Will GM be able to unload Hummer?

The relationship between GM and its jilted brands continues like a bad soap opera.

By InvestorPlace Jan 14, 2010 7:55PM

The latest development: A planned marriage between GM's infamous Hummer brand and Chinese firm Tengzhong Heavy Industrial Machinery is in jeopardy of falling through as Beijing regulators drag their feet. Adding to the drama, GM plans to shut down Hummer production on Tuesday no matter what.

 

If the Hummer deal fails, this would be the fourth botched sale of a General Motors brand in less than six months. But frankly, both sides have a lot of incentive to get this agreement in ink and move on with their lives. Here's why.

 

First off, the apparent hold-up in China is the fact that Tengzhong is not an established car manufacturer. Normally the heavy-handed Chinese government frowns upon businesses branching out wherever they please. However, even the hard-liners in Bejing have to realize that the booming Chinese auto market is presenting unprecedented opportunities right now. If a company like Tengzhong doesn't fill the void, it's very likely a foreign company will jump in.

 

Consider that even amid bankruptcy restructuring and a horrible economic environment, General Motors managed to sell 67% more vehicles in China across 2009. That's simply staggering. China has become the #1 market for automobiles in the world, and companies that do business there are seeing exponential sales growth. That means Beijing has a big incentive to ramp up home-grown production and cash in on this trend.

 

Secondly, General Motors should be just as eager to unload Hummer as China should be to allow the sale. Originally, executives pegged the sale of the brand at a value of about $500 million. The current going rate for Tengzhong is a mere $150 million after Hummer sales in the fourth quarter dropped a gut-wrenching 85%.

 

The harsh reality is that GM sells Hummer for pennies on the dollar, or it simply has to shut down and unwind this highly unprofitable segment of its business.

 

While there are stories out there about the SUV icon's Louisiana plant shutting down production despite no formal agreement on the sale, but frankly this is an overdue step that investors shouldn't read too much into. In December, a mere 325 Hummers were sold in total. It's hardly like consumers are foaming at the mouth for these trucks. General Motor's claim of a "sufficient inventory" of Hummers to sustain dealers while the deal with Tengzhong gets final regulatory approval is probably a gross understatement, considering how steep the sales drop-off has been in recent months.

 

General Motors does have a very bad track record when it comes to shedding its existing brands. In September, Penske Automotive Group (PAG) pulled out of an agreement to buy Saturn the day before signing the deal. Then in November, GM reneged on the sale of a controlling stake in Europe's Opel to Magna international investors. Most recently, General Motors has been dragging its feet on a deal to save Saab and contends that bidders like Stryker have yet to offer "financially viable" plans.

 

What a mess. But whatever else has happened, we still believe that the Hummer/Tengzhong deal is a good fit for both companies. The deal should close sometime in the next few months.

 

(Buying shares in Chinese automakers now while the sector is red-hot could deliver truly amazing profits in 2010 as the economic recovery gains momentum. Read: "Drive Home Big Profits With These Chinese Auto Stocks" for the top picks in this sector.)

 

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