China's Buying Hummer Brand From General Motors

Sichuan Tengzhong Agrees to Purchase Hummer From GM (Update1)
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By saudi-nicevehicle
Oct. 10 (Bloomberg) -- China’s Sichuan Tengzhong Heavy Industrial Machinery Co. agreed to buy the Hummer brand from General Motors Corp., adding sport-utility vehicles to a product lineup that includes bridge parts and construction equipment.

Tengzhong will have an 80 percent stake through an investment group with entrepreneur Suolang Duoji, who will hold the rest, according to a statement on GM’s Web site. The sale is worth $150 million, people familiar with the deal said Oct. 8, about 70 percent less than GM valued it in court.

Acquiring Hummer propels Chengdu, China-based Tengzhong, a privately owned industrial manufacturer, into the passenger- vehicle industry. Chief Executive Officer Yang Yi said he wants to grow the business beyond the U.S. market, which accounts for about two-thirds of the brand’s sales.

“We are really looking to expand our global reach to tackle some of the high-growth markets, particularly the China market, in which we expect to enjoy explosive growth,” Yang said yesterday through a translator in an interview.

Disposing of Hummer is a victory for GM in its post- bankruptcy restructuring after the sale of the Saturn unit to Penske Automotive Group Inc. fell through last week. GM is shutting Saturn and Pontiac and is close to a deal with Sweden’s Koenigsegg Group to acquire the Saab brand.

Hummer plans to resume exports to China, Europe, the Middle East and Russia, CEO Jim Taylor said in an interview. It will probably take five to six months to adapt vehicles to Chinese regulations before Hummer can export in any significant numbers, Taylor said.

“Tengzhong may not get a deal as good it appears to be, as there are a lot of questions to be answered, for instance, we don’t know much Tengzhong needs to pay for the use of Hummer’s manufacturing technology and what other are strings attached,” said Zhang Xin, a Beijing-based analyst at Guotai Junan Securities Ltd. “Then there’s the regulatory hurdle of getting the license to import and sell the car in China.”

Staying in Michigan

Hummer will remain based in southeastern Michigan, starting with about 100 to 150 people, Taylor said. The next step would be to hire about 200 engineers, he said. The company plans to continue contracting with GM for vehicle production from plants in Mishawaka, Indiana, and Shreveport, Louisiana, for two to three years, Taylor said.

Tengzhong and Hummer executives will meet in China next week to determine product, manufacturing and expansion plans, Taylor said. The brand has been profitable, Taylor said, and he expects it to continue to make money.

Hummer plans to ramp up exports before exploring assembly in China, pending the appropriate regulatory approvals, Taylor said. He expects Hummer to follow the typical pattern of importing to China in small numbers, then send almost fully assembled vehicles for final assembly in the country, then send kits for assembly and finally produce most of the car in China.

“It will be a gradual process,” Taylor said. “It takes three to four years to accommodate.”

Protecting Jobs

Rising gasoline prices helped erase U.S. demand for the full-size SUVs made by Hummer, whose value Detroit-based GM had projected at $500 million in court documents earlier this year. GM left Chapter 11 on July 10 and is keeping its Chevrolet, Cadillac, Buick and GMC brands in the U.S.

Tengzhong and GM had said the accord would protect more than 3,000 U.S. corporate, manufacturing and dealership jobs. The sale agreement caps talks that Tengzhong had disclosed in June.

Hummer’s dealer accords and senior management team will be taken over by Tengzhong, the maker of special-use vehicles, structural parts for highways and bridges, and construction machinery.

Tengzhong plans to apply for Chinese regulatory approval once a binding agreement with GM is made, said a person familiar with the matter.

Duoji, Tengzhong’s investment partner, has holdings that include Hong Kong-based Lumena Resources Corp., in which he holds a 38 percent stake, according to Bloomberg Data.

Credit Suisse is the financial adviser and Shearman & Sterling LLP is international legal counsel to Tengzhong. Citigroup Inc. is advising GM.

Declining Demand

GM bought the license for the Hummer brand from AM General in 1999 and started selling the $140,000 H1, a 7,600-pound (3,400-kilogram) SUV patterned after the all-terrain military vehicle popularized for road use by actor Arnold Schwarzenegger, who is now California’s governor.

H1 production ended in 2006, when Hummer’s U.S. deliveries peaked at 71,524, according to Autodata Corp. U.S. sales of the SUVs fell 51 percent in 2008, when retail gasoline reached a record $4.11 a gallon, and 63 percent this year through September. The cheapest model, the H3, starts at about $31,000.

A liter of regular gasoline costs 5.88 yuan (86 U.S. cents) in Beijing, compared with 65 U.S. cents in the U.S.

To contact the reporter on this story: Katie Merx in Southfield, Michigan, at kmerx@bloomberg.net

Last Updated: October 10, 2009 03:46 EDT

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