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Hummer acquisition: Off-road or way off track?
By John Bonnell (China Daily)
Updated: 2009-06-29 07:54
Almost two months ago, few people in China's automotive industry had heard of Sichuan Tengzhong. Today the company is recognized across not only China's automotive industry, but the global automotive industry as well. That's a phenomenal accomplishment for a company that has never built passenger car. Sichuan Tengzhong captured the world's interest when it announced on June 2 its plan to purchase the Hummer brand from bankrupt General Motors Corp. Since then, government officials, industry executives and automotive analysts alike have scrambled to learn more about the acquiring company, and to understand the implications of the company's plans. For all the prominence Tengzhong gained from the announcement, the acquisition of Hummer is not a significant development for China or China's automotive industry. Set aside the fact that Tengzhong has no experience in the automotive industry. If Shanghai Automotive Industry Corporation (SAIC), a company that will produce 1.9 million vehicles this year, were taking on Hummer, the move would still be considered insignificant within China's automotive industry. After all, the move runs counter to the prevailing trends in the industry. Guided by explicit direction from Chinese policymakers, China's automotive industry is feeling pressure to consolidate, deliver smaller engines, provide more fuel-efficient drivetrains and give higher consideration for the environment. A Hummer acquisition fails on each of these fronts. Insignificant move In our view, it's not likely that Sichuan Tengzhong is looking to enter - in a meaningful way - China's fiercely competitive automotive industry. Besides the would-be challenge of gaining approval from Beijing, profits in China's automotive industry are increasingly scarce. Companies with many years of experience in the industry are losing money, despite the fact total industry volumes continue to grow at a rapid pace. This situation is likely to continue until the industry consolidates into fewer, more efficient players. As a privately owned company employing private capital, Sichuan Tengzhong's main objective is a return on its investment. This is somewhat different than the State-owned enterprises that control many of the other top automotive competitors in China. These companies consider employment and overall economic development as well as profits when making investment decisions. For Tengzhong, it's profits. Tengzhong surly recognizes the challenge it would be to enter and profit from China's automotive industry. And therefore, it most likely has something else in mind with Hummer. Now let's consider the fact Sichuan Tengzhong has no experience in the automotive industry. With an acquisition of Hummer, its automotive experience goes up, but not by a whole lot. Hummer is a toy for the very wealthy, principally in the US, where it sold 80 percent of 35,000 global sales in 2008. As a stand alone, Hummer makes for a small company. Hummers are produced and will continue to be produced for the undetermined future by General Motors and American General in the US. According to reports, Tengzhong will keep production as is and source the product. In other words, the manufacturing experience stays with the current owners.
With this in mind, it's hard to place any significance on an acquisition of Hummer in terms of China's position in the global automotive industry. In contrast, a Geely acquisition of Volvo Car or a winning bid by Beijing Automotive Industry Corp for the Opel business in Europe would hold much more significance. Volvo and Opel are much larger companies. An acquiring company of either of these two brands would gain greater scale, broader product know-how and a much wider skill set than with Hummer. Enjoying media coverage So what is Sichuan Tengzhong up to? It could be that Tengzhong's goal has already been met. While negotiations between General Motors and Tengzhong move from Memorandum of Understanding to signed contract, Tengzhong is enjoying fabulous media coverage. There is speculation that management will pursue a public offering in the US, and that the exposure facilitates the listing. The company itself has expressed confidence in its ability to improve the fuel efficiency and therefore the appeal of Hummer. This should be seen more as a confidence in other companies' ability to improve fuel efficiency because Tengzhong does not specialize in engine technology or alternative energies. By providing capital that was not otherwise available under General Motors, Tengzhong states its intentions to broaden the distribution reach of Hummer. But it will take revolutionary changes to fuel economy, a lot of capital and a lot of patience to build Hummer's appeal outside of the US. And without control of the production, this seems risky for a company from China's Sichuan province. From our perspective, Tengzhong is most likely interested in expanding on its current specialty vehicle business. The Hummer's strength is in its roots. The offspring of an intense, go-anywhere off-road vehicle called the Humvee, the Hummer is designed to perform best in rough terrain: snow, ice, desert, rocks, and mountains. With an existing business in specialty vehicles, this is the area a company like Tengzhong could gain the most from purchase of Hummer. By taking the refinement out of Hummer, and moving it back toward its natural character as a specialty off-road vehicle, a wide range of commercial and military applications open for Hummer and opportunities open for the newly famous Sichuan Tengzhong. John Bonnell is senior director of JD Power Asia Pacific Forecasting (China Daily 06/29/2009 page1) |
