Behind Tengzhong's plan to aquire Hummer

Hummer vehicles are offered for sale at Woodfield Hummer,
 a Hummer and Chevrolet dealership, in Schaumburg, Illinois.

Sichuan Tengzhong Heavy Industry Machinery, a Chinese company, is to acquire Hummer from General Motor (GM), which has caused concerns among analysts. Some analysts said that this “Tengzhong-Hummer Deal” was probably a trick to move enormous funds overseas considering Tengzhong’s current funds, technology, operation and management.

On June 2 GM confirmed it had come to a preliminary agreement with Sichuan Tengzhong Heavy Industry Machinery over its Hummer sale. Jim Taylor, Hummer’s CEO, said in an interview with the Wall Street Journal, “Tengzhong plans to leave the bulk of the Hummer operation in the U.S. but has committed significant investment to fund the brand's future and expand its international presence.”

GM had expected Hummer to be sold in the sub-$500 million range in 2008. Frederick Henderson, GM’s CEO told Columbia Broadcasting System (CBS) that the buyer was capable of closing the deal and this deal would preserve 3,000 U.S. jobs for factories and distributors.

Big financing gap

Tengzhong’s sales revenue for 2008 is about CNY 1.57 billion with paid tax of only CNY 20 million. It is estimated that Tengzhong has to pay $500 million to GM for this deal; secondly, it has to keep 3,000 U.S. jobs and calculated at the lowest wage - $70 to 80 per hour per autoworker – the overall wages for a year will reach over $400 million. Tengzhong has also to carry at least $200 million for its technical research and development and integrated operation. Besides, Tengzhong will also bear most of Hummer’s liability in general acquisition cases. GM has $172.81 billion in debt currently and the allocated Hummer debt wouldn’t be low either, even if the specific amount is unknown.

How to make up such a big financing gap? The most common ways are raising funds from bank loans and investors. Bank loans usually depend on the pledge of fixed assets and the strict assessment of the output value of an enterprise. A CNY 1.57 billion enterprise can hardly get higher loans than its value.

As for recruiting investors, Hummer sales fell rapidly in the recent two years in both U.S. and global markets. Moreover, this year Hummer has had a sharper slide: it only sold 5,113 vehicles from January to May this year, down 63.7 per cent from the same period in 2008 and is the biggest sales decline among nine brands in GM, therefore, its loss is also the biggest. Investors cannot help asking: is the high fuel-consumption and high emission Hummer still a worthy vehicle in today’s world where environment protection energy saving prevails? Secondly, can Tengzhong successfully complete industry chain integration after buying Hummer in an enterprise that has never before been involved in automobile manufacture? Thirdly, can this enterprise cope with the upcoming complicated labor-capital issues and enormous operation costs after acquisition? Facing such an acquisition in an economic downturn, most real investors will hesitate. Hence, common fund-raising methods will never work.

Measure to transfer enormous amounts of funds overseas?

Some analysts boldly pointed out that this “Tengzhong-Hummer Deal” is a deceptive trick to move enormous funds overseas. In general, this poor value deal is unlikely to succeed without a secret backup considering $500 million acquisition costs and almost $600 million  operation cost, plus unknown debts.

Overseas investment is a classical way to transfer enormous amounts of funds. According to their agreement, the Hummer production line is still kept in the U.S., which can facilitate the funds transfer by e.g. taking kickbacks and sharing and sending the spoils overseas after over-invoicing equipment and raw materials to foreign suppliers by high proportional commission and discount; or under-invoicing product prices so as to get price differences deposited into overseas bank accounts. If more daring, they can open a personal bank account overseas. Thus, the overseas branch of a Chinese private enterprise will become a professional money laundering center.

21st Century Business Herald was quoted as saying, “A gatekeeper of a company next to Tengzhong’s factory revealed that local people tended to think top managers of Tengzhong are very mysterious, ‘There are always cars bearing special car license plates coming to the factory about once a month.’ It seems there are many unknown secrets behind this mysterious enterprise.