Wednesday, February 24, 2010

Why Is GM Shutting Down Hummer Instead of Selling It for Something?

CC photo from Sfoskett of Wikimedia.

From the New York Times:
DETROIT — General Motors said Wednesday that it would shut down Hummer, the brand of big sport-utility vehicles that became synonymous with the term “gas guzzler,” after a deal to sell it to a Chinese manufacturer fell apart.
The buyer, Sichuan Tengzhong Heavy Industrial Machines, said in a statement that it withdrew its bid because it was unable to get approval from the Chinese government, which is trying to put a new emphasis on limiting China’s dependence on imported oil and protecting the environment.
....
G.M. had been trying to sell Hummer for nearly two years, and struck a preliminary deal with Tengzhong last June. The two companies had planned to close the $150 million deal by the end of January, then delayed the deadline by a month in the hopes of getting the green light from China.
GM can't get $150 million for Hummer, so instead it's settling for ... $0 ... by retiring the brand? This doesn't add up. Whenever you have an asset that has lost a substantial amount of value (without going entirely bust), you don't just throw it in the trash--you sell it for whatever you can get for it.

I'm not precisely sure what's involved, but there are some underlying costs associated with transferring a brand to another company (for a numerical example, assume this is $1 million). But there are also costs associated to shutting down a brand outright (say this is $200,000). In this scenario, any sale of the brand above $800,000 makes the company a net profit and should be undertaken. Just because GM couldn't make a deal for $150 million doesn't mean it shouldn't have tried to sell the Hummer brand for a tenth of that.

Perhaps GM doesn't want to undercut the perceived value of its other brands or generate public ridicule at the low sale price. Those are the only excuses I can think of off the top of my head. But neither seems like a good enough justification for leaving money on the table.

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