Saturday, June 13, 2009

Sichuan Tengzhong Heavy Industrial Machinery Co. and the Purchase of Hummer From General Motors

The transformation of General Motors from an independent multinational corporation that once commanded great power (including the power to influence smaller states) to a mere state owned enterprise of the United States has many ramifications. One of the more interesting, of course, is the way the United States is revolutionizing the construction of systems of political control of economic enterprises while simultaneously attempting to regulate the private markets in which these operate. Another is the elaboration of rules through which states, as owners of private enterprises, now buy and sell interests in them to other states. And yet another is the extent of control over sales of control where private entities have been charged with technologicvalñly sensitive undertakings for the state, even when the sale is to private parties. The old rules, it seems, are increasingly inadeqaute to understand, mucgh less regulate, the emerging reality on the ground. The sale of GM's Hummer Division proivides a case in point. To understand the issues a little better, my research assistant put together the following report:

Sichuan Tengzhong Heavy Industrial Machinery Co., the Potential Buyer of Hummer
Prepared by Siyu Zai (宰丝雨) (Penn State Law '11)

Sichuan Tengzhong Heavy Industrial Machinery Co., Ltd. (“Tengzhong”) and GM have entered into a Memorandum of Understanding, for Tengzhong to acquire HUMMER, on June 2nd, 2009.1 Crucial information in a press release on this potential transaction is quoted as follows:

Sichuan Tengzhong Heavy Industrial Machinery Co., Ltd. (Tengzhong) and General Motors Corp. (GM), today confirmed details of their proposed transaction, pursuant to which, Tengzhong, a major Chinese industrial machinery group, will acquire the rights to the premium off-road HUMMER brand, along with a senior management and operational team. It will also assume existing dealer agreements relating to HUMMER’s dealership network. It is contemplated that Tengzhong will, as part of the transaction, enter into a long-term contract assembly and key component and material supply agreement with GM. In an earlier statement, GM said it expects the deal if successful to secure more than 3,000 U.S. jobs. The final terms of the deal are subject to final negotiations.

Based in the Chinese province of Sichuan, Tengzhong is a privately owned company, and a leading domestic manufacturer of road, construction and energy industry equipment. It will expand into the premium off-road vehicle segment through what will be a strategic acquisition for Tengzhong and a catalyst for HUMMER’s growth in the U.S. and around the world.

HUMMER will continue to maintain its headquarters and operations in the U.S., and will continue to be managed by its existing leadership team. The team intends to expand HUMMER’s dealer network worldwide, particularly into new and underserved markets such as China.

The transaction is expected to close in the third quarter of this year and is subject to customary closing conditions and regulatory approvals.

Credit Suisse is acting as exclusive financial advisor and Shearman & Sterling is acting as international legal counsel to Tengzhong on this transaction. Citi is acting as financial advisor to GM.”2

Western media generally described Tengzhong as “a small, almost unknown privately-owned heavy equipment manufacturer from the province of Sichuan.”3 Tengzhong successfully kept itself a low-profile privately-owned corporation; however, this is probably just the beginning of its story.

Based on its industrial and commercial registration materials, Tengzhong’s registered capital is merely 21,000,000 RMB, which is equal to some 3,000,000 US Dollars, and its equity has been subject to several changes. 4 Tengzhong’s predecessor was Tengzhong Electrical Corporation and was initiated by Huatuo Industrial Corporation (“Huatuo”) and a natural person, Yu Hong. 5 There existed a rumor that Tengzhong is actually controlled by Huatuo.6 Subsequently, the question turns to be what role Huatuo is playing. Huatuo is a subsidiary corporation of Huatong Investment Holding Limited (“Huatong”), a large corporation which is in the monopoly position in the chemical engineering industry domestically in China and also owns the worldwide biggest producer of Glauber's salt.7 The biggest producer of Glauber's salt, Xuguang Resources Ltd. is a Cayman Islands registered corporation and its stocks are going to be traded in the Hong Kong securities exchange market.8 Right now, Xuguang has initiated its IPO process and has drawn much attention in the financial market.9 It is also reported that Huatuo itself has been seeking issuing stocks in securities markets overseas.10 In addition, Morgan Stanley once bought less than 20% stakes of Huatuo for 80,000,000 US Dollars and, in 2008, Morgan Stanley issued 200,000,000 US Dollars bonds through its subsidiary corporation in helping finance Huatuo. 11 So media guess it was Morgan Stanley that connected Huatuo to GM in this Hummer deal. 12

Nothing indicates that these companies are related to any state-owned capital. Instead it has been reported "in the financial magazine Caijing and state-run newspapers said a mining tycoon, Suolang Duoji, who is also known by the Chinese name Li Yan, was behind the deal. Suolang Duoji indirectly owns a big stake in Sichuan Tengzhong through an investment company called Sichuan Huatong Investment Holding Co., the reports said. He also is the controlling shareholder and chairman of Lumena Resources Corp., a mining company that is preparing to list shares on the Hong Kong Stock Exchange."13 Yet there may be state money being indiorectly funneled into the deal. "Tengzhong is likely benefitting from heavy stimulus spending on construction projects and from rebuilding from last year's earthquake in Sichuan, given its specialization in construction equipment and heavy trucks." 14

In terms of Tengzhong’s motive in buying Hummer, the official response was:
“This transaction would allow Tengzhong to enter into the global premium off-road vehicle market quickly, consistent with Tengzhong’s corporate development strategy and strong track record over the last few years of expansion through M&A.

The proposed transaction will enable HUMMER to continue on its growth path and provide capital for future product investments to secure HUMMER’s position as a successful, off-road vehicle brand. Tengzhong will be providing the resources for further expansion of the HUMMER brand, including in emerging markets, to increase the global footprint and profitability of HUMMER.15
Besides that, there are possibly three other motives in this deal:

First, Tengzhong may be interested in the technology, as well as the Hummer research and development institution, that would come along with Hummer. “Tengzhong is a manufacturer of heavy machinery equipment with a presence in special-use vehicles, road and bridge construction equipment and construction and energy industry equipment.”16 As a manufacturer of special-used vehicles, Tengzhong may make use of Hummer technology. " The U.S. Army is assuring people that General Motors' deal to sell its Hummer brand to a Chinese company has nothing to do with the military version of the rugged vehicle. . . . The company, born of Jeep heritage, was once part of American Motors Corp. It began designing the Humvee in 1979, and since then has sold more than 200,000 to the U.S. military and friendly nations, the company said on its Web site. The vehicles became famous in the 1991 Gulf War."17

Second, Tengzhong, actually its ultimate owner, Huatong, may intend to use this acquisition as preparation for raising capital in overseas stock markets. As mentioned above, Xuguang is under IPO process in the Hong Kong Securities market and Huatuo has been seeking to be listed in the US stock market. Therefore, this Hummer deal may promote their reputation, and it actually appears to have started to do so. Even if this acquisition is rejected by either government, it has served as a good advertisement, since Tengzhong has already turned from an unknown privately-owned corporation to a well known primary corporation.

The last, also the most outrageous, possible motive was that the ultimate owner of Tengzhong is using this deal to make money laundering.18 Because Tengzhong, Xuguang, Huatuo and many other capitally related corporations all suggest one ultimate owner who is not well known to the public, people began to guess illegal motive behind this deal.

Now, both Tengzhong and GM are waiting for scrutiny from both side’s governments, which will definitely be a crucial step in this process.


1 . Deal Facts (2009),



4 . 成都德阳争悍马生产线 幕后推手华通系浮现,

5. Id.

6 . Id.

7 . 腾中重工收购悍马 四川华通或是主谋,

8. 旭光资源将启动香港IPO,

9. Id.

10. 腾中重工收购悍马 四川华通或是主谋,

11. Id.

12. Id.

13. Elaine Kurtenbach, Report Questions Chinese Hummer Acquisition, Enquirer-Herald, June 5, 2009.

14. Id.

15. Deal Facts,

16 . Company,

17. Tom Krisher, Military Version Excluded From Hummer Sale,, June 4, 2009.

18 .腾中重工回应媒体质疑 否认收购悍马洗钱说,

No comments: