On June 2, a day after it filed for bankruptcy protection, General Motors Corp. said it reached a memorandum of understanding (MOU) to sell its Hummer brand to a privately held Chinese company – Sichuan Tengzhong Heavy Industrial Machinery Co., Ltd. (Tengzhong).
According to the MOU, Tengzhong will acquire the rights to the Hummer brand, retain Hummer’s senior management and operational team, and assume Hummer’s existing dealer agreements. An agreement on future contract assembly and key component and material supply with GM is also expected.
Financial terms are still under discussion, GM said. The deal, which is subject to regulatory review and is expected to close in the third quarter of 2009, “will help secure 3,000 jobs in the U.S.,” if successful.
If the deal goes through, it would be the first time that a Chinese company acquires a U.S. vehicle brand.
Tengzhong who?
Tengzhong’s bid for Hummer comes as a surprise to most industry observers. The little-known Sichuan-based construction equipment manufacturer suddenly attracts the eyeballs of the world.
Local Chinese media rushed to Tengzhong located in Xinjin Industrial Park of Chengdu, capital of Sichuan Province but found little information there. “Nobody is allowed to talk about the deal and the company,” said a receptionist, referring all inquiries to the company’s public relations firm in Hong Kong.
On June 8, a week after announcement of the deal, Tengzhong finally began communicating with the media via its special website page about the transaction.
Tengzhong is a privately-held company which makes special-purpose vehicles, highway and bridge structural components, construction machinery and energy facilities. The company admitted that it has no experience in making or selling passenger vehicles, and that it would be the first time for the company to run an overseas plant if the deal goes through. It plans to use Hummer as a platform to enter the luxury off-road vehicle segment, considered to be the company’s long-term strategy. It also said that it would leverage the company’s R&D resources and develop new vehicle product lines, especially more fuel efficient off-road vehicles.
Analysts believe that the modest-size company may have stronger financial backing for the deal. Established in 2005, Tengzhong has kept acquiring state-owned enterprises of heavy machines and equipment since its establishment, at a pace of one year a deal. Currently, it is buying another state-owned engineering company in Gansu Province.
“Those acquisitions prove that Tengzhong had strong financial backing,” Wang Hexu, an engineering industry analyst, was quoted as saying by a local newspaper, the 21st Century Business Herald. “The fund needed to purchase Hummer may very well come from profits of the business owners in other industries.”
Tengzhong admits that the company is owned by several individual investors, and it will acquire Hummer through an investment company along with other private investors. Zhao Xiaolu, spokeswoman of Tengzhong, told Beijing Times that, besides their own money, a part of their investment will come from bank loans, but she did not disclose specifics.
Who is behind?
Yan Li, reputed to be one of the richest people in Sichuan Province, is said to be the person behind the Tengzhong-Hummer deal. Li founded Sichuan Huatong Investment Co., Ltd. (Huatong), which controls the biggest share of Tengzhong.
Established in 1996, Huatong now has four subsidiaries and mainly runs business in chemistry and engineering. Its net assets are claimed to be worth ¥1.5 billion ($217 million). Sichuan Huatuo, one of Huatong’s main subsidiaries, has been seeking a U.S. stock listing in recent years, but has not moved along as smoothly as they hoped. The company is known as one of the main researchers and producers of high-tech materials in China. Morgan Stanley has spent $80 million to take 20 percent stake in Sichuan Huatuo and helped it raise $200 million in early 2008, said 21st Century Business Herald.
In fact, Morgan Stanley acts as one of the advisors of the Hummer deal, reports said. “Tengzhong became interested in buying Hummer at the beginning of last year at suggestion of Morgan Stanley,” an insider told Beijing Times.
Last March, the City of Deyang hosted a delegation for an automotive project, the paper said. The delegation included Yan Li, Hummer CEO James Taylor, Huang Zheng from Credit Suisse and Tang Xianping from China’s CITIC Group. Credit Suisse is acting as exclusive financial adviser to Tengzhong.
The paper said both Sichuan provincial and local governments back the deal and are trying to help Tengzhong find a partner in the automobile sector. They have talked with Chang’an Group and Dongfeng Motor Corp. But Zhou Wenjie, Dongfeng group vice president, denied at a forum on June 6 that the company was involved.
Why Hummer?
Although Tengzhong said it had been planning to enter passenger vehicle manufacturing, analysts doubt the value in acquiring gas-guzzling Hummer at a time when China and the global automobile industry are moving toward fuel efficient and new energy vehicles. The U.S. brand, synonymous with financial excess and poor gas mileage, has lost favor with consumers since sales peaked in the early 2000s.
“We have been in talks with these guys for over six months,” Hummer CEO James Taylor told Automotive News in an interview. “The reality is in China you have folks that are willing to make investments all over the world and they go on a world search for a business that would be complementary for them. They see a lot of growth potential with this brand both inside and outside of China.”
The multipurpose, off-road vehicles came from Humvee, the originally model built by AM General for the U.S. armed forces. GM bought the civilian Hummer brand in 1999 and went on to sell the H1, H2 and H3 civilian models.
The Hummer SUVs costs roughly $31,000 at the low end and up to about $72,000 with options. The brand has struggled over the past few years as oil prices rose, with sales declining more than 50 percent in 2008.
GM earlier said the automaker had expected Hummer to fetch more than $500 million when it went up for sale in June 2008, but the sale could not proceed on “reasonable terms” due to tight credit and concerns about the automaker.
Both GM and Tengzhong decline to disclose the sale price of the Hummer. “It dose not cost $500 million as rumored. But we are not going to announce the specific price immediately,” said Zhao.
Investment bankers have said Hummer would fetch about $100 million in cash, much lower than the initial expectations of $500-$750 million.
“We will be investing in the Hummer brand and its research and development capabilities, which will allow Hummer to better meet demand for new products such as more fuel-efficient vehicles in the U.S.,” said Yang Yi, general manager of Tengzhong.
Tengzhong said it will maintain Hummer’s headquarters and operations in the U.S., and will retain Hummer’s existing management team. The team intends to expand Hummer’s dealer network worldwide, particularly into new and underserved markets such as China. The new owner will consider building plants in China or other countries outside the U.S. in the future, according to Tengzhong’s statement.
In addition, the company will not be responsible for paying Hummer’s debts, the statement said.
“The new Hummer will transfer to green vehicles. The first model will be the HX, 3.6 liter with gasoline, with diesel and hybrid options,” Yang Cheng, general manager of a Hummer dealership, told 21st Century Business Herald.
But that would involve huge investment, much more than the purchase price. “GM once proposed plans of technological reform on the Hummer vehicles, but only stayed on concept level. Technology breakthrough and market exploration will need enormous investment, which is a big burden for GM, let alone a private company like Tengzhong,” Zhang Yu, auto analyst from CSM Greater China, was quoted as saying by the paper.
Zhang cautioned that domestic banks should be more careful if Tengzhong wants to finance through bank loans on this deal.
“Hummer’s executives have talked with us many times,” Geely chairman Li Shufu told Xinhua News Agency on June 7. “But we are not interested in it. The Hummer brand does not have much market potential, and is not in accordance with our development strategy.”
Will the deal be approved?
Surprisingly the Obama Administration has spoken highly of the deal. White House spokesman Bill Burton said it was “good news” because the sale helps secure 3,000 jobs in the U.S. Although Hummer has nothing to do with the military version, it uses the same engine, according to a U.S. engine expert.
Tengzhong’s general manager Yang Yi said the company is “in the middle of the approval process” in China. It needs support from three different Chinese government agencies governing overseas investment, economic planning and foreign exchange.
New rules that came into effect May 1 require a number of approvals before Tengzhong and GM can sign a binding agreement. The rules stipulate that overseas investments of more than $100 million require central government approvals, while provincial governments can sign off on smaller deals.
Central government agencies expected to review the deal include the Ministry of Commerce, the National Development and Reform Commission and the State Administration of Foreign Exchange.
While the company appears to have ties in the local governments, it will not likely translate to clout on the national level. Local government’s support does not include explicit financial support, said a source close to the deal.
Key criteria is said to include whether the company will be able to fund the purchase and succeed in developing the business. The other issue involves the national government’s decision to control the number of new entrants into automobile assembly in an already crowded market.
“The central government may disapprove such a deal,” Jones Zhong, veteran auto analyst and editor of CBU’s Chinese newsletter Qiche Yaowen, told CBU/CAR in a telephone interview. “Tengzhong will have difficulties in explaining the future prospective of the deal. Moreover, the government would be concerned about domestic banks’ involvement in the high risk business at a time of financial crisis.”
China has also made it a national strategy to encourage the development and commercialization of fuel efficient and new energy vehicles. Numerous laws, regulations and tax measures have recently been adopted in favor of fuel efficient, small displacement and new energy vehicles. Vehicles with engine displacement larger than 4 liters, for example, are subject to a 40 percent consumption tax in addition to the 25 percent import tariffs.
But the little known Tengzhong and its owners may also have connection or backing in the central government that people are unaware of.