Geely buys Volvo Status symbol

Geely buys Volvo

Status symbol An obscure Chinese carmaker buys a famous but ailing Swedish one

Mar 31st 2010 | From The Economist print edition

IF OPPOSITES attract, Ford’s sale of Volvo to a Chinese upstart, Geely, for $1.8 billion ought to be a marriage made in heaven. Sweden’s Volvo is the epitome of good middle-class taste; its slightly dull but hugely safe and practical cars were, in better days, the default choice on many a suburban driveway in America and Europe. Geely, on the other hand, is barely known outside China, partly because its range of mainly cheap, small cars is not yet capable of meeting the rich world’s more stringent safety and environmental regulations. But it is ambitious.

The deal, which was signed on March 28th, brings to an end protracted negotiations by Ford to sell the last of the European premium brands it acquired in a spell of expansionary hubris starting at the end of the 1980s. Having disposed of Aston Martin and Jaguar Land Rover, Alan Mulally, the chief executive brought in from Boeing in 2006, was determined to offload Volvo too, which lost $1.3 billion last year and sold only 335,000 cars. Although Volvo this year appears to have turned a corner and is operating at “sustainable levels”, Mr Mulally’s thus far successful “One Ford” strategy involves concentrating all the firm’s financial and managerial resources on reviving the Blue Oval.

For Geely, acquiring Volvo is both an extraordinary statement of intent and a huge gamble. The deal could help Geely realise the dream of its founder, Li Shufu, the self-styled Henry Ford of China, to become a big international carmaker. Even though Ford has done its best to ring-fence its intellectual property, Volvo has plenty of its own, especially in the critical area of safety, to which Geely will have access and which will lend credibility to its cars as its range expands in both scope and scale. It will also learn from Volvo about how to run a global supply chain and an international dealer network.

But Mr Li believes that Volvo too will benefit. Most important, it will realise its potential in China, the world’s biggest and fastest-growing vehicle market. Fifteen years ago Volvo outsold Audi in China, but these days the German premium brand’s sales in the country dwarf Volvo’s, which were only 22,000 cars last year. He also thinks that away from Ford and the Premier Automotive Group that used to house its upmarket brands, Volvo will have freedom to go into market segments that were previously closed to it because they were occupied by models from Jaguar, Land Rover or Ford itself.

Volvo may still struggle to become a genuine competitor for Audi, BMW and Mercedes, which define and dominate the premium end of the market, but Geely should give it a big presence in China. Volvo’s main production sites will continue to be in Sweden and Belgium, but Geely has plans for two factories and an engine assembly plant in China. These, combined with Geely’s clout in distribution, could help Volvo nearly double its sales to 600,000 by 2015, Mr Li believes.

But what should really ensure Volvo’s future success in China is the government’s commitment to it. Although Geely is that rare thing, a privately owned Chinese carmaker, it could not have raised the money needed to buy Volvo (along with the $900m it is planning to inject in working capital) without the support of state-owned banks and provincial governments’ investment funds. The presence at the signing ceremony in Gothenburg of Li Yizhong, the minister of industry and technology, was significant: Geely is buying Volvo, but so too is China.

Nonetheless, doubts linger. The record of cross-border carmaking mergers is atrocious. Geely intends to allow Volvo to operate with a high degree of autonomy, but cultural clashes are almost certain. Within China, there are worries that Geely lacks the expertise to take on the management of a famous but ailing foreign company—a concern of which Mr Li is well aware. Ford, for its part, insists that Geely has what it takes to be a worthy steward of Volvo. Lewis Booth, Ford’s chief financial officer, is said to have taken a shine to Mr Li, seeing in him a real passion for the car business. At a time when relationships between China and other international companies are under severe strain (see Schumpeter), the future of a small Swedish car firm is not the only thing at stake.

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