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.