Scandinavian Purchase

China’s largest private carmaker Geely buys Volvo

By DING WENLEI

Ford Motor Co. is handing the keys of

its Volvo car unit over to a new owner∶Zhejiang Geely Holding Group Co.Ltd. The Chinese automaker inked a deal with Ford on March 28 purchasing the Volvo brand for $1.8 billion and allowing Geely to expand its foothold in Western markets.

The agreement—the biggest overseas purchase of China’s auto industry—was signed by Geely Chairman Li Shufu, and Ford Chief Financial Officer Lewis Booth.Li Yizhong, Chinese Minister of Industry and Information Technology, and Swedish Minister for Enterprise and Energy Maud Olofsson were also present at the signing.

The government-backed agreement ends nearly two years of talks between Geely and Ford over Volvo. The landmark deal for the first time puts a Chinese company in charge of a major global car brand and will elevate Geely’s pro fi le onto the global auto market.

Li described the deal as “a milestone” for both Geely and Volvo and pledged to maintain Geely Automobile Holdings Ltd.—a subsidiary of Zhejiang Geely—and Volvo as separate subsidiaries at Volvo’s headquarters in Gothenburg, Sweden.

The deal

Zhejiang Geely secured Volvo at a price far less than the $6.45 billion Ford paid for the brand in 1999. The Volvo deal will help free the No.2 U.S. automaker of its Volvo obligation and enable it to focus on its core Ford brand.

“We think it’s a fair price for a good business,” Booth told a news conference at the signing.

Under the deal, Ford will get $1.6 billion in cash and a $200 million note from Geely.

Li said the deal is worth the price because Ford and Volvo spent nearly $10 billion in research on vehicles fueled by new energies in the past decade.

“New energy-powered vehicles are the future of the global auto industry and it’s expected that some day soon, Geely Auto will produce only electric hybrids,” Li said.

Zhejiang Geely owns 51 percent of Hong Kong-listed Geely Automobile Holdings Ltd. The privately owned parent company made a bid for Volvo, instead of through the publicly traded Geely Auto, a fi nancial move that would otherwise have increased the automaker’s debt as it had already invested heavily to expand in the Chinese market.

VOLVO’S EVOLUTION: Geely will endeavor to improve Volvo’s profit-making capability after the purchase. A Volvo car was on display at the Guangzhou Auto Show in November 2009

Geely Auto has already announced an aggressive target of boosting its sales to 2 million vehicles by 2015 from last year’s roughly 330,000 units—about the same as Volvo’s global output.

China surpassed the United States to become the world’s top auto market last year,with sales surging 46 percent to a record 13.6 million units. Domestic carmakers including Geely, BYD and Chery are keen on driving into Western markets, but have so far lacked the brand recognition to do so.

“What Geely lacks is not brand awareness but high brand reputation, and acquiring a well-known brand like Volvo will help elevate global recognition of its Geely products,” said Li Yang, an observer of China’s auto industry and an editor of the Auto Fan magazine, in an interview with the First Financial Daily newspaper.

“It could be the fastest way for a company like Geely Auto to move up from making affordable family cars for the masses to building respected cars for the af fl uent,” Li said.

The deal is scheduled to close in the third quarter of this year, subject to regulatory approvals. In a statement, Geely said it had secured all the necessary fi nancing to complete the deal, as well as “signi fi cant working capital facilities to fund Volvo’s ongoing business.”

The future

Zhejiang Geely is expected to face tough challenge after acquiring the Volvo brand.

The company has little experience selling cars outside China, let alone running major manufacturing operations in Europe.In addition, Geely established its reputation for low-end cars, which, along with its lack of global stature, could be a drag on Volvo’s reputation for quality and performance.

But Nick Reilly, President of General Motors International Operations in Shanghai said people could underestimate the true capabilities of the Chinese Auto industry.

“Their rate of progress in terms of technology, innovation and quality improvements is really remarkable,” said Reilly, who didn’t think technology or intellectual property is the primary target Geely has for the Volvo deal.

“It can mean a great leap forward for Chinese car exports,” he said.

Geely’s chairman believes the integra-tion itself will be advantageous for both Geely and Volvo. “It may face cultural barriers, but if the integration is properly guided, the result will be bene ficial for all,”Li said.

Li wants to radically slash the Swedish brand’s costs for some of its primary operations, such as product development and manufacturing, by tapping the relatively cheap labor available in China.

While retaining Volvo’s existing manufacturing facilities and management teams in Sweden and Belgium, Geely plans to build another plant in China, most likely near Beijing or Shanghai, to double production of Volvo cars.

“China, the largest car market in the world, will become Volvo’s second home market,” Li said at the news conference.

At another press conference on the Volvo takeover in Beijing on March 30, Li said Geely is ready to inject $900 million worth of operating capital into Volvo.

“We should not only inject money into Volvo, but also endeavor to improve Volvo’s pro fi t-making capability,” Li said.

Volvo’s biggest problem was its small production scale and high research and development expenses, Li said, adding Volvo should try to increase production and sales to cut costs.

Made-in-China Volvo may get a boost from the Central Government’s recent plan requiring at least 50 percent of government cars be homegrown. At present, Volkswagen AG’s Audi A6 is the car of choice for Chinese state of fi cials.

One tricky part of the deal could be separating Volvo from Ford—technology, intellectual property and designs of Ford and Volvo have been deeply integrated in the 11 years since Ford purchased Volvo, said Li Yang.

“If the problem is well handled, the purchase could help Geely attract Volvo suppliers and polish its technologies in making luxury cars for the Geely brand, as the sales of Land Rover did for BMW and Ford,” Li said.

The ambition

Geely Chairman Li Shufu, the son of farmers from Taizhou, Zhejiang, always dreamed of making a choice car for customers worldwide. He turned Geely, a small business building motorcycle parts, into one of China’s fastest-growing companies in more than a decade.

The former head of a refrigerator factory had already invested 2 billion yuan ($292.8 million) in his car dream when he got the license for car manufacturing in 2002. In May 2007, Geely changed its slogan from“making quality and affordable cars for the masses” to “making the most environmentally friendly, energy ef fi cient and safest cars for the world,” a clear confirmation of its global ambitions. ■