Thursday, February 25, 2010

Hummer rejection: It's all right there in the policy

The recent failure of a Chinese company to buy the Hummer brand from GM highlights an interesting aspect of business-government relations in China.

Nearly every news article on this failed transaction has contained quotes from people at China's Ministry of Commerce stating that Sichuan Tengzhong, the intended purchaser of Hummer, never even submitted an application. An article in today's Wall Street Journal contains a similar quote, and also includes the NDRC, China's main economic planner, in the mix:
On Wednesday, Assistant Commerce Minister Wang Chao said his ministry never received an application from Tengzhong, echoing other comments from the ministry in recent months. An official in the foreign affairs department of the NDRC said the commission also hasn't received any application.

"It looks like no one took responsibility" for the deal inside the bureaucracy, said the person. But since Tengzhong's application "was never formally received" by regulators, "it's not going to be formally rejected."
Seriously? Are we to believe that Sichuan Tengzhong was so absent-minded that they neglected even to fill out the paperwork?

Of course not. We can be certain that representatives of Tengzhong have been living in Beijing for at least the past eight months, doing their best to gain approval for this deal. But since there does not exist a clear set of criteria as to how such an approval decision would be made, discussions had to be conducted on an informal basis.

Though I am privy to no confidential information, I can imagine most of the discussions could be summarized as follows:

Tengzhong: If we apply to you for approval, will you approve it?

Random representative of any number of agencies: Hmmm, that would be, um ... difficult.

Throughout the past year, as I conducted interviews among various auto industry related people, I was continually amazed that no one seemed to have a full picture as to how approvals for business deals should work. Those who appeared confident in their answers often provided me with information that conflicted with what I had heard from others.

It finally occurred to me that I was trying to shoehorn China into my own expectation of how a government should work, and that the lack of clarity in the rules isn't necessarily a bad thing. Of course, it isn't necessarily a good thing either.

Still, as I pointed out in my previous post on Hummer, the deal was unworkable from the Chinese perspective because it did not conform to central government policy. What Tengzhong's representatives were essentially doing in Beijing was asking the Ministry of Commerce, NDRC, et al, to approve their attempt to violate Central Government policy.

China's Central Government may lose the occasional battle, but it ultimately gets what it wants. If you want to know what the Central Government wants, the best place to start is their policies.

Tuesday, February 23, 2010

Why is this Hummer Deal Taking so Long? (Updated)

Last June, news first surfaced that General Motors (GM) had found a buyer to take its much loved and hated Hummer brand off its hands. The prospective buyer, Sichuan Tengzhong, a maker of heavy equipment came from out of nowhere to make a bid for the Hummer brand. (Please see previous posts on Tengzhong here and here.)

Auto industry related people I spoke with in China at the time told me that the CEO of Tengzhong was friends with the heads of a lot of mining companies who are also customers of Tengzhong's heavy equipment. Most of the miners favored Hummers as their personal vehicles, so Tengzhong's CEO jumped at the opportunity to grab the American icon. Of course, this was only hearsay.

As of today, the Hummer deal still has yet to be approved by China's Ministry of Commerce which has the authority to approve outbound investment by Chinese companies. Why is it taking so long?

This article by Patti Waldmeir of the Financial Times contains a few quotes that very nicely sum up the reason:
Producing the hulking Hummer, with its image of wasteful excess, could hardly be less consistent with Beijing’s pro-green automotive policies, said Mike Dunne of Dunne & Co, an Asia-based automotive consultancy: “For them to approve the Hummer deal would be a big contradiction”.

The deal would violate not just Beijing’s environmental goals but also the government’s insistence on consolidation in the Chinese car industry, which has up to 100 carmakers, according to Yale Zhang of CSM Automotive in Shanghai.
Beijing isn't against purchase of foreign auto companies and assets, as can be seen by its support for Shanghai/Nanjing Auto's purchase of MG-Rover in 2007, and more recently, BAIC's purchase of Saab technology and Geely's (ongoing) attempt to buy Volvo from Ford.

Beijing's problem with the Hummer purchase is very simple: it violates policy. Support, or lack thereof, doesn't appear to stem from whether an auto company is state-owned or private (BAIC and Geely, are, respectively, an SOE and a private company), but from whether a potential deal conforms to central government policy. The current policy in force calls for both improvements in the environmental impact of automobiles and consolidation of China's many automakers into fewer, larger companies that will be more competitive on a global scale.

So that's the end of it, right?

Not quite. Apparently Tengzhong remains so keen to get its hands on Hummer that it will try an end-around. This article from Reuters reports:
"Tengzhong has not given up hope yet to win government approval, but buying Hummer through an offshore investment vehicle could be an option if it can't get the green light," said a source close to the deal, who asked for anonymity due to the sensitivity of the issue.
So Tengzhong could, theoretically, establish an offshore entity to purchase Hummer. And as long as Hummer production isn't brought onshore, there wouldn't be a problem. But then Tengzhong would lose the ability to take advantage of China's lower cost labor force. Tengzhong could also run into issues with a sorely disappointed Central Government when trying to import Hummers manufactured abroad.

Furthermore, the offshore route will probably require the use of foreign exchange (which, again, is controlled by the Central Government) to complete the deal -- that is, unless GM could be persuaded to sell Hummer for non-convertible Chinese Renminbi.

If I had to bet, I'd say this deal isn't going to happen.

UPDATE: About 24 hours after I posted the above, official word has come from GM. The Tengzhong deal is off, and Hummer will be wound down.

While this may sound like the end for Hummer, there may still be a faint glimmer of hope. GM has previously said the same of both Saturn and Saab after their respective deals fell through. Though Saturn is indeed being wound down, Saab was rescued at the 11th hour by Dutch investor group Spyker Cars.

And now Sichuan Tengzhong can return to the obscurity from whence it came.

Friday, February 5, 2010

The Cost of a Camaro in China

The guys at China Car Times posted this entry about the biggest auto discounts in China. Topping the list is the Chevrolet Camaro with a stunning 160,000 RMB (US$23,500) discount from list. The Camaro's base price in the US is only $22,995, which is even smaller than the amount by which it is being discounted in China!

Frankly, I'm not surprised that the Camaro would need to be discounted so much. While it appeals to me as an American who remembers the '68 Camaro, it is hardly suitable for the rough streets of China or for China's fuel-conscious drivers. (Gasoline is more expensive in China than in the United States at the moment.)

What is most interesting to me about CCT's post is how much the Camaro costs in China.

The Camaro lists in China for about $117K, and is now discounted to $93K. That's $93K for a car you can buy in the US for under $30K! So if we take $30K as the cost of a nicely-equipped Camaro, and add to that a generous shipping charge of $10K, we have a car for which GM should want to collect about $40K in China.

Of course, China will want a cut of that as well. Under its WTO commitment, China may charge a maximum import tariff of 25%, which would bring the price to $50,000.

Even with a huge discount, the Camaro's price in China is still $43,000 more expensive than the same car sold in the United States. Why?

Is it demand driven? Is Chevrolet simply unable to build Camaros fast enough that they can get away with charging that much for a car in China?

What is missing here? Why is the Camaro so expensive in China?