Some mysteries about a Chengdu company’s offer to buy GM’s Hummer vehicle have been answered. But questions remain.
Li Zengxin, Li Weiao and Liang Dongmei 19 June 2009
(Caijing Magazine) The bulky, brassy Hummer is one of the world’s most conspicuous sport-utility vehicles, but the Chinese company that plans to buy the brand from bankrupt General Motors Corp. has been somewhat shrouded in mystery.
Yet Caijing has learned that the suitor -- specialty truck and equipment builder Sichuan Tengzhong Heavy Industrial Machinery Co. -- has ties to a low-profile businessman as well as a minerals company that raised HK$ 1.2 billion in an IPO just two weeks after GM announced plans to sell Hummer.
Moreover, Tengzhong’s ability to close the deal has been questioned by analysts who wonder whether the private company can get the necessary financing and sell Hummers to wealthy Chinese consumers, or the military.
Tengzhong’s winning bid, details of which were not disclosed, apparently beat offers from Indian automakers Tata Motors and Mahindra Group, as well as a bid from the investment firm Societe de Participation Financière Eidos Canada Inc.
A GM deal with Tengzhong would fit the fallen U.S. auto giant’s plan to restructure while retaining at least some jobs and production at GM plants. Selling Hummer is one step in the automaker’s race to scale back and survive after filing for bankruptcy June 1. The transaction is expected to be finalized by the third quarter.
Nevertheless, the global auto industry has been surprised that a relatively unknown Chinese company would try to buy, let alone win, the iconic Hummer. Some have compared the challenge facing Tengzhong to “a snake trying to swallow an elephant.”
“A lot of issues need to be discussed before the formal agreement is signed,” said Wang Shusheng, a senior executive at the law firm Butzel Long. “It’s still possible that Tengzhong could be replaced by other buyers.”
Ownership Structure
Details about Tengzhong’s ownership and finances are scanty. But Caijing learned from Sichuan Province business sources that the company is controlled by entrepreneur Li Yan, 55, a Sichuan native now living in Hong Kong.
Li generally keeps a low profile but is known as chairman of Lumena Resources Corp., the world’s second largest producer of mirabilite, a key laundry soap ingredient. U.S.-based Procter & Gamble is the company’s biggest customer.
Cayman Islands-registered Lumena (HKSE: 0067), launched an IPO on the Hong Kong Stock Exchange on June 16. The stock debuted at HK$ 2 a share and closed the day at HK$ 2.38, raising HK$ 1.2 billion from investors. It was Hong Kong’s largest IPO so far this year.
Li, who also uses the name Suolang Duoji, declined to speak with reporters at the exchange on the day of the IPO.
Li’s Tengzhong is not listed, although last year the company revamped its ownership structure and increased its registered capital to 300 million yuan from 210,000 yuan. It also changed its name from Sichuan Tengzhong Electric Co. and took over a road construction machinery firm from China Communications Construction Co.
Tengzhong’s 4,800 employees manufacture fuel tankers, dump trucks, tow trucks and fire trucks. The company also makes structural components for highways and bridges, as well as oilfield equipment.
In addition, Li is the largest stakeholder in Sichuan Huatong Investment Co. which, along with a businessman named Yu Hong, launched Tengzhong in 2005.
Tengzhong bought Sichuan Changdian Electric Co. in 2005 and Guangyuan Construction Machinery Group a year later. Now, in addition to working on a deal for Hummer, Tengzhong is in the process of buying the Gansu Lantong Machinery Plant.
Marketing Challenge
But can Tengzhong successfully market giant Hummers, which dwarf most cars now rolling down Chinese roads, on the domestic front? Perhaps, thanks to the company’s hometown edge.
Chengdu, the capital of Sichuan, is not only Tengzhong’s headquarters but also at the heart of Hummer’s major Chinese market. According to Cui Dongshu, deputy secretary-general of China’s National Passenger Car Association, “most Hummer customers in China come from Chengdu and Zhejiang,” a province in the country’s east.
Cui said “a major reason for Tengzhong to buy Hummer might be its attempt to get a share of the booming auto market in Sichuan.”
The association reported passenger vehicle sales in Sichuan rose 50 percent in the first four months of this year from the same period 2008, outpacing the national average growth of 25 percent.
Cui told Caijing that owners and potential owners of Hummers in China are rich, insensitive to price, and attracted to the brand because it advertises the driver’s wealth. Cui admitted, though, that the brand may lose some status value following a change of ownership.
And Hummer’s declining sales globally point to Tengzhong’s risks outside China. GM sold just 38,000 Hummers worldwide last year, down 42 percent year-on-year, according to the company’s report. Sales in the first five months of 2009 were off more than 63 percent to 5,113 units.
Wu Jinghui, a senior manager at the consulting firm A.T. Kearney, said Hummer has consistently failed to find a way to turn its fame into sales to offset high manufacturing costs.
Former Volvo China CEO Wu Yuzhang told Caijing the brand’s popularity peaked when oil prices were low, and that future sales are likely to be weak.
A former senior executive for an international automaker’s China operations, who asked not to be named, told Caijing that Tengzhong’s takeover will succeed “only if a god runs it.”
Tough Challenges
A senior financial executive in Sichuan told Caijing several commercial banks have shown interest in financing Tengzhong’s deal, including China Merchants Bank and Citic Bank. A European bank is also helping Tengzhong.
But financing and consolidating operations will be major challenges for Tengzhong, which has no direct experience in the auto business. Sources said the company may not spend much to buy Hummer, but operation costs will be high.
Tengzhong agreed to take over Hummer’s more than 3,000 employees who, according to Kearney’s Wu, are paid relatively well. Moreover, he said, dismissing Hummer workers in the United States could be costly.
The Tengzhong-GM agreement appears to rule out vehicle assembly in China, at least for the time being. That would prevent Tengzhong from benefiting from low wages in China and avoiding Chinese tariffs of 40 percent on imported vehicles with engines larger than 4 liters.
GM announced the memorandum of understanding to sell Hummer on June 3. The deal calls for a contract manufacturing arrangement in which GM commits long-term to provide assembly and components for Hummers.
Tengzhong and GM said in a joint statement that Hummer’s senior management team and dealer network would remain in place.
But Tengzhong may have trouble consolidating cultures. Independent auto analyst Zong Shi noted that even major Chinese automaker Shanghai Automotive Industry Corp. failed to turn around South Korea’s Ssangyong.
Military Option
Some analysts think Tengzhong might succeed if the Hummer deal includes a military component. They wonder whether Tengzhong may be able to sell military vehicles to the People’s Liberation Army.
A senior manager at Citic Bank in Sichuan, for example, told Caijing he thinks military sales will determine the success of the deal.
Indeed, the military market may suit Tengzhong: The company’s Web site says it is officially qualified to produce military hardware. That qualification could lay a foundation for future military vehicle production.
Formally, there is no military component to the deal with GM. Hummers are entirely civilian vehicles, despite similarities to a military version called Humvee made by a separate company, AM General LLC.
According to analyst Zhong, the most valuable of Hummer’s assets is the H1 model military vehicle, whose main customer is the U.S. Department of Defense. But this model was discontinued in 2006 and excluded from the deal with Tengzhong.
As a result, the Citic Bank manager said financing the takeover would be “highly risky for banks... if there are no military orders and if lenders don’t know what’s in the confidential agreement between Tengzhong and GM on core technologies and equipment.”
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High Hopes for Hummer’s Curious Suitor
Some mysteries about a Chengdu company’s offer to buy GM’s Hummer vehicle have been answered. But questions remain.
Li Zengxin, Li Weiao and Liang Dongmei
19 June 2009
(Caijing Magazine) The bulky, brassy Hummer is one of the world’s most conspicuous sport-utility vehicles, but the Chinese company that plans to buy the brand from bankrupt General Motors Corp. has been somewhat shrouded in mystery.
Yet Caijing has learned that the suitor -- specialty truck and equipment builder Sichuan Tengzhong Heavy Industrial Machinery Co. -- has ties to a low-profile businessman as well as a minerals company that raised HK$ 1.2 billion in an IPO just two weeks after GM announced plans to sell Hummer.
Moreover, Tengzhong’s ability to close the deal has been questioned by analysts who wonder whether the private company can get the necessary financing and sell Hummers to wealthy Chinese consumers, or the military.
Tengzhong’s winning bid, details of which were not disclosed, apparently beat offers from Indian automakers Tata Motors and Mahindra Group, as well as a bid from the investment firm Societe de Participation Financière Eidos Canada Inc.
A GM deal with Tengzhong would fit the fallen U.S. auto giant’s plan to restructure while retaining at least some jobs and production at GM plants. Selling Hummer is one step in the automaker’s race to scale back and survive after filing for bankruptcy June 1. The transaction is expected to be finalized by the third quarter.
Nevertheless, the global auto industry has been surprised that a relatively unknown Chinese company would try to buy, let alone win, the iconic Hummer. Some have compared the challenge facing Tengzhong to “a snake trying to swallow an elephant.”
“A lot of issues need to be discussed before the formal agreement is signed,” said Wang Shusheng, a senior executive at the law firm Butzel Long. “It’s still possible that Tengzhong could be replaced by other buyers.”
Ownership Structure
Details about Tengzhong’s ownership and finances are scanty. But Caijing learned from Sichuan Province business sources that the company is controlled by entrepreneur Li Yan, 55, a Sichuan native now living in Hong Kong.
Li generally keeps a low profile but is known as chairman of Lumena Resources Corp., the world’s second largest producer of mirabilite, a key laundry soap ingredient. U.S.-based Procter & Gamble is the company’s biggest customer.
Cayman Islands-registered Lumena (HKSE: 0067), launched an IPO on the Hong Kong Stock Exchange on June 16. The stock debuted at HK$ 2 a share and closed the day at HK$ 2.38, raising HK$ 1.2 billion from investors. It was Hong Kong’s largest IPO so far this year.
Li, who also uses the name Suolang Duoji, declined to speak with reporters at the exchange on the day of the IPO.
Li’s Tengzhong is not listed, although last year the company revamped its ownership structure and increased its registered capital to 300 million yuan from 210,000 yuan. It also changed its name from Sichuan Tengzhong Electric Co. and took over a road construction machinery firm from China Communications Construction Co.
Tengzhong’s 4,800 employees manufacture fuel tankers, dump trucks, tow trucks and fire trucks. The company also makes structural components for highways and bridges, as well as oilfield equipment.
In addition, Li is the largest stakeholder in Sichuan Huatong Investment Co. which, along with a businessman named Yu Hong, launched Tengzhong in 2005.
Tengzhong bought Sichuan Changdian Electric Co. in 2005 and Guangyuan Construction Machinery Group a year later. Now, in addition to working on a deal for Hummer, Tengzhong is in the process of buying the Gansu Lantong Machinery Plant.
Marketing Challenge
But can Tengzhong successfully market giant Hummers, which dwarf most cars now rolling down Chinese roads, on the domestic front? Perhaps, thanks to the company’s hometown edge.
Chengdu, the capital of Sichuan, is not only Tengzhong’s headquarters but also at the heart of Hummer’s major Chinese market. According to Cui Dongshu, deputy secretary-general of China’s National Passenger Car Association, “most Hummer customers in China come from Chengdu and Zhejiang,” a province in the country’s east.
Cui said “a major reason for Tengzhong to buy Hummer might be its attempt to get a share of the booming auto market in Sichuan.”
The association reported passenger vehicle sales in Sichuan rose 50 percent in the first four months of this year from the same period 2008, outpacing the national average growth of 25 percent.
Cui told Caijing that owners and potential owners of Hummers in China are rich, insensitive to price, and attracted to the brand because it advertises the driver’s wealth. Cui admitted, though, that the brand may lose some status value following a change of ownership.
And Hummer’s declining sales globally point to Tengzhong’s risks outside China. GM sold just 38,000 Hummers worldwide last year, down 42 percent year-on-year, according to the company’s report. Sales in the first five months of 2009 were off more than 63 percent to 5,113 units.
Wu Jinghui, a senior manager at the consulting firm A.T. Kearney, said Hummer has consistently failed to find a way to turn its fame into sales to offset high manufacturing costs.
Former Volvo China CEO Wu Yuzhang told Caijing the brand’s popularity peaked when oil prices were low, and that future sales are likely to be weak.
A former senior executive for an international automaker’s China operations, who asked not to be named, told Caijing that Tengzhong’s takeover will succeed “only if a god runs it.”
Tough Challenges
A senior financial executive in Sichuan told Caijing several commercial banks have shown interest in financing Tengzhong’s deal, including China Merchants Bank and Citic Bank. A European bank is also helping Tengzhong.
But financing and consolidating operations will be major challenges for Tengzhong, which has no direct experience in the auto business. Sources said the company may not spend much to buy Hummer, but operation costs will be high.
Tengzhong agreed to take over Hummer’s more than 3,000 employees who, according to Kearney’s Wu, are paid relatively well. Moreover, he said, dismissing Hummer workers in the United States could be costly.
The Tengzhong-GM agreement appears to rule out vehicle assembly in China, at least for the time being. That would prevent Tengzhong from benefiting from low wages in China and avoiding Chinese tariffs of 40 percent on imported vehicles with engines larger than 4 liters.
GM announced the memorandum of understanding to sell Hummer on June 3. The deal calls for a contract manufacturing arrangement in which GM commits long-term to provide assembly and components for Hummers.
Tengzhong and GM said in a joint statement that Hummer’s senior management team and dealer network would remain in place.
But Tengzhong may have trouble consolidating cultures. Independent auto analyst Zong Shi noted that even major Chinese automaker Shanghai Automotive Industry Corp. failed to turn around South Korea’s Ssangyong.
Military Option
Some analysts think Tengzhong might succeed if the Hummer deal includes a military component. They wonder whether Tengzhong may be able to sell military vehicles to the People’s Liberation Army.
A senior manager at Citic Bank in Sichuan, for example, told Caijing he thinks military sales will determine the success of the deal.
Indeed, the military market may suit Tengzhong: The company’s Web site says it is officially qualified to produce military hardware. That qualification could lay a foundation for future military vehicle production.
Formally, there is no military component to the deal with GM. Hummers are entirely civilian vehicles, despite similarities to a military version called Humvee made by a separate company, AM General LLC.
According to analyst Zhong, the most valuable of Hummer’s assets is the H1 model military vehicle, whose main customer is the U.S. Department of Defense. But this model was discontinued in 2006 and excluded from the deal with Tengzhong.
As a result, the Citic Bank manager said financing the takeover would be “highly risky for banks... if there are no military orders and if lenders don’t know what’s in the confidential agreement between Tengzhong and GM on core technologies and equipment.”
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