Friday, June 5, 2009
The proposed acquisition of Hummer is a bit of an odd deal. In addition to the (non)issue that Hummer
builds a civilian version of the Humvee, which may cause some US-based political questions –
there is now also the issue of Chinese government approval. The WSJ this morning has a good story
outlining some of the issues (here). Most important, every out-bound investment
from China worth more than $100 million must get a government ok. Where transactions are done by a state-owned
enterprise (like the Rio-Chinalco deal that just went south yesterday - here),
then it’s easy to imagine that Chinese government approval will be forthcoming. The gestation periods are long and many times
the acquisitions are part of a government/industry strategy. Such is not quite the case in the Hummer deal. The
English-language China Daily is now reporting that GM and Tengzhong may “have
jumped the gun” with this deal (here). Even
the people’s daily noted in its story
on the transaction that other recent acquisitions of foreign auto brands had
not gone well for the Chinese acquirers (Ssangyong).
Two issues seem to stand in the way of getting the OK from the Chinese government. First, is China’s recent adoption of greener automotive regulations. Buying Hummer is exactly consistent with that objective. Second, Tengzhong is only a 4 year old company with no experience managing an overseas investment and no experience building anything less than a truck. If you’ve tried to visit the company’s website recently, the first question you have to ask is whether the company is up to the task of managing a 3,000 person manufacturing division in the US. It's easy to imagine a Ssangyong-like ending to this transaction.
In any event, if Tengzhong wants to make this transaction happen it will have to get approval from SAFE, the central bank’s foreign exchange regulator and the Ministry of Commerce. SAFE recently began circulating draft regulations (described here). The Ministry of Commerce recently updated its outbound rules (descriptions here and again here) that would loosen the approval process. But, MOFCOM and SAFE remain the gatekeepers for Tengzhong and it’s not yet clear whether they will give an okay to the deal. However, it's still early since apparently the parties haven't even reached a definitive agreement, yet.
Anyone with a China practice who thinks they know how this deal will go down from a Chinese perspective should feel free to leave comments.