What China Gets From Bailing Out Hummer

It would be foolish to dismiss the deal as naive

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Nobody saw this one coming: An obscure Chinese company that doesn’t even build cars buys a troubled but iconic division from General Motors. Hummer, made famous by American G.I.s, Arnold Schwarzenegger and oversized U.S. consumers, will now be run by a construction-equipment company located 1,200 miles southwest of Bejing (and 8,000 miles from Detroit). It’s tempting to laugh it off as globalization run amuck.

Don’t. The Chinese may not be automotive experts (yet), but they’re smart and bold and they know a bargain when they see one. It would be foolish to dismiss the Hummer purchase by the Sichuan Tengzhong Heavy Industrial Machinery Co. as a rookie mistake or a hopelessly naïve investment. Instead, we should pay attention to how the Chinese see opportunity in a turbulent economy, and how they plan to take advantage of others’ distress.

[See how to tell if you should buy an American car.]

Tengzhong may be buying Hummer as a turnkey way of entering the global automotive market, and especially the surging market for cars in China, one of the world’s fastest-growing and potentially most profitable. But Chinese businesses—and the government that often supports them—also invest in Western businesses in order to learn how to run world-class enterprises. For a nation trying to leap into the ranks of the world’s most developed countries, it’s a pretty smart approach.

For a hint of how the Hummer acquisition might go, it’s worth examining Lenovo’s purchase of IBM’s Personal Computing division in 2005, for nearly $2 billion. At the time, Lenovo was well-known inside China but virtually unknown anyplace else. Then, overnight, it owned a global computing powerhouse, with responsibility for thousands of demanding corporate clients in virtually every part of the world. Some western analysts predicted that the startling deal would flop, fast.

[See how GM gets its groove back.]

A few clients bolted, but most stayed on, reassured by the continued presence of IBM’s sales staff and management team. Lenovo gradually integrated engineers and managers from China into the old IBM group. The firm performed a “cultural audit” to figure out the differences between Chinese and western corporate culture. Instead of moving the operation to China, Lenovo retained the IBM PC division headquarters in North Carolina, while building up hubs in Beijing, Singapore, Japan, Europe, and other regions. An American CEO stayed at the helm during a four-year transition, but the Chinese CEO of the old firm eventually became head of the new Lenovo. The stock price, meanwhile, has performed on par with established competitors like Dell and Hewlett-Packard, and better in some instances.

That’s a huge win for China, since it has gained a firm foothold in a mature, global market where it had no meaningful presence beforehand. It also highlights the insistence of Chinese government officials—both national and regional—that homegrown companies expand beyond China’s borders. Other Chinese firms in industries like electronics, telecommunications and oil and gas have made similar lunges into global markets, often targeting regions like Africa and Latin America that western competitors might feel aren’t worth the trouble. That shows considerable foresight among Chinese leaders: They realize that true economic power and wealth these days must come from a global presence. Relying on your home-grown market isn’t enough, not even in China (or America).

[See how to find gold in a recession economy.]

It’s not clear what the strategy for Hummer is, but the prospects for success might be better than many want to believe. Like Lenovo, the new Hummer owners plan to keep the American managers in place for the time being. The vehicles will still be built and sold in the United States, preserving about 3,000 jobs—and building some goodwill toward the new proprietors. Tengzhong may expand sales in China, where Hummers are still somewhat exotic, and it could also sell the rugged vehicles to Chinese construction firms working on projects in Africa, the Middle East, and other regions. “It fits into government's strategy of encouraging private enterprises to go abroad,” says professor Baizhu Chen of the USC Marshall School of Business. “It has bought a piece of an American legend. The government has every incentive to make Tengzhong successful.”

It may also mark the beginning of a Chinese buying spree. Also for sale: Saturn, Saab and Volvo. Other Chinese firms, including some already in the car business, are among the bidders. Go east, young man.

General Motors
  • Rick Newman

    Rick Newman is the author of Rebounders: How Winners Pivot From Setback to Success and the co-author of two other books. Follow him on Twitter or e-mail him at rnewman@usnews.com.

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