Harvard Case - Acquisition of Hummer: M&A Challenges Faced by Chinese Companies Overseas
"Acquisition of Hummer: M&A Challenges Faced by Chinese Companies Overseas" Harvard business case study is written by Dean Xu, Penelope Chan. It deals with the challenges in the field of General Management. The case study is 37 page(s) long and it was first published on : Jun 24, 2010
At Fern Fort University, we recommend that Sichuan Tengzhong Heavy Industrial Machinery Co. Ltd. (STHIC) reconsider the acquisition of Hummer from General Motors (GM). While the acquisition presents opportunities for STHIC to enter the US market and gain access to Hummer's brand and technology, the potential risks and challenges outweigh the potential benefits.
2. Background
This case study focuses on STHIC's proposed acquisition of Hummer in 2009. STHIC, a Chinese heavy machinery manufacturer, saw this acquisition as a strategic move to expand its international presence and gain access to the lucrative US market. However, the deal faced significant scrutiny from both the US and Chinese governments, ultimately leading to its collapse.
The main protagonists in this case are:
- STHIC: A Chinese company seeking to expand its global reach and diversify its business portfolio.
- General Motors (GM): A struggling American automaker looking to divest its non-core assets, including Hummer.
- US Government: Concerned about the potential national security implications of a Chinese company acquiring a US brand with military ties.
- Chinese Government: Concerned about the potential risks and challenges associated with overseas acquisitions, particularly in a politically sensitive sector like the automotive industry.
3. Analysis of the Case Study
The case study highlights several key challenges faced by Chinese companies undertaking overseas acquisitions, particularly in the context of the US market. These challenges can be analyzed through the lens of various frameworks:
Strategic Framework:
- SWOT Analysis: STHIC's acquisition of Hummer presented both strengths and weaknesses.
- Strengths: Access to Hummer's brand recognition, technology, and US market presence.
- Weaknesses: Lack of experience in the US automotive market, potential cultural and language barriers, and regulatory hurdles.
- Porter's Five Forces: The US automotive industry is highly competitive, with established players like Ford and Chrysler, as well as emerging competitors from Asia. The acquisition of Hummer would have placed STHIC in a challenging competitive environment.
- Competitive Advantage: STHIC lacked a clear competitive advantage in the US market. Hummer's brand was struggling, and STHIC's core competency in heavy machinery did not translate well to the passenger vehicle market.
Financial Framework:
- Valuation: The acquisition price was considered too high by many analysts, given Hummer's declining sales and profitability.
- Financing: STHIC faced difficulties securing financing for the acquisition, as banks were hesitant to lend to a Chinese company entering a new and challenging market.
- Return on Investment (ROI): The potential ROI for STHIC was uncertain, given the risks and challenges associated with the acquisition.
Cultural & Operational Framework:
- Cross-cultural Management: Integrating Hummer's US workforce and culture into STHIC's Chinese organizational structure presented significant challenges.
- Operations Strategy: STHIC lacked experience in manufacturing and distributing vehicles in the US market, requiring significant investment and expertise.
- Change Management: Implementing organizational changes within Hummer to align with STHIC's vision and strategy would have been complex and disruptive.
4. Recommendations
STHIC should reconsider the acquisition of Hummer. The potential risks and challenges outweigh the potential benefits. Instead of pursuing a high-risk acquisition, STHIC should focus on:
- Developing a long-term strategy for entering the US market. This strategy should be based on a thorough analysis of the market, competitors, and potential opportunities.
- Building partnerships with US companies. This could involve joint ventures, technology licensing agreements, or other collaborative arrangements.
- Investing in research and development to develop new products and technologies that meet the needs of the US market. This would allow STHIC to build a competitive advantage in the long term.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core competencies and consistency with mission: STHIC's core competency lies in heavy machinery, not passenger vehicles. Acquiring Hummer would have been a significant departure from its core business and would have created challenges in managing two vastly different operations.
- External customers and internal clients: STHIC lacked a clear understanding of the US market and its customers. The acquisition would have required significant investment in marketing, distribution, and customer service to build brand awareness and loyalty.
- Competitors: The US automotive market is highly competitive, with established players like Ford and Chrysler, as well as emerging competitors from Asia. STHIC would have faced significant challenges in competing against these established players.
- Attractiveness ' quantitative measures: The acquisition price was considered too high by many analysts, given Hummer's declining sales and profitability. The potential return on investment was uncertain, given the risks and challenges associated with the acquisition.
6. Conclusion
The acquisition of Hummer presented significant challenges for STHIC, including regulatory hurdles, cultural differences, and a lack of experience in the US automotive market. While the acquisition offered opportunities for STHIC to enter the US market, the potential risks and challenges outweighed the potential benefits. STHIC should focus on developing a long-term strategy for entering the US market that is based on its core competencies and strengths.
7. Discussion
Other alternatives not selected include:
- Acquiring a smaller, more niche US company: This would have allowed STHIC to gain experience in the US market with less risk and investment.
- Partnering with a US company to develop and market a new product: This would have allowed STHIC to leverage its technical expertise and the US company's market knowledge.
Key assumptions:
- The US government would have approved the acquisition: The US government's concerns about national security implications were a significant factor in the deal's collapse.
- STHIC would have been able to integrate Hummer's US workforce and culture into its Chinese organizational structure: Cultural differences and language barriers could have created significant challenges in integrating the two companies.
- STHIC would have been able to secure financing for the acquisition: Banks were hesitant to lend to a Chinese company entering a new and challenging market.
8. Next Steps
STHIC should:
- Conduct a thorough analysis of the US automotive market. This should include an assessment of market trends, competitive landscape, and potential opportunities.
- Develop a long-term strategy for entering the US market. This strategy should be based on STHIC's core competencies and strengths.
- Identify potential partners in the US. This could involve joint ventures, technology licensing agreements, or other collaborative arrangements.
- Invest in research and development to develop new products and technologies that meet the needs of the US market. This would allow STHIC to build a competitive advantage in the long term.
By taking these steps, STHIC can increase its chances of success in the US market while minimizing the risks associated with a high-risk acquisition.
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Case Description
In June 2009, Sichuan Tengzhong Heavy Industrial Machinery Company Limited ("Tengzhong"), a little-known manufacturer of construction machinery and special-use vehicles in south-western China, took the global auto industry by surprise when it announced its plan to acquire the money-losing Hummer division of General Motors Corp. Hummer's premium sport-utility vehicles and sport-utility trucks had relatively low fuel efficiency of 9−16 miles per gallon. Since 2006, Hummer's sales volume had declined sharply due to escalating oil prices, its negative image as a "gas-guzzler" and a shift in customer preferences towards smaller sedans. Tengzhong had no prior experience in the light vehicle industry or in managing a major auto brand. Because this was Tengzhong's first attempt at foreign direct investment, it was imperative for its management to figure out the major obstacles in managing its new Hummer subsidiary in the US. They also had to formulate a sound business plan to get the Chinese government's approval for this acquisition, and to make the investment a big success. (Note: This acquisition was called off in February 2010 because Tengzhong was not able to get the Chinese government's approval. The details are included in Appendix 1 of the teaching note for reference.)
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