Hummer Deal on the Ropes

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Environment, Green, M&A Activity

Sichuan Tengzhong, the provincial Chinese maker of machinery is struggling to gain regulatory approval from Beijing to close their purchase of GM’s Hummer. The company appears to have run up against a policy issue that has nothing to do with east-west relations and everything to do with the direction the Chinese authorities want to take the country in the years ahead. The $160m deal would see Sichuan Tengzhing acquire the Shreveport manufacturing facilities and rights to the Hummer brand allowing them to sell the model again in the US through the approx 160 dealers some have gone bust since last year – but more importantly sell globally through the 232 overseas outlets that made up 75% of Hummer sales. Not least of which would be sales into China of course, and therein lies the problem.

As Businessweek rightly points out, China is also encouraging automakers to build more fuel-efficient cars, including hybrids, to help win sales overseas and to reduce oil imports and pollution at home. The 3.7-liter Hummer H3T gets 14 miles to the gallon in city driving, according to the U.S. Environmental Protection Agency.  Incentives for smaller cars combined with rural subsidies boosted nationwide sales in China last year to 13.6 million, helping it supplant the U.S. as the world’s largest auto market. However, after so much support both financial and legislatively for fuel efficient cars, acceptance of the Hummer would be a complete about-face something the Chinese are not noted for. Sichuan Tengzhong have said they want to make more fuel efficient versions but there is a limit to how fuel efficient you can make a 4700lb car, the weight of the current H3. A new smaller version could be designed but that becomes incredibly expensive and without GM’s design expertise it would be a major challenge to design and bring to production a new car that would be acceptable to buyers used to the H3. The brand would risk serious damage if it was deemed to be a failure.

Dealers were keen for a deal according to an FT article, just so long as production at Shreveport continued. Although sales dropped dramatically in 2009, Hummer still outsold Porsche, Land-Rover or Jaguar in the US. May be this really will be the end of Hummer and it will be consigned to the history books as the kind of behemoth that buyers could indulge in during the days of cheap gas. In the new green world Hummers do seem out of place, shame though as a lover of big boys toys I for one would regret their passing.

–Stuart Burns

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