How China Auto Maker Geely Wowed Volvo
Posted: Wednesday, March 31, 2010
by Walter Rhett
Charleston Perlo
In December 2008, Ford motors put the fabled Volvo brand up for sale. A Chinese auto producer, Geely Automobile Holdings, was eager from the beginning to buy the Volvo brand and its powerful cache. Since Ford purchased Volvo in 1999, Volvo's sales have rapidly declined, and its profits disappeared. In 2009, the global sales for Volvo were only 335,000 units. At the same time, the luxurious car market in China was expanding by 46 percent annually. Mercedes-Benz sales increased by 77 percent! Yet in 2009 Volvo sales in China were up an incredible 80 percent annually, beating Mercedes-Benz, BMW (38%), and Audi (33.1%). The China market made the Chinese buyer Geely a wise choice. Geely will receive Volvo's physical and intellectual property, along with its marketing, supplier, and sales network.
Geely had demonstrated its respect for intellectual property, long a sore point for international businesses involved in China, and has highly developed manufacturing technology, yet several issues endangered the deal. Among them were deep concerns by the auto unions, Ford's concerns about common intellectual property with Volvo, and the special capital requirements Ford demanded at the last minute. Large concerns still remain as to whether Geely can leverage or raise the nearly 4 – 6 billion it may need before Volvo can generate self-sustaining cash flow and profits. Volvo's pretax loss narrowed to $934 million last year from $1.7 billion in 2008, Ford said on Jan. 28. Volvo's last annual pretax profit was $377 million in 2005. The average Chinese car cost $17,000 last year.
Despite the enormous financial perils, the deal has a dramatic and real upside. It gives Geely a highly sought brand in the fastest growth segment of China's auto market. China's car market grew in 2009 to 13.6 million vehicles-the world's largest--while U.S. auto sales slumped to 10.4 million.
Geely's ambition as the 10th largest domestic Chinese auto maker, the 2nd largest private enterprise auto company, is to do well at home. It currently has less than a 3% market share, and sold only 330,000 vehicles in 2009. Foreign brands account for two thirds of China's sales, with the six leading brands all international. GM China and Volkswagen remain China's largest auto companies.
Geely is also unrestricted by joint venture agreements with Western auto companies that prohibit and block import sales. Asian markets, and Mexico, Brazil offer potential opportunities.
Geely President Li Shufu's personal charisma was an important force in winning the deal. During talks with the union, Li was asked to describe Geely's competitive advantage--in only three words. Li answered "I love you." It broke everybody up and helped bring the unions on board. Volvo has about 20,000 employees worldwide, including nearly 14,000 in Sweden.
Volvo was Geely's third international auto manufacturing purchase, after the British Manganese Bronze Holdings in October 2006 and Australian DSI in March 2009. But still, it came as a surprise when a Chinese private enterprise became the preferred bidder and closed the Volvo deal in the end. Ford paid 6.4 billion for Volvo; Geely bought it for 1.8 billion and has announced plans to invest 900 million, and to build a manufacturing plant in China. The agreement calls for 1.6 billion to be paid to Ford in cash.
Volvo's headquarters will remain in Gothenburg, Sweden, and Ford will continue to supply parts and other support from its Visteon China operation. Geely aims to complete the acquisition in the third
quarter, Li, who once ran a photo shop, said earlier this week.
"The deal won't work if Volvo continues to rely on blood transfusions," Li said. "We will help it recover the ability to generate blood," Li said.
All photos, fair use.
Thanks for reading! /wr