Opinion

The Great Debate

Bet on small firms to lead China global foray

By Wei Gu
June 17, 2009

Wei Gu–Wei Gu is a Reuters columnist. The opinions expressed are her own–

Chairman Mao used to say the truth is always kept by the minority.

A little-known private Chinese machinery company’s bid for a GM marque has been sneered at by even the patriotic Chinese media, but the deal could succeed where mightier plays like Chinalco’s for Rio Tinto have failed.

True that private sector firms face an uphill battle in China against more dominant state-backed firms, but it seems like double standards when Western observers, who extol the virtues of the private sector taking the driver’s seat, praise Chinalco’s deal but dismiss Tengzhong’s bid for Hummer.

Chinese media’s disapproval of Sichuan Tengzhong Heavy Industrial Machinery’s move has tempered concerns about technology and job transfers to China, as well as questions whether China’s military was behind the bid.

This could give Tengzhong more bargaining power with bankrupt General Motors. Underestimation of Tengzhong could prove beneficial to the buyer in an environment where there are worries about Chinese deals not being completely driven by commercial interests.

No matter how carefully the now busted Rio deal was structured, Chinalco should know that buying pricey and highly political targets like resource companies is going to be greeted by the rest of the world with a great deal of suspicion.

Beijing’s promotion of Chinalco’s former boss Xiao Yaqing to the State Council, or cabinet, only served to reinforce that perception.

In contrast with the outspoken Xiao, the man behind the Hummer bid Li Yan, who now goes with a Buddhist name Suo Lang Duo Ji, tries his best to hide from the limelight, but that does not mean he does not have a plan.

HUMMER LIFT

If the deal goes through, the key question is whether Tengzhong has good strategy to turn around a tarnished GM brand.

China has shown success in the past – GM is already selling more Buicks in China than in the United States.

What Tengzhong could do is negotiating full rights to the Hummer brand and extending Hummer’s powerful brand image to a broader line of industrial vehicles.

Industrial vehicles from airport trucks to oil-field trucks are selling like hot cakes, riding the country’s construction boom.

If the Sichuan company, which already makes fuel tankers, dump trucks, tow trucks and fire trucks, wants to compete against the likes of Caterpillar in this niche market, will it have a better chance branding its vehicles as ‘Tengzhong’ or ‘Hummer’?

While the Hummer brand has indeed become a lightning rod for critics of America’s love for SUVs, the brand has also won acclaim as outperformers on rugged roads.

By using Hummer for industrial vehicles, Tengzhong can bypass Hummer’s gas-guzzler image problem. Will you care how much gas a fire truck uses?

The company is talking about selling a greener version of Hummer and extending to emerging markets.

If Tengzhong could further broaden Hummer’s offerings to include small SUVs, their sales are likely to jump in China, a country just starting to fall in love with big cars. China’s SUV sales rose 25 percent in 2008, outpacing the 18 percent increase of passenger cars.

Hummer might have a reputation of being a millionaire’s toy, but they are still coveted in China. An online survey by Sina.com shows that more than 60 percent people want to own a Hummer that costs more than half a million yuan (about $70,000).

Of course, the global auto industry has had its fair share of cash-rich investors who tried to revive ailing brands and failed, but Chinese entrepreneurs should not be underestimated.

Critics had scoffed at Geely Automobile’s founder Li Shufu some 15 years ago.

After Li dropped out of school, he made refrigerator parts, then refrigerators and motorcycles, before pushing to make cars for the masses.

Today, Geely is one of the few Chinese automakers that export – Geely now supplies London’s black taxis.

Defying media reports that regulators in China might block the Hummer deal, China’s Ministry of Commerce said on Monday that Tengzhong’s bid for Hummer is normal behaviour for a company seeking to take advantage of the global downturn to broaden its horizons.

This makes sense. The acquisition has the potential to meet China’s strategy to move up the manufacturing value chain.

Moreover, the repeated disappointment by state-backed acquirers should have taught Beijing that buyers like Tengzhong are their best bet to drive China’s great wall of money to global markets.

– At the time of publication Wei Gu did not own any direct investments in securities mentioned in this article. She may be an owner indirectly as an investor in a fund –

Comments
4 comments so far | RSS Comments RSS

I’m sure the Hummer brand will sell well in China if they can get hold of it. From what I could see on a visit to China back in ’07 it seemed there was an amorous infatuation with almost anything with a European/US brand attached to it, or even just a word in English… almost any word would do! Volvo’s seemed to be very popular too.
It’ll be interesting to see how much of Africa’s oil and gas (and other resources) end’s up being extracted by the Chinese.

Posted by Peter H | Report as abusive
 

I travel around China many times a year.
A Hummer is a guaranteed success story for China. One needs a car like this if you want to travel the roads in mainland China once you get of the mostly empty highways, away from the big cities, and care for some comfort.

Posted by Dick Van Gelder | Report as abusive
 

Re China oil, aside from its efforts to import oil, are you aware that China (Shenhua) has 2 huge major CTL (coal to liquid) refineries coming on line? There is also a third facility being planned. The news says they are the world’s biggest. The first plant has had a pilot run and the news says it was successful so a limited production run is now in process. Aside from that, China has 40 new nuclear power generators in process of being built and maybe 60 if the increase is approved. They can install a nuclear plant in 5-6 years, it takes us 10 to 12 years. We have 19 nuclear plants in the request for permit phase and only recently 4 have been approved for go-ahead(after 2 years in review). They plan to triple their wind and solar power capabilities and are increasing their biofuel acreage. Over a dozen car companies are developing hybrid/electric cars. They produce 3x more electric bikes and scooters than gasoline cars and are producing gasoline cars at a higher rate that America. As an aside they are buying oil now to increase their reserves by 3X. Looks to me they are walking the talk though telling the world they want the United States to lead in developing alternate fuels. Maybe an electric Hummer? Hmmmm!

Posted by Masao Miwa | Report as abusive
 

Well-written article with clear statement of facts and superb analysis. Well done, Ms. G!
P.S. I normally do not read Reuters, but tis article is very impressive.

Posted by bachi | Report as abusive
 

Post Your Comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
  •