Hummers In China

Ever since the initial announcement that a little-known, special purpose vehicle maker in Sichuan Province had agreed to buy Hummer from bankrupt General Motors, news regarding the proposed deal has been scarce.

The early reaction was that it was a deal that the Chinese government might very well block. After all, it runs counter to every message that the Chinese government wants to convey to the outside world about its burgeoning auto industry–that China wants to emphasize the design and manufacture of smaller, fuel efficient vehicles. Everything that the Hummer is not.

Although it already has 4,800 employees, Sichuan Tengzhong Heavy Industrial Machinery Co., is not a recognized name in China’s auto industry. I had never heard of it in all my years dealing with the commercial vehicle industry, despite the fact that we were very active in this segment, and at various points in time, had two factories in Sichuan. Tengzhong was only established in 2005 and has grown through a series of mergers. News reports describe it as a private company, but it appears to have a great deal of local government backing. Tengzhong makes special-use vehicles, highway and bridge structural components, construction machinery and energy equipment.

In its announcement on June 2, General Motors said that the buyer of Hummer, whom it did not initially identify, would contract to build the H3 model SUV and the H3T pickup truck at GM’s plant in Shreveport, Louisiana, through at least 2010. In addition, GM said the investor would fund future vehicles for Hummer and invest in alternatives to the heavy gas-guzzling engines that are the hallmark of the brand.

While it’s tempting to think that the leaders at Tengzhong must have completely lost their minds to take on a company whose products are so counter to prevailing trends and whose sales in the United States have fallen by two-thirds in the first four months of this year, I have found in my years in China that there are usually reasonable explanations for what may seem like bizarre events. What could they be in this case?

Cheap technology, for one. Despite the gas guzzling characteristics of the Hummer, it is an all-terrain vehicle with valuable technology. Reportedly, General Motors had hoped to get $500 million for the company only a year ago. Tengzhong’s price may be as low as $100 million. If the cash losses at the Shreveport plant can be capped in some reasonable way (admittedly a big if), it may be a very cheap price to pay for difficult-to-find technology.

Manufacturing in China to lower costs is also likely part of the plan. GM’s statement that the buyer had committed to manufacture the Hummer in Shreveport at least through 2010 begs the question as to what happens afterwards. My guess is that it moves to Sichuan Province, where that $71,000 price tag can be reduced dramatically. Small volume vehicles typically do not entail expensive automation and are a natural for China with its low labor costs. I was recently on a panel at the JP Morgan Conference in Beijing with a senior executive from Geely, who said that his company is making the London Taxi Cab at one-half of what it costs to manufacture the vehicle in Coventry.

There is a need in China for vehicles that can handle the country’s harsh terrains. It’s not surprising that a Sichuan company would make this purchase. Sichuan and its neighboring provinces have some of the most inhospitable terrains anywhere in the world. I saw it first hand when I visited many of Mao’s Third Front factories in 1993, and we all saw it in the pictures last year of the devastation caused by the earthquakes in that part of China. Local governments could be big purchasers of the vehicle, particularly if the price can be reduced by manufacturing in country.

The military may also be a big potential market. The Hummer was first developed as the “Humvee,” a multipurpose, off-road vehicle by AM General for the United States military. GM bought the Hummer brand from AM General in 1999. AM General still produces the Humvee for the U.S. armed forces, and with all that is going on in the world today, it can’t make them fast enough. Presumably the technology is the same, and Tengzhong can tap into a big market with the Chinese military.

Finally, never underestimate conspicuous consumption in China. Five or six years ago, a Hummer was showcased at the Beijing Auto Show. I’ve never seen so many people gathered around one vehicle. A great deal of money has been made in China, and many of the newly rich will simply have to have a Hummer.

Those leaders at Tengzhong may be on to something after all.

2 Responses to “Hummers In China”

  1. June 19, 2009 at 12:52 am

    Mr. Perkowski,

    I found your blog via “The Truth About Cars”, and I am enjoying it very much.

    The Hummer deal puzzled me too for two reasons:
    1. The H2 and H3 platforms and technology are basically borrowed from valuable products in the GM and Isuzu line-ups. At best Sichuan Tengzhong Heavy Industrial Machinery Co. (STHIM Co.) would be able to “rent” the right to make the engines and 4wd systems… but they will not own them.
    2. The H1 is not owned by GM. GM can’t sell it to STHIM Co. GM only owns the right to market the vehicle to the civilian market. AM General still owns H1 vehicle, the assembly line, patents, and the right for all military sales. This limits the value for STHIM.

    So STHIM Co. really only owns the Hummer name, the US dealers (who are ready to sue if they are closed), and what ever parts of the Yukon and GMT355 truck platform patents GM/Isuzu was willing to share with STHIM Co.

    So what is the value of this declining Hummer brand?

    I think what might be of key value here is using the Hummer name on STHIM Co.’s heavy road equipment vehicles. It will provide instant world wide brand recognition to go against competitors like John Deere, Caterpillar, Volvo in heavy vehicles. This deal also provides STHIM Co. an instant/imperfect dealer network for their products in the US market. (This all might be worth $100 million?)

    They can offer surviving US Hummer dealers the H3, and large STHIM Co. trucks and tractors to sell at their swanky downtown dealers… maybe not a good fit. The surviving US Hummer dealers in the future might be found more often on the edge of town… instead of downtown…

    Thanks again Mr. Perkowski.

    -Mike James

  2. Mike James,

    Welcome to the site! We got a great deal of traffic from “The Truth About Cars” recently. There was quite a discussion about the article I wrote about the United States and China switching economic playbooks. We hope that you’ll continue to log on.

    You raise many good points, which without seeing the backup documents, it’s difficult to comment definitively. I seem to recall that STHIM is being represented by a well-known U.S. law firm, but I couldn’t find the reference. Assuming that they are, then they should be able to supplement the existing agreements with AM General with supplemental agreements with GM.

    For example, I would expect them to get license and right to manufacture agreements with GM for any technology used by the H2 and H3 platforms. You are right that they won’t own them, but once they have the drawings and technical blueprints for the product, it will be easier to improve the designs. Assuming they negotiate the right to “own” any improvements made to the vehicle, they will ultimately have designs that they own. In some cases. license agreements are negotiated for a specific time period, after which the licensee has full rights to the product.

    New agreements might also be struck with AM General, a company which I believe will have a vested interest in STHIM being successful and selling more Hummers. For one thing, they may be able to jointly develop component sources in China that can reduce costs for both parties.

    In other words, if STHIM does a good job negotiating, they can gain the latitude that will provide them with the full benefits of the acquisition. In GM, they have a motivated seller, and in AM General, they have a company that will be motivated, in my opinion, to work with them.