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.
