What China Gains from Bailing Out Hummer

Nobody saw this one coming: An obscure Chinese company that doesn’t even build cars buys a troubled but iconic division from General Motors (GMGMQ.PK). Hummer, made famous by American G.I.s, Arnold Schwarzenegger and oversized U.S. consumers, will now be run by a construction-equipment company located 1,200 miles southwest of Bejing (and 8,000 miles from Detroit). It’s tempting to laugh it off as globalization run amuck.

Don’t. The Chinese may not be automotive experts (yet), but they’re smart and bold and they know a bargain when they see one. It would be foolish to dismiss the Hummer purchase by the Sichuan Tengzhong Heavy Industrial Machinery Co. as a rookie mistake or a hopelessly naïve investment. Instead, we should pay attention to how the Chinese see opportunity in a turbulent economy, and how they plan to take advantage of others’ distress.

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Tengzhong may be buying Hummer as a turnkey way of entering the global automotive market, and especially the surging market for cars in China, one of the world’s fastest-growing and potentially most profitable. But Chinese businesses—and the government that often supports them—also invest in Western businesses in order to learn how to run world-class enterprises. For a nation trying to leap into the ranks of the world’s most developed countries, it’s a pretty smart approach.

For a hint of how the Hummer acquisition might go, it’s worth examining Lenovo’s purchase of IBM’s Personal Computing division in 2005, for nearly $2 billion. At the time, Lenovo was well-known inside China but virtually unknown anyplace else. Then, overnight, it owned a global computing powerhouse, with responsibility for thousands of demanding corporate clients in virtually every part of the world. Some western analysts predicted that the startling deal would flop, fast.

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A few clients bolted, but most stayed on, reassured by the continued presence of IBM’s sales staff and management team. Lenovo gradually integrated engineers and managers from China into the old IBM group. The firm performed a “cultural audit” to figure out the differences between Chinese and western corporate culture. Instead of moving the operation to China, Lenovo retained the IBM PC division headquarters in North Carolina, while building up hubs in Beijing, Singapore, Japan, Europe, and other regions. An American CEO stayed at the helm during a four-year transition, but the Chinese CEO of the old firm eventually became head of the new Lenovo. The stock price, meanwhile, has performed on par with established competitors like Dell and Hewlett-Packard, and better in some instances.

That’s a huge win for China, since it has gained a firm foothold in a mature, global market where it had no meaningful presence beforehand. It also highlights the insistence of Chinese government officials—both national and regional—that homegrown companies expand beyond China’s borders. Other Chinese firms in industries like electronics, telecommunications and oil and gas have made similar lunges into global markets, often targeting regions like Africa and Latin America that western competitors might feel aren’t worth the trouble. That shows considerable foresight among Chinese leaders: They realize that true economic power and wealth these days must come from a global presence. Relying on your home-grown market isn’t enough, not even in China (or America).

[See how to find gold in a recession economy.]

It’s not clear what the strategy for Hummer is, but the prospects for success might be better than many want to believe. Like Lenovo, the new Hummer owners plan to keep the American managers in place for the time being. The vehicles will still be built and sold in the United States, preserving about 3,000 jobs—and building some goodwill toward the new proprietors. Tengzhong may expand sales in China, where Hummers are still somewhat exotic, and it could also sell the rugged vehicles to Chinese construction firms working on projects in Africa, the Middle East, and other regions. “It fits into government's strategy of encouraging private enterprises to go abroad,” says professor Baizhu Chen of the USC Marshall School of Business. “It has bought a piece of an American legend. The government has every incentive to make Tengzhong successful.”

It may also mark the beginning of a Chinese buying spree. Also for sale: Saturn, Saab and Volvo. Other Chinese firms, including some already in the car business, are among the bidders. Go east, young man.

Disclosures: none

Comments

[Harus:]

The pickup based Hummer has no future. The only sale happening is fire sale. Now if GM included a secret pact selling that chasis technology to Tengzhong that would be something else.

Why does Tengzhong want Hummer, Perhaps put the logo on their earth diggers ?

Lenovo wrote off $Billion losses on that IBM deal. What it gained is still unclear.

Jun 04 09:12 AM

[Spook:]

What if this is indirectly relate to military-industrial complex, remember, the Chinese military and government have patience to wait for their opportunities. Hummer is the commercial version of Humvee.

Remember the Russian aircraft carrier that was suppose to be purchase by an investor, drag it all the way to Hong Kong, then to China, which is by now being use as a mock up/training for future naval aviation.

Jun 04 09:48 AM

[john redmond:]

Sir, your article is right on. While the bunch of cabbages who presently are inshrined in the seats of power of the United States dream of turning this country into a carbon copy of the Old Soviet Union and enslaving this nation's childern and their future in a sea of unpayable debt, the clever Chinese are doing all the right things. As a child who was born during WW11 and grew up walking among men who were heroic giants, It is all I can do to keep my sanity in a day when people think they can have everything they want without having to work for it, by simply electing the right people to public office.

Jun 04 10:48 AM

[HaavBline:]

The Chinese clearly don't think Lenovo's purchase of IBM PC was a success. Lenovo may have learned some lessons after writing off Billions, after sinking back to #4 with a widening lag behind #3 Acer.

If you read the Chinese press, the Hummer deal appears even more of a surprise there than in the U.S. Tengzhong is obscure not just in the U.S., it is obscure in China too. There is juicy speculation who is the really financial backer behind the deal. Many analyst raised objections and concerns.

The goverment itself already have a stated policy discouraging the over 100 Chinese automakers to buy into whole car business such as Hummer, Saab, Volvo even though some Chinese automakers clearly have itchy fingers due to the fire sale price tag. The goverment policy planners do not believe any of the Chinese automakers currently possessed the management expertise to turn such aquisitions into success story, for very good reasons.

How will this deal end remains to be seen.

Jun 04 10:51 AM

[Flamecoach:]

How much is a household brand worth? For the $80 million that "Sichuan Tengzhong Heavy Industrial Machinery Co." invested, they can put "Hummer" on all their construction equipment they sell, and it will look as smart as "Tonka" in the truck aisle at Toys R Us.

Hummer is a recognized brand world wide. If things work out for Sichuan Tengzhong Heavy Industrial Machinery Co., they can then start building construction equipment in Louisiana. If not, they can take home their machinery and put the Louisiana factory up for sale.

For a company that builds construction equipment, the name alone was worth $80 million. That it includes an SUV factory and a dealer distribution network is really baggage.

Granted the brand "Hummer" fits on very few enterprises. But here, they score big. Good for Sichuan Tengzhong Heavy Industrial Machinery Co.

Jun 04 01:23 PM

[jimmy46:]

I think the chinese military made the push to buy Hummer,
the chinese army had always been large, but not mobile.

Jun 04 02:56 PM

[coreopsis:]

Deal ain't gonna happen -- it will be blocked by China, as it should be. Hummer is a piece of toilet merchandise, otherwise there'd be private equity buyers lined up for a small deal like this.

Jun 05 12:22 PM

[Nichalous Otto:]

Didn't the Chinese also come close to buying Maytag?

Jun 05 12:29 PM

[Know Nothin...:]

It is a philosophy of "I pick if others discard; I leave if others rush in". The use of Hummer is a small truck that runs in busy streets. Many cities and areas prohibit big trucks to pass-by in a busy day.
I think Hummer can serve the purpose as a sedan as well as a business use small truck.

Jun 05 05:57 PM