On June 2, just a day after General Motors filed for Chapter 11 bankruptcy, it was announced that the US auto giant reached agreement on selling its Hummer brand to a little-known private Chinese company, Sichuan Tengzhong Heavy Industrial Machinery Co., Ltd, a manufacturer of road, construction and energy industry equipment in southwest China’s Sichuan province. So why would a company which mainly produces industrial machinery and has no experience in the passenger-vehicle market buy this famous off-road vehicle brand?

While the auto industry in the US and the rest of the world is suffering, the Chinese auto market alone keeps on expanding with unprecedented speed. Data released on June 9 by the China Passenger Car Association showed that sales of passenger vehicles, including minivans, sports utility vehicles, and multi-purpose vehicles reached 812,178 units in May, increasing by a faster-than expected 54.7% year-on-year, and up 1.2% from April. Total passenger car sales in the first five months jumped 29.6% to 3.64 million units from the same period last year. Many experts believe that China's automobile market is expected to see a new monthly sales record in June, and sales in the second half of the year is expected to be much better still than those in the first six months.

Given such assuring results and promising forecasts, its not surprising that companies without a direct relationship to manufacturing passenger cars should start showing stronger interest in this segment of the market. Yet what becomes more interesting now are the actual details of the deal.

It is not the first time that a Chinese company has bought a famous foreign auto brand. In 2004, Shanghai Automotive Industry Corporation Group (SAIC) purchased a 48.9% equity share of Ssangyong Motor, the fourth-largest automaker in the Republic of Korea. In 2005, Nanjing Automotive bought the British brand MG. And this March, China's largest independent carmaker Geely Automobile acquired Drivetrain Systems International, the world's second-largest auto transmission supplier.

For its part, Tengzhong have officially announced that it has no plans to manufacture Hummer in a Chinese plant. Rather than setting up a plant in China, Tengzhong plans to keep using the current facilities in the US. Moreover, the deal will also allow Tengzhong to keep Hummer's original management and operational team intact, along with the Hummer brand. As Yang Yi, Tengzhong CEO, put it in a statement, “the company will allow Hummer to innovate under the leadership and continuity of its current management team.”

Considering this information, it is clear that Tengzhong is investing not in new manufacturing capacity, but in Hummer’s research and development capabilities. This serves as another good illustration of how Chinese companies are willing to pursue opportunities to learn from foreign brands’ successful experience in research, design, marketing and service.

Tengzhong’s plans, however, may still face resistance from the Chinese government. Officials from the Development Research Center of the State Council have already made it clear that they are not enthusiastic about the deal, to say the least. They have claimed that “buying a fuel-hungry and high-emission brand is directly against the current trend of energy saving and emission reduction.” So there is still a possibility that the deal can be blocked. So both sides, General Motors and Tengzhong, are waiting in anticipation of the government’s decision on the matter.

The Central Economic Work Conference closed in Beijing on Wednesday with headlines proclaiming that the 'ten-year prudent' monetary policy will be replaced by the 'tight one' in 2008. The current 'prudent' policy itself replaced the 'proactive' policy in 2005. Amid familiar fears of 'overheating,' China's economy has been running at 11.5% year-on-year growth in the first nine months of 2007, and the annual consumer price index was estimated to stand at about 4.5%, overrunning the warning threshold by more than 1%. The conference identified five major problems in the national economy, starting with 'overheating' and inflation concerns, to a weak agricultural sector and difficulties with energy conservation and emission reduction, and ending with welfare issues.

So with the economy frequently showing signs of overheating, how long can China's phenomenal growth rates continue? Moreover, while low labour costs have undoubtedly been China's trump card in capturing world markets, how long can this advantage persist with labour costs likewise creeping upwards?

One study (see reference 1 below) conducted this year examining the impact of market access and internal migration on average provincial manufacturing wages in 29 Chinese provinces between 1997 and 2004 found that provincial wages increased by about 15% per year (or 130% over the 7 year period), corresponding to 'common shocks possibly like total factor productivity growth and national rise in prices.' Internal migration, the study found, has slowed down wage growth by only 2% per year.

The question is really how China can keep increasing the competitiveness of its products and maintain its export growth, and factors such as low wages, a favourable exchange rate and the flow of foreign direct investment have all played their part in fuelling China's growth. Yet according to a study (2) assessing the causes for China's competitiveness, China's pool of cheap and increasingly mobile labour means competitiveness based on low wages will persist for 'quite some time,'  and Chinese producers are becoming much more proficient in enforcing world requirements for quality and product design, partly facilitated by the inflow of foreign direct investment and entrepreneurship. In effect, the study suggested, with China's enormous rural population and increasing number of 'floating' urban workers, 'it will be many years before the supply of low-cost unskilled labour runs out.'   

(1) De Sousa, J; Poncet, S, How are wages set in Beijing?, CEPII, No. 2007 - 13.   

(2) Adams, FG; Gangnes, B; Shachmurove, Y; Why is China so competitive? Measuring and Explaining China's Competitiveness, 2006.