Doubts Over GM's Hummer Sale To China

[1969pontiac]

Another Chinese company may lose money on a foreign automaker.


HONG KONG--Why is a Chinese company with no apparent car experience looking to buy General Motors' Hummer brand? That is what some Chinese analysts are asking. If past cases are any indication, China's Tengzhong faces significant challenges in successfully absorbing a Western brand like Hummer.

General Motors ( GM - news - people ), which filed for bankruptcy Monday, said Tuesday that it signed a tentative agreement to sell its Hummer sport utility vehicles unit to China's Sichuan Tengzhong Heavy Industrial Machinery. The U.S. automaker touted the memorandum of understanding with privately held Tengzhong, saying it would preserve American jobs and help the company emerge from bankruptcy. But the deal has observers in China worried.

"It will be difficult for Chinese to develop this well," said Liu Sheng Wang, Shenzhen-based analyst for China Merchant Securities, citing cultural barriers and differences in management.

Tengzhong will keep Hummer's core management and operations team and existing dealership network, according to the agreement. It will also clinch a long-term agreement to become a GM supplier. Tengzhong, which is based in Chengdu, in southwestern China's Sichuan province, manufactures heavy industry vehicles, highway and bridge components, construction machinery and energy equipment.

Tengzhou will invest in Hummer's brand and research and development to "allow Hummer to better meet demands for new products such as more fuel-efficient vehicles in the U.S.," according to a company statement. The companies did not disclose the price tag being negotiated.

It remains unclear how research and development and technology transfer will work, Liu said. "There have been no successful cases in the past" of such acquisitions. SAIC Motor's control of South Korea SUV maker Ssangyong Motor, which filed for bankruptcy in February, was a costly "defeat," he said.

Others agreed. "Tengzhong has no passenger auto experience" and faces a two-fold challenge, said Li Chunbo, Beijing-based analyst for CITIC Securities.

While China's affluent class is growing rapidly and China looks set to be the first major economy to emerge from the global slump, the Hummer will be a difficult sell in China. GM will want to keep manufacturing based in the U.S., saying the Hummer deal would preserve 3,000 U.S. jobs, but that would inhibit Tengzhong from making Hummers more affordable by switching to cheaper Chinese labor, he said.

"If the cars are built in the U.S. and sold to China, that will be good for American employees, but the Hummer won't successfully enter the Chinese market," Li said. Hummer SUV's cost over $70,000, or about 478,000 yuan, which is more than what the average so-called affluent Chinese household makes in a year. Tengzhong's options are to maintain the U.S. plants or to partially move assembly to China, while complete relocation is only a possibility in the distant future, according to Li.

Whether U.S. customers will still want to buy a Chinese-owned brand is another issue, he added. The company's expertise in heavy industry won't contribute to the manufacturing and marketing prowess of the luxury SUV brand, Liu said.

Hummer does have some advantages in China though. The "Chinese are not as environmentally conscious as American consumers so Hummer does not face the same consumer backlash," said Shaun Rein, head of China Market Research Group. Hummer sales started sliding in the U.S. several years ago on criticism of gas-guzzling engines. Meanwhile, pump prices are state-regulated in China and kept more stable, and average drives in China are not as long in the U.S., so gas costs may be lower, Rein added.

GM has had trouble selling Hummer amid last year's credit freeze and the uncertainty over GM's fate. This deal would represent the first Chinese purchase of a brand from the Detroit Big Three. There is also speculation that Geely is looking at Ford Motor's Volvo unit.