Why did Tengzhong fail to purchase Hummer?

10:04, March 03, 2010      

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General Motors (GM) announced in Detroit February 25 that because Sichuan Tengzhong Heavy Machinery Company (Tengzhong) did not complete the purchase of Hummer on schedule, the acquisition has failed, and GM will now gradually close down its Hummer business operations.

Tengzhong also announced February 25 that because the acquisition did not obtain the approval of China's relevant supervision authorities within the time limit determined by the 2 sides, it will stop all relevant work of the acquisition and terminate the "final agreement" they had signed.

On October 9, 2009, the 2 sides signed the "final agreement" in terms of Tengzhong's purchase of GM's Hummer business, and jointly decided that the acquisition would be completed by January 31, 2010. The deadline had already been extended once to the end of February 2010.

This case which lasted 9 months and attracted much attention finally failed. So, what are the reasons for the failure?

Tengzhong not qualified for auto manufacturing

During the Detroit Auto Show held at the beginning of 2010, Kevin Wale, president of GM China, said that the largest obstacle for Tengzhong to purchase Hummer was that Tengzhong did not possess the qualifications for manufacturing automobiles. In order to complete the acquisition, Tengzhong must first overcome this obstacle.

Because automobile products are related to people's safety, China has adopted a strict production licensing system. Currently, China has over 100 domestic enterprises that possess the qualifications required for manufacturing finished automobiles.

The main business of Tengzhong is producing road construction machines such as cement mixers, and the enterprise did not possess the qualifications for producing automobiles. Therefore, it would have been extremely difficult for such an enterprise to purchase a foreign auto brand in deep trouble, and successfully manufacture high-end cross-country vehicles.

Tengzhong violated national policies

The news that Tengzhong would purchase Hummer attracted the attention of millions of people. But if we analyze it carefully, we may find that this was not like a normal commercial acquisition, but more like a hyped activity.

According to the "Tentative Administrative Procedures on Verification and Approval of Overseas Investment Projects" issued by the National Development and Reform Commission of China (NDRC) in 2004 and currently still in-effect, overseas investment resource development projects and the projects that require a large amount of foreign exchange must obtain the approval of China. Before carrying out negotiations with foreign merchants, the project must be recorded in the NDRC, and the negotiation cannot begin without the approval letter.

The capital for Tengzhong to purchase Hummer would have exceeded 100 million U.S. dollars. It was such a large overseas investment project that the NDRC would have reported it to the State Council after approval. Since Tengzhong had long ago planned and prepared to purchase Hummer, it should know this policy. So, why did Tengzhong not record it with the NDRC?

Tengzhong announced the acquisition of Hummer in June of last year, and then reported it to regulatory authorities. However, the company found it impossible to gain approval according to its original plan, so it reported to the NDRC via the Sichuan Provincial Development and Reform Committee, and only decided to buy the Hummer brand, not to buy shares and produce vehicles at home.

Under the terms of "final agreement" Tengzhong and GM signed October 9 of last year, Tengzhong will get the Hummer brand, trademark, ownership of the brand name, and also the patent rights involved in manufacturing Hummer vehicles. In addition, the buyer will carry on the existing distributorship agreements that GM signed with Hummer distributors.

It can be seen from the agreement that Tengzhong did not give up the intention of producing Hummer vehicles at home. What's more, the company planned to buy not only the Hummer brand, but also the distributing rights and channels, which is definitely beyond the scope of service trade. The company "racked its brains" to get around government regulations.

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