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Hummer of a challenge for Chinese firm

By Li Fangfang (China Daily)
Updated: 2009-06-04 07:20

Scooping up the Hummer brand from bankrupt General Motors was the easy part.

The difficulty for China's Tengzhong Heavy Industrial Machinery Co, Ltd now is convincing critics it was the right move.

"It's a good time for Chinese companies to acquire overseas brands as the assets are relatively cheap because of the industry downturn," said Garry Wang, China M&A specialist with consulting firm Mercer LLC. "But remember, an acquisition only works when it matches the company's long-term strategy."

Tengzhong, a four-year-old Chengdu-based industrial machinery maker, announced in a joint statement yesterday it will pick up the rights to the Hummer brand from GM for an undisclosed price. According to GM's bankruptcy files, Hummer's value was around $500 million, Bloomberg reported yesterday

"From the point of view of business strategy, it might be a good deal for Tengzhong to buy Hummer right now," Wang said.

Not so, according to other domestic analysts, who poured downright scorn on Tengzhong. Marketing specialist Wang Yukun called Tengzhong's move "childish". Financial commentator Ye Tan described it as "unpromising".

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The Hummer, seen as a gas guzzler, has been faced with slumping sales.

According to the joint statement, Hummer will continue to maintain its headquarters and operations in the US, and will continue to be managed by its existing leadership team, which intends to expand Hummer's dealer network worldwide, particularly into new and under-served markets such as China.

"In the first six months to one year, Tengzhong should avoid any changes to the senior management team, as it would be quite difficult for a Chinese company with no overseas market experience to merge a global brand," Wang suggested.

Tengzhong is one of the largest privately-owned enterprises in Chengdu, capital of Sichuan province. It specializes in making special-purpose vehicles and heavy machinery for the construction of roads and bridges and for the energy industry.

The company has been active in domestic mergers and acquisitions in recent years. It reportedly owns two manufacturing facilities in the suburbs of Chengdu, with a total of 4,800 employees.

Hummer is headquartered in Detroit, Michigan. It produces Hummer H1 and H2 models in Mishawaka, Indiana, and H3 models in Shreveport, Louisiana and Port Elizabeth, South Africa. It also has a production facility in Russia for the licensed version of H2.

"The Hummer brand is synonymous with adventure, freedom and exhilaration, and we plan to continue that heritage by investing in the business, allowing Hummer to innovate and grow in exciting new ways," Yang Yi, the chief executive of Tengzhong, said in a statement released by GM.

"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 US."

The transaction is expected to close in the third quarter of this year and is subject to closing conditions and regulatory approvals.

James Taylor, Hummer chief executive officer, said that if successful the deal will allow Hummer to embark on a more aggressive global expansion.

According to financial information website Hexun.com, the forces behind Tengzhong's move may actually be Sichuan Huatong Investment Holding Co and US-based investment bank Morgan Stanley. Morgan Stanley acted as the financial advisor for Huatong in a $200-million bond issuance for one of Huatong's subsidiaries in 2008, Hexun quoted unnamed sources as saying.

As to whether Tengzhong should attempt to produce the Hummer locally, Zhong Shi, an independent auto industry specialist, told China Daily that he thought it "unworthy and difficult" to move the manufacturing facilities from the US to China.

But it will be an good idea if Tengzhong could introduce some of Hummer's technology, especially its chassis design, into its vehicle construction to meet the needs of the Chinese market, lower manufacturing cost and raise efficiency, Zhong added.