Successful cross-border vehicle company mergers can be counted on the fingers of one hand. When one famous car brand buys another – whether General Motors and Saab, Daimler and Chrysler, or Ford and Volvo – one of the most common by-products is buyer remorse.
Perhaps yesterday’s Geely-Volvo deal will go down in automotive history as just another mergers and acquisitions lemon – or maybe it will help make Geely a household name. Either way, the $1.8bn deal is likely to mark a significant shift in the global industry, to the East.
China has the world’s largest auto markets; now it owns one of the world’s best known premium car brands. It would be foolish to underestimate either the ambition of Beijing, or the resources that it can muster, to build a world-class industry.
On paper, the deal makes sense: Geely makes cheap small cars; it is developing a line of new mid-sized cars; what it lacks is a premium brand, strong in all the areas where Chinese carmakers still trail: technology, research and development, service and quality.
But that assumes that Geely can do what Ford could not: run Volvo profitably. Geely has never bought a foreign car brand or run a car company overseas; its only claim to fame is selling cheap cars in China.
Last year, when China’s small car market exploded in the wake of government tax breaks, Geely lost market share. Its sales rose 48 per cent in 2009, to 330,000 units – but other automakers did better.
Li Shufu, the rags-to-riches self-made head of Geely – whose name, he says, came to him in a dream – has no shortage of ambition: staff compare him to Henry Ford.
According to criteria outlined by Bain & Co, the management consultancy, in a study of why M&A deals succeed or fail, Mr Li has slim prospects with Volvo. Bain concludes that there are “two kinds of deals that most (Chinese) auto players should walk away from”, and one of them is “buying stakes in US or European OEMs [original equipment manufacturers] in the hope of turning them around”. That is exactly what Geely plans to do with Volvo: run it profitably, by liberating the Volvo management from the dead hand of Ford (according to Geely insiders), and selling lots of Volvos in China.
Selling cars may be the easy part: the Swedish company sold only 22,000 vehicles in China last year, according to JD Power.
Yale Zhang, of CSM Auto in Shanghai, says such entry-level luxury brands will grow very strongly in coming years.
Geely’s strong connections with central government – without which no such acquisition could have been contemplated – will not hurt: if Volvo can be named an approved brand for government procurement, that could boost sales.
Freeman Shen, Geely’s head of international operations, says Geely has no illusions about potential integration problems between what is in many ways the most Chinese of Chinese automakers, and its magnetic opposite in Sweden.
Mr Shen believes Geely can raise Volvo profits because Mr Li “is not fettered by 100 years of automotive history”.
For the time being, Volvo will remain very European: R&D will remain in Sweden, and the main production base will stay in Europe, says Mr Shen.
“We want to be careful not to damage the Volvo brand,” he says. “We don’t want the image of a luxury car made in a third world country. We want the image of a European luxury car, owned by a Chinese.”
Volvo and Geely will be run as separate operational units, to avoid brand bleed.
Arthur D Little, the consultancy, has predicted that Geely would be one of only five Chinese automakers – out of more than 100 – likely to make it into the “exclusive club of global OEM champions” by 2020.
Yesterday’s deal could well determine whether that ever happens.
source: ft.com
