June 29,2009

Rocky Road for Tenzhong-Hummer Deal

By CT Johnson

Conflicting reports emerged this week regarding the future of Tenzhong Heavy Industrial Machinery’s (Tenzhong) purchase of Hummer from GM.  On Thursday, China National Radio reported that the government National Development and Reform Commission (NDRC) is likely to block the merger on the grounds that Tenzhong, a manufacturer of special-purpose construction machinery and infrastructure products, lacks the expertise to run Hummer.  The NDRC is also unhappy about the poor fuel economy and high environmental impact of Hummer’s gas-guzzling SUVs. 

On Saturday, the Wall Street Journal cited an unnamed GM executive as saying that the China National Radio report was "pure speculation" and that the deal would not be blocked.  Tenzhong also issued a statement casting doubt on the China National Radio statement, saying, "The view expressed on China National Radio's website did not quote or source anyone at NDRC."

Tenzhong officials, who remain confident that they will successfully close the Hummer deal by October, went on to reassure regulators that they will follow the proper procedures in getting the transaction approved.  "We don't have a definitive agreement but we're developing our proposals with GM and Hummer and we'll continue to engage with the appropriate authorities in the appropriate manner," said Christina Stenson of the Brunswick Group, the Tenzhong’s public relations firm. 
The deal teams from both GM and Tenzhong reportedly met this week to hasten negotiations and clarify the acquisition structure for Chinese officials.

While the deal has yet to be officially presented to government regulators, the NDRC has already publicly expressed its opposition to the deal.  "Buying a fuel-hungry and high-emission brand is directly against the current trend of energy saving and emission reduction," said NDRC vice director Lu Zhongyuan on June 6.  "If the Chinese company is just trying to stir up media hype, that is understandable; if it really takes this step to buy, relevant departments should be strict and cautious with the approval, or reject the application if necessary."

The NDRC, which is responsible for formulating and executing policies to guide the development of China’s economy, is one of at least three ministries with jurisdiction over overseas investments like the Hummer acquisition.  The Ministry of Commerce and the State Administration of Foreign Exchange are also involved. 

To further complicate matters, the NDRC and the Ministry of Commerce are taking contradictory positions, both administratively and in reference to the Hummer deal.  Whereas the Ministry of Commerce recently relaxed its rules for overseas acquisitions, delegating authority for deals under $100 million to provincial officials, the NDRC last Friday issued an order requiring Chinese firms to report intended overseas acquisitions before they sign any binding agreements.  Contrary to the NDRC’s negative reaction to the deal, the Ministry of Commerce has signaled at least conditional approval of the deal, saying it was normal behavior for a company seeking to take advantage of the global financial crisis.

One aspect of the situation that remains unclear is the extent to which the NDRC’s concerns are driven by commercial and environmental issues, and the extent to which they are driven by Tenzhong’s apparent failure to work through appropriate channels. 

To be sure, the Chinese government is concerned with both the energy implications of its burgeoning car culture and its growing emissions levels.  In an effort to improve fuel efficiency, the government recently cut sales taxes on smaller, more fuel-efficient cars and began encouraging carmakers to develop electric vehicles. 

Hummer (known as "Han Ma" or "bold horse" in Chinese) and Tenzhong have been quick to address the government’s environmental concerns by talking up the H4, a smaller model that uses 26 mpg, and a 100 mpg plug-in hybrid prototype.  Both companies declined to say when the H4 would go on sale, but have talked emphatically about the new direction of the Hummer products.  Hummer’s CEO, Jim Taylor, said, "It’s a big number to take on (100 mpg), a ground-up hybrid or electric vehicle, but it’d make a lot of sense for the Hummer brand."

This is a significant change from Hummer’s previous stance.  Its best-known vehicle, the H2, weighs more than 3 tons and has a staggeringly poor fuel consumption rate of 12 mpg. 

At the same time, it was clear from the start that Tenzhong was out of step with the NDRC on the Hummer deal.  Mr. Lu expressed dismay at the idea any Chinese company would take unilateral actions that were against the state policy of increasing fuel efficiency and lowering emissions.  "I hope Chinese enterprises will not do stupid things which in the end get the stones in their feet."  Considering the more positive note sounded by the Ministry of Commerce, it is not clear that this position is shared by the other relevant officials in Beijing.

All of which leaves the Tenzhong-Hummer deal in a state of flux.  Unlike the government ministries involved, Tenzhong and GM are unified in their position that the show will go on, doubts and set-backs notwithstanding.  Given the complexity of the regulatory environment in China, it remains to be seen whether Hummer and Tenzhong can negotiate the difficult bureaucratic terrain and get their deal approved by the regulators. 

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