ©Copyright Ma Guangyuan.)
