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Entry of Volvo in the Luxury Market of China

Saturday, May 1st, 2010

The past several years have seen most of the Western world and other economies around the globe reeling from the onslaught of the economic crisis that gripped several governments – not to mention the economic downtrend experienced by several industries. The automotive industry proved to be no exception as major players in both mainstream and luxury car markets felt the stinging jabs wrought by this world crisis.

Alliances had to be made to ensure survival. However, the past major mergers proved to be terrible if not disastrous to the entities involved. David Welch from business week notes some of these marriagesgone- wild including the merger of Daimler Benz and Chrysler, as well as the acquisitions made by General Motors of Hummer and Saab. GM tried another go at it with unsuccessful tie-ups with Subaru, Suzuki and Isuzu. Asian corporate giants dived into the foray, led by Tata Group’s acquisition of Land Rover and Jaguar, but it proved to be a struggling endeavor for this conglomerate from India.

But despite the worldwide crisis affecting major industries, China’s car market, the largest in 2009, continued to enjoy a boom in sales. At the forefront is Geely Motors, the largest privately-owned Chinese automaker, which is now making history by finalizing the biggest overseas acquisition by a China-based auto company of a well-known Western car brand. In an unprecedented US$1.8 billion purchase deal, Zhejiang Geely Holding Co. signed a binding contract with a representative from Ford Motors for ownership of Sweden-based Volvo Cars.

While many see the purchase as an upstart move by a rising Chinese conglomerate eager to get its hands on an established Western product at a bargain price, others see it as a brilliant strategy that has been exemplified and manifested by the business processes and methods by founder Li Shufu. According to Michael Dunne of the Wall Street Journal, the Chinese business magnate is known to dominate a particular industry he has entered throughout the years, doing so through fast production and considerable cost reductions.

This success formula has seen the company dominate several industries from refrigerator parts to motorcycles and finally to the car industry. Now, it’s taking the strategy one step further and is on the move to dominate the luxury market – first in China – and soon, who knows, probably the world.

About Geely Motors

Geely Automobile is the car manufacturing facility of parent company Zhejiang Geely Holding Co., which started as a refrigerator manufacturer in 1986, moving to motorcycles in 1994 and eventually to automobiles in 1996. The facility started exporting cars by 2003 and has an annual production capacity of 300,000 cars.

The term “geely” is derived from the word “Jílì” which means auspicious or lucky. Chairman and Founder Li Shufu needs all the luck he could muster to achieve his vision for the company to sell two-thirds of its production output outside of mainland China – a task that he acknowledges as difficult, but achievable nonetheless.

With this vision on the horizon, Geely started making waves in the international market, aggressively appearing as the first Chinese automaker to participate in prestigious international auto shows like the Frankfurt Motor Show in 2005 and the Detroit Auto Show in 2006. Geely entered the European market in 2007, but its initial attempt to enter the North American market in 2008 failed due to crash and emission test failures as required by the U.S. auto industry. What could have been a great complement to the 2008 Beijing Olympics was delayed until 2010.

With the March 2010 acquisition of Volvo Cars from Ford Motors, Geely is taking both the luxury car market in China and the current Volvo automobile operations and market by storm. This is seen to come into fruition by the third quarter of 2010, when all technical and commercial aspects of the deal are finally closed.

Ford’s Acquisition of Volvo

Many say that Ford’s acquisition of Volvo in 1999 was its response to the previous year’s merger between automobile giants Chrysler and Daimler Benz. The $6.45 billion price tag that this purchase of the Swedish-based automobile manufacturer took produced a volley of issues and concerns from the auto industry. These concerns were rightly so as the industry at that time was churning out 15 million cars in excess of what the global demand was, resulting in more than 80 assembly plants that owners may find they have no use for in the current market.

This situation eventually took its toll on Ford as sales dipped tremendously, forcing the company to operate at a loss since the issues overtook them in 2005. Ford Motors had no choice but to release most of its foreign assets to recover its losses and pay off outstanding debts. With this refocus back to its original domestic brands, Ford has no choice but to relinquish its hold on Volvo Cars – and this is when Geely Holdings jumped in. Li Shufu believes that it can turn Volvo around, this time just by facing its own shores – the fast growing China luxury car market, touted to be the biggest in the world at present.

Geely Moves to Purchase Volvo from Ford

In a deal that began negotiations several months ago last year, Zhejiang Geely Holding Company and Ford Motors Company have finally agreed to an accord for the purchase of Volvo Cars for $1.8 billion. Li Shufu met with Ford Motor’s Executive Vice-President Lewis Booth at the corporate headquarters for Volvo Cars in Gothenburg, Sweden to finalize the deal.

Li Shufu announced that Volvo would continue to be headquartered in Sweden, but will make a strong move to enter China’s growing luxury car market – a move that will put Geely in the same league as luxury car giants Audi, BMW and Mercedes-Benz. Geely plans to achieve this by adding $900 million to the original price tag of the acquisition, hoping to turn Volvo Cars around and make it more appealing to its targeted market.

Implications of Volvo’s Entry to China… and the World

With the acquisition of Volvo Cars from Ford, Geely Motors aims to compete with global leaders and crack the biggest luxury car market in the world – China. AFP Global Edition says that using the same cuttingedged technologies that Volvo used, which made it one of the most-loved family car brands, Geely projects to do well in a market dominated by Audi, BMW and Mercedes-Benz.

But first, according to analysts, Geely should ensure the public and its targeted markets that the Volvo and Geely brands would remain distinct from each other. Geely is known for its relatively cheap and affordable cars, a fact that many feared could be translated in the manufacture of upcoming Volvo cars under Geely’s ownership. In response, Geely has given the assurance that Volvo will be independent in its use of its technologies, including the continued existence and operations of its plants in Belgium and Sweden.

According to Chairman Li Shufu’s own words: “I see Volvo as a tiger: it belongs to the forest and shouldn’t be contained in the zoo. The heart of the tiger is in Sweden and Belgium – Its paws should extend all across the world.”

Geely’s top executives have acknowledged the superiority of Volvo’s technologies and will give the manufacturer a freehand in developing its current line of luxury cars with their own distinct features that are recognized across the world as uniquely Volvo. In the process, Geely can learn from this source of enormous technology to develop their own product lines and improve their image as a car manufacturer in China. At the same time, Geely will use the good image and branding that Volvo possesses to tap into the lucrative market for government luxury cars.

Current regulations in procurement can be to Geely’s advantage as the government requires 50 percent of purchases to be Chinese brands. With more bureaucrats and government officials seen driving Chineseowned Volvo cars, sooner or later China’s wealthy middle class, complete with their enormously increasing buying power, will eventually switch to the Swedish brand. Currently, Audi leads the Chinese market for luxury sedans with more than 157,000 units sold in 2009. Volvo is a far cry with a little over 22,000 units sold in the same period. In anticipation for restored profitability, Volvo plans to produce 390,000 cars in 2010, which is more than the 330,000 units built in 2009.

What the Future may Hold for Volvo in China

Geely Holding’s purchase of the Volvo brand would keep the management and operational structure of the Swedish company intact, while maintaining its original headquarters in Gothenburg, Sweden. This is an assurance that Volvo will keep its own Swedish heritage and engineering that American and European loyalists have grown to love over the years. But will the new acquisition suffer the same fate by maintaining the same management and operational structure that has been losing millions during the past few years?

Analysts do not think so as Geely have the most important element that will make the new merger work – the Chinese luxury car market. Geely is in the position to market the Volvo image and brand, and with Chinese ownership at the helm, this would be seen as more preferable by the targeted Chinese market. Aside from that, it would be inevitable that Volvo will start to have their own manufacturing plants in the heart of China – using the same Volvo engineering and technologies it has used throughout the years, but with a fraction of the high manufacturing cost that has characterized the Swedish and Belgian processing plants.

The result – higher profit margins and better business for Volvo – even more than it ever had as an independent Swedish car manufacturer, or as a former subsidiary of the Ford Motor Company. With Volvo’s engineering and Geely’s innovative car designs (a characteristic Volvo is not known for), the new merger is seen to churn out better, high-quality cars, at more affordable price tags than its overpriced predecessors.

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