How Tengzhong Won by Losing the Hummer Deal

(Caixin Online) The proposed sale of General Motors Corp.'s struggling Hummer subsidiary to China's privately owned Sichuan Tengzhong Heavy Machinery Co. never seemed to make much sense. So few were surprised February 25 when Tengzhong officially abandoned the proposal after failing to receive critical support from Chinese government regulators.

The estimated US$ 150 million buyout was scheduled to close by China's Lantern Festival in late February, almost nine months after Tengzhong and GM signed a memorandum of understanding in June 2009.

At one point during the process, which was constantly shadowed by doubts over regulator and funding support, Tengzhong introduced a plan that bordered on comic desperation: It offered to salvage the deal by creating an offshore company in hopes of sidestepping the tricky Chinese government approval process. But the joke fell flat.

Now, GM plans to shutter the Hummer line of military-inspired SUVs. And Sichuan Province-based Tengzhong, which builds heavy equipment, is moving on.

In retrospect, failing to buy Hummer may have been the best possible outcome for Tengzhong.

Heavy Doubts

Tengzhong has never built an automobile, so skeptics rose in force as soon as the Hummer plan surfaced. Many questioned the Chinese company's motivation and doubted its ability to raise the US$ 150 million GM sought. Moreover, many said Tengzhong would not be able to run a multinational operation.

Apparently reflecting these doubts was a slow, sometimes hard to trace handling of the Hummer buyout application by government regulators scattered across three agencies.

Chinese law says overseas investment transactions exceeding US$ 100 million must be approved by the National Development and Reform Commission (NDRC), Ministry of Commerce (MOC), and State Administration of Foreign Exchange (SAFE). So after the Hummer memorandum was signed, NDRC's Foreign Investment Department became the first to process the application.

NDRC officials said July 15 they received Tengzhong's application to acquire Hummer. That was about six weeks after the companies had signed their memorandum.

Then on August 27, more than a month later, NDRC announced that "the acquisition of Hummer does not involve localization" and so "does not fall within the NDRC's approval scope." Instead, the agency suggested MOC consider the application.

After NDRC's withdrawal from the procedure, an MOC source responsible for foreign investment projects later said, a Tengzhong representative and a deputy mayor from the Sichuan city of Deyang visited MOC offices in Beijing to discuss the transaction. Nevertheless, the source said, the company never submitted a formal application to MOC.

Indeed, on February 24 – the day before Tengzhong formally cancelled the transaction – Assistant Minister of Commerce Wang Chao told reporters at a press conference that MOC had never received Tengzhong's application. Wang also discounted claims that the application had been "rejected."

But sources familiar with the government approval process say various government approval bodies sometimes "play football" with an overseas transaction application. When that happens, it's a signal that a deal is in trouble.