A Chinese company's bold bid for General Motors Corp's Hummer brand has brought few accolades - instead more expression of doubt and dispute.
Sichuan Tengzhong Heavy Industrial Machinery Co Ltd, a small and before-obscure local company with no background in automobile manufacturing, said it will be the owner of the world's most celebrated off-road vehicle brand Hummer.
It signed a Memorandum of Understanding with GM, parent of Hummer, on June 2 to acquire the rights to the Hummer brand along with the senior management and operational team, just one day after the US auto giant filed for bankruptcy protection.
However, a China National Radio report from Sichuan on Friday said that the National Development and Reform Commission, China's top industry watchdog, would possibly derail the deal because it clearly broke government guidelines.
The report said that Tengzhong lacked auto industry expertise and the oil-guzzling Hummer vehicles did not follow China's energy-saving policy.
Tengzhong's bid staggered the imagination of many - a Chengdu-based privately owned industrial machinery group only four years old taking over the gas-guzzler, which was put on the sales block a year before GM's then-CEO Rick Wagoner.
According to Hummer CEO Jim Taylor, both sides are currently enjoying "honeymoon", with the actual transaction expected to close in the third quarter, subject to customary closing conditions and regulatory approvals.
Both sides decline to disclose the value of the deal, but foreign media have variously reported the estimated price at $100 million and $500 million.
Hummer will maintain its headquarters and operations in the US, and will continue to be managed by its existing leadership team. The team intends to expand Hummer's dealer network worldwide, particularly into new and underserved markets such as China.
Suspicions
After a short period of excitement and pride that a premium automotive brand will be owned by a Chinese company, the deal soon aroused suspicion.
The biggest question is how Tengzhong, a local company established in 2005 with registered capital of just 300 million yuan, can take over international brand Hummer with price tag 10 times that.
As well, the transaction if successful will secure more than 3,000 high-paying jobs in the US and require Hummer to embark on a more aggressive campaign of global expansion.
With a US autoworker salary package averaging about $70 an hour, Tengzhong will need pay more than $400 million to US employees each year.
Tengzhong has refused to reveal any information about its source of capital or the real dealmaker. Its CEO Yang Yi continues to repeat that "we are capable of achieving the final deal".
"The public should not judge a private company's financial capability from its registered capital," Yang said. "We have the resources for the Hummer deal from our own capital and also funding from financial institutions."
Chinese media report that Suolang Duoji, who also has the name Li Yan, who partly owns the parent company of Tengzhong, put his own money into the Hummer deal.
His plastic manufacturing company Lumena Resources was listed in Hong Kong on June 16, which boosted Li's wealth by HK$315 million ($40.6 million).
Management integration and culture clash are also worries for the Tengzhong-Hummer marriage.
Financial commentator Ye Tan described it as "an unpromising deal".
"There are few successful cases of this kind in cross-industry mergers owing to different practices, experience and cultural backgrounds. I am not optimistic on the deal's future also because Tengzhong has no overseas market experience," she says.
Garry Wang, China M&A specialist with consulting firm Mercer LLC, is also skeptical.
"It is a challenge for Tengzhong to attract and retain top staff after the acquisition," said Wang.
The deal "doesn't seem to be useful to Tengzhong", said Wang Qing, deputy director of the market economy research department of the Development Research Center of the State Council. "It will be a huge challenge for it to consolidate Hummer's resources as the company has a totally different cultural background."
Indeed, auto history is strewn with the wreckage of failed cross-cultural deals.
Even Western automakers have difficulty in blending different styles, management and languages, as shown most recently by the 2007 breakup of Daimler and Chrysler.
In 2004, Shanghai Automotive Industry Corp (SAIC) paid $500 million for a 49-percent stake in South Korea's Ssangyong Motors. The latter went bankrupt this January, making SAIC's investment a total failure.
In December 2007, India's small car maker Tata won bids at auction for Jaguar and Land Rover, two luxury brands under Ford. But the future of the two ailing brands remains clouded and neither contributes profit to Tata.
Yet both Hummer and Tengzhong said they are confident on their handshake, for they reached agreement on the operation and management of the new Hummer.
"All I need is cash," said Taylor. "We were looking for companies with the resources to fund our future development and keep the brand and dealers alive. It's better for Tengzhong to be a capital investor of Hummer, just like Warren Buffet's being shareholder of China's BYD Auto."
He thinks the deal is "a perfect fit": Tengzhong will get an auto business and GM will get the brand off its books.
"We are not planning to be involved in the daily operations of Hummer. We have full confidence in Hummer's current management team," Yang said.
As a symbol of ecological irresponsibility, the Hummer itself is criticized because it runs counter to the Chinese government's vow to create an economical and green society.
"The brand image of Hummer as a luxurious gas-guzzler does not fit China's determination for energy conservation," said Ouyang Minggao, director of department of automotive engineering of Tsinghua University. "It is risky for a private enterprise that has no experience in passenger vehicle production to acquire such a brand because in the future there will be regulations that will restrain demand for such vehicles."
Yang counters that Tengzhong "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 US."
"The Hummer of tomorrow is not as the same as the Hummer of today," said Taylor. "It has to be more fuel efficient, it is a must, and with a (new) investor we are going to change the image of Hummer."
A number of Chinese companies are among the international buyers casting their eyes on brands for sale, including Volvo, Opel and the just-sold Saab.
"It's good time for Chinese companies to acquire overseas brands as the assets and brands are available at relatively low prices in the industry downturn. But remember, the acquisition must match the company's long-term development strategy," said Wang of Mercer.
(China Daily June 29, 2009)
