Rival says gov't won't OK Tengzhong's Hummer deal

Sichuan Tengzhong Heavy Industrial Machinery's agreement to buy General Motors's Hummer nameplate has set the Chinese auto industry on its ear.

First, Tengzhong doesn't have a high profile, even in China. It doesn't make consumer vehicles. And the purchase of a noted gas-guzzling brand seems to run counter to the stated priorities of the central authorities in Beijing.

The later is the fatal blow to the deal in the eyes of rivals. "Absolutely impossible," says Liu Shanwen, chief technology officer of Dongfeng Diesel Engine, a unit of Dongfeng Motor Group. "Hummer is such an opposite product to what the government is promoting." As such, it is the kind of a deal only an outsider could try, Liu says.

What he means is that Chinese auto makers are pushing hard for fuel-efficient technologies. Dongfeng Motor, the second largest Chinese auto maker after Shanghai Automotive Industry Corp. by market value, is attacking the problem of CO2 emissions by introducing better engines. Another big player, Beijing Automobile Works, has just launched a product line for diesel engines that will meet the European Union standards known as Euro IV that will be adopted in China in 2010. As a result, established auto makers like Dongfeng Motor or SAIC probably wouldn't risk such an outlay of cash–Hummer's price tag has been reported only as less than $500 million–on a deal unlikely to be approved.

"It is buying a famous name with $500 million," Liu said. If that case, Tengzhong may already be a winner. News of the deal has raised the profile of the company both inside and outside of China, a company that has been looking to be listed in the U.S. for three years.

Still, Liu warns, it is "a baby calf who is not afraid of a tiger," using a Chinese idiom that means one isn't acting according to one's ability.

The verdict on whether the transaction can proceed will come in a few weeks, when it is reviewed by China's Ministry of Commerce. If it passes that hurdle, a more-daunting judgment awaits, that of the marketplace. "I give it 30% chance," he said of the deal's business prospects. He says that to continue producing Hummer in the U.S. and to sell the vehicles in China "Tengzhong will have to revamp most of the manufacturing," Liu said. For a construction-equipment maker with limited experience in automobiles, that could be the toughest test.