HUMMER STUCK IN THE MUD

C O N F I D E N T I A L SECTION 01 OF 02 BEIJING 000444

SIPDIS

STATE PASS USTR

E.O. 12958: DECL: 02/24/2020
TAGS: EINV EIND CH
SUBJECT: HUMMER STUCK IN THE MUD

Classified By: Economic Minister Counselor William Weinstein for reason
s 1.5 (b) and (d).


1. (C) Summary and comment: Hummer's Detroit-based government
affairs representative Wei Shen told EconOff February 15 that
the PRC had formally rejected Tengzhong's application to
acquire the Hummer brand from General Motors (GM). While the
details are unclear, Post understands that this was a formal
rejection of Tengzhong's application under the PRC's
"technology transfer" regulations. Shen told Emboffs
February 11 that GM and Tengzhong had repackaged its
application as a "foreign acquisition" and were preparing to
submit it for approval. Nevertheless, Post believes PRC
industrial and environmental policies and poor relations
between Tengzhong and Sichuan Province officials make PRC
approval of Tengzhong's application unlikely. GM was
considering extending its end-of-February deadline for the
sale, said Shen, while at the same time exploring other
options. End summary and comment.

HITTING A RED LIGHT
--------------


2. (C) Hummer Vice President for Industry and Government
Relations Wei Shen on February 15 informed EconOff that the
Ministry of Commerce (MOFCOM) had issued a notification to
the Sichuan Provincial Department of Commerce (SPDOC) denying
Tengzhong's application to acquire Hummer. According to
Shen, MOFCOM's decision was based on an "Opinion" issued by
the National Development and Reform Commission (NDRC) that
she had not seen. She said MOFCOM did not state a reason for
the denial, but credited the decision to "industrial policy."

SPINNING ITS WHEELS
--------------


3. (C) Briefing Emboffs on February 11, Shen said GM and
Tengzhong had been struggling with the PRC bureaucracy since
the deal was first announced last year. According to Shen, GM
and Tengzhong had originally decided to ask Sichuan
provincial agencies to submit the purchase request on their
behalf rather than apply directly to the central government.
Despite the deal requiring only central government approval,
Shen said, MOFCOM and NDRC "would not take the application
seriously" if it was not submitted from -- and with the
implicit support of -- the Sichuan provincial government.


4. (C) GM and Tengzhong officials initially approached SPDOC
and the Sichuan Development and Reform Commission (SDRC),
packaging the purchase as a "technology transfer" from the
United States to China. NDRC, arguing that MOFCOM handles
technology transfers, instructed SDRC not to get involved.
MOFCOM determined Tengzhong "did not qualify" for the
proposed technology transfer and "refused to accept" the
application.


5. (C) According to Shen, the companies had since repackaged
the application as a "foreign acquisition" and were in the
process of resubmitting it to SPDOC and SDRC. She said
SPDOC's rules required the company to submit a feasibility
study to determine whether the transaction could be
classified as a foreign acquisition.


6. (C) Shen asserted that Sichuan,s Provincial Party
Secretary had not yet gotten involved in the Hummer case;
however, he had been courting GM investment for some time.
Shen implied the Party Secretary had been seeking some sort
of quid pro quo from GM before agreeing to support the Hummer
transaction. Shen predicted the Party Secretary's backing
would convince MOFCOM to approve Tengzhong's application.

NOT MADE IN CHINA
--------------


7. (C) Shen said PRC officials at the central and provincial
levels had cited multiple reasons for their unwillingness to
grant Tengzhong approval to purchase Hummer. Foremost, while
they recognized the deal would be good for the United States
and good for Tengzhong, they failed to see "what's in it for
China."


8. (C) Shen noted that many Chinese officials dismissed
Hummer as "gas-guzzling junk," a cast off from an
unsuccessful American venture inappropriate for China. The
perception that America was "flexing its muscle" to push the
sale of the Hummer brand was pervasive among PRC contacts.
Shen confirmed that Tengzhong's near-term plan was to
continue manufacturing in the United States, limiting the
potential for job creation in, and related benefits to,

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China. To compound problems, as part of the PRC's broader
industrial policy, the Ministry of Industry and Information
Technology (MIIT) has called for auto industry consolidation
and attempted to limit new market players.


9. (C) Shen added that Tengzhong had also faced trouble
getting approval from the State Administration for Foreign
Exchange (SAFE) to convert domestically-earned Renminbi into
foreign currency for the purchase. She noted at the February
11 briefing that Tengzhong might be able to circumvent SAFE's
approval for Renminbi conversion by utilizing other revenues
held offshore. On February 15, however, Shen said MOFCOM
indicated that it would "never" approve Tengzhong's
application "even if it used offshore money."

HIDDEN ROADBLOCKS
--------------


10. (C) Beyond the PRC's expressed policy concerns, Shen
believed other forces were at play. For example, a key MIIT
Vice Minister had opposed the Hummer purchase because of his
connections to Wuhan-based Dongfeng Motor Corporation,
producer of a product similar to the Hummer line that would
compete with a Tengzhong-owned Hummer. Shen also recounted a
conversation in which an SPDOC official seemed to refer
obliquely to a previous ill-fated dealing with Tengzhong.
"There is some bad blood," said Shen, "but we're not sure
what it is."

ATTRACTIVE FINANCING AVAILABLE
--------------


11. (C) Shen said that during GM's due diligence, the company
had recognized Tengzhong was not a major player in the
Chinese auto industry. GM ultimately decided to accept
Tengzhong's offer because the company was able to prove it
had the required cash and financing, which GM interpreted to
mean that it also had the necessary Chinese government
connections to succeed. "A private company with that kind of
money is not a coincidence," Shen commented. She noted
Tengzhong had shown its commitment to the $150 million deal
by providing "millions of dollars a month" to fund Hummer's
ongoing operations.

NO CASH FOR CLUNKERS
--------------


12. (C) Shen claimed the Hummer deal had received "all
necessary approvals" from the U.S. side, including from the
Committee on Foreign Affairs in the United States (CFIUS).
The GM-Tengzhong agreement gives the Chinese firm until the
end of February to secure PRC approval, though Shen suspected
that timeframe might be flexible. "It's not like there are
other white knights out there for us," she confided.


13. (C) Shen admitted that GM had earlier looked at other
possible Chinese buyers and had been approached by Beijing
Auto Industry Holding Company (BAIC),which recently
purchased Saab from GM (septel). She said GM recognized that
selling Hummer to a well-connected national champion would
likely speed the PRC approval process, but the company
questioned whether BAIC had the necessary financing
immediately available to close the deal.


14. (C) Comment: The PRC has from the beginning been
reluctant to discuss with Post Tengzhong's potential purchase
of Hummer. Wei's account was at times self-contradictory,
causing us to question the accuracy of the details of her
account. For example, on February 11, Wei indicated that
MOFCOM had refused to accept Tengzhong's technology transfer
application and that the foreign acquisition transfer had not
yet been submitted, but on February 15 she said MOFCOM had
formally rejected Tengzhong's application. Still, the PRC's
actions lead us to believe that decision-makers are loathe to
allow a company that has not been hand-picked as a national
champion to acquire what is seen as a controversial U.S.
brand. End comment.
HUNTSMAN