Geely buys Volvo. Believe it or not, it could work

Posted by: David Welch on March 29, 2010

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Mergers and acquisitions in the car business have a terrible record. DaimlerChrysler stands tall as the worst example of a bad marriage. General Motors made a hash of Saab and Hummer and its tie-ups with Isuzu, Suzuki and Subaru didn’t yield much either. Tata has struggled with Jaguar and Land Rover and now that Ford is sending Volvo off in a boat to China, we have to ask, can Geely make a go of this?

It’s going to be a tough job. Geely is paying $1.8 billion for the brand. Volvo sales of 335,000 globally are off 11% this year and 27% off their peak, according to this Bloomberg story. The Swedish carmaker has lost $2.6 billion during the last two years. The brand hasn’t been a real moneymaker for a very long time. Its costs are high and prices are strong, but Volvo doesn’t command luxury premiums for its cars.

On paper, at least, this could be a very good deal for Volvo. Be clear about one thing. Zhejiang Geely Holding Co., not the carmaker, is buying Volvo. This is an important distinction, says Jim Hall, principal of 2953 Analytics in Birmingham, Mich. It indicates that Volvo won’t just be folded into Geely and lose the brand’s strong Nordic identity. Geely Chairman Li Shufu said with unintentional humor that, “I see Volvo as a tiger. It belongs to the forest and shouldn’t be contained in the zoo,” Li said in Mandarin. “The heart of the tiger is in Sweden and Belgium.”

Volvo will keep its own management team, board of directors and headquarters in Gothenburg, Sweden. That would indicate that Volvo will keep its Swedish heritage and cachet. European and American Volvo loyalists will still be buying cars engineered in Gothenburg and built in Europe. .

What that would mean, however, is that Geely is buying Volvo and lingering on with the same money-losing structure. That’s where China comes in. The Chinese luxury market is booming and still has room for some other players to come in and build a brand. Geely will assemble Volvo cars in China using cheaper manufacturing, Hall says. The brand is upscale and Geely ownership might even be seen as preferable by Chinese consumers. So the company car grow sales and get fatter margins in China. That makes the business case work better than it ever did either under Ford or as an independent carmaker.

After so many failed auto deals, this one has the makings of a success. Of course, it means Geely can’t manhandle Volvo. They need to rely on Ford and the Swedes for technology that will make the Chinese cars real Volvos. In short, they should manage it as a separate subsidiary the way Volkswagen Group runs Audi AG. Give it autonomy and let the tiger run. Volvo is a niche brand and will never be a cash cow. But it certainly could work if Geely gives it some independence.

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Reader Comments

Husin O'Bama

March 29, 2010 11:13 PM

Like what the Chinese likes to say, the Li guy is certainly no fool if a Toad can swallow a Swan.

DotHeadChimp

March 30, 2010 02:26 AM

Too bad Geely is a backward farmer boy that will never change. Didn't it copy RR?

Interconnect

March 30, 2010 08:15 AM

As Chairman Li Shufu said with unintentional humor that, “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. Honorable Mr. Li compliments to Geely on this initiative. Stability is sought after M&A. It is expected the consumers in the SAARC region, China, the Indo-Pak subcontinent will see more of regional trade, than before. A logical happening for production where its likely to be consumed, will benefit the consumers. What is important is the convergence of scientific and economic integration, between Volvo and Geely.

Frank A NYC

March 30, 2010 09:51 AM

It's inevitable that Volvos will be built in China and exported. Why wouldn't a Chinese company take advantage of their main strategic asset, low cost production?

cragar77

March 30, 2010 11:20 AM

Now that the Chinese will own Volvo, we can finally buy a Volvo that folds up like a cheap suitcase when it crashes!!

Smarty

March 30, 2010 11:28 AM

Geely needs to make a more affordable model at Volvo. Volvo cars are overpriced for a brand that is not known as a premium brand. I know people who have had Volvo's and they are low quality. Geely will have to work on Volvo's quality. Volvo car designs are bad. Volvo's are notorious for being box cars with no innovative or stylish car design. Geely has a lot of work to do to make Volvo profitable. The Volvo brand has always been badly managed. We'll have to see what new Geely management will do.

Tom

March 30, 2010 10:08 PM

Volvo makes some quite stylish cars, having given up on the boxy designs about a decade ago. Their major problem, particularly in markets like here in Canada is that they are priced like BMWs and Audis and they clearly are not. Part of that is that their pricing does not reflect the strength of the Canadian dollar. Will that change, and what influence will Geely have on Volvo's business practices?

Another big question is how will Volvo function when separated from Ford, as Ford had integrated Volvo into its designs more so than with Jaguar and Aston Martin.

Colin

March 31, 2010 04:04 AM

Isn't what Geely is doing - letting Volvo remain an autonomous unit with Swedish management and design - just what GM did with Saab?

And look how that ended!

Bob

March 31, 2010 12:43 PM

The old PV544 and later 144 and 164 models from the sixties and seventies were far better than anything they have built in the last ten years. If the new Volvo gets their quality back to what it used to be, they have a good chance.

The_Observer

April 1, 2010 02:44 AM

In the not too distant past in the UK Volvos use to be bought by people would didn't want the expense of buying a LandRover. The former may have been boxy and a little sluggish but they were solid. The later models are much more stylish and include 4WD. Used in Sweden where winter roads are slippery they would be ideal cars for use not just in Northern China but in China's near markets of Korea, Japan, Russia and Central Asia. I suspect this is Geely's plan for their China production.

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Want the straight scoop on the auto industry? Detroit bureau chief David Welch , Dexter Roberts and Ian Rowley bring daily scoop, keen observations and provocative perspective on the auto business from around the globe. Read their take on such weighty issues as Detroit’s attempt at a comeback, Toyota’s quest for dominance and the search for an efficient car.

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