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Posted on Harvard Business Review: April 15, 2010 3:14 PM
Will Volvo's recent takeover by Geely (Mandarin for lucky) prove to be lucky for both companies? The Hangzhou-based company paid Ford $1.8 billion ($1.6 billion for a 100% equity stake and $200 million for a credit note), and raised $900 million to keep Volvo running, which took the total tab to $2.7 million. To finance this deal, Geely secured $2.1 billion of loans from Bank of China, China Construction Bank, Export-Import Bank of China, Geely Automobile Holdings (the group's listed arm), and the government of Gothenburg, where Volvo is headquartered. In return, Geely has promised to return Volvo, which made a $934 million loss last year, to profits in two years' time. Is that possible?
Geely's turnaround plan for Volvo consists of three lines of action:
1. Geely won't interfere in Volvo's day-to-day management, will continue manufacturing Volvo cars in Europe, and plans to retain the existing management team. That's a textbook case of partnering.
2. Geely will integrate Volvo's patented technologies into its vehicles for which it will pay the latter.
3. Geely will take Volvo to China by setting up a 300,000 units per annum plant there.
Based on my M&A experience in China, I'm skeptical that this deal will generate value—for several reasons.
Geely lacks the management skills to integrate a large company like Volvo. The two companies made almost the same number of vehicles last year: Geely manufactured 329,000 units while Volvo made 335,000 units. However, the $2.4-billion Geely was six times smaller than Volvo, whose revenues were $12.4 billion.
The Chinese automobile-maker lacks global exposure. It exports a small number of automobiles to other developing countries; has made only a few overseas investments; and in China, it has entered into just one joint venture with the London taxicab producer, Manganese.
There are few production or marketing-related synergies. While Geely, a low-cost, low-end producer, will gain access to a premium brand and sophisticated technologies, it isn't clear what it brings to Volvo. It'll be tough to reduce costs; the two have different platforms and quality standards.
Managing becomes complicated because of differences in perspectives and hierarchical decision-making. When I have chatted with senior executives of European and American companies acquired by Chinese enterprises, they have all mentioned the resulting challenges.
Although Geely says it will allow Volvo to retain its independence, founder Li Shufu is an aggressive entrepreneur. It may be difficult for him to adopt a hands-off approach, particularly if Volvo keeps losing money; that hasn't been his style in the past.
If there are question marks around production, technology, marketing, and management synergies, what's driving the takeover? Well, Geely had access to cash, Li was willing to invest it in Volvo, and he's betting on the fact that entering China will return Volvo to profitability. After all, China is the world's largest automobile market, with 13.6 million units sold in 2009 and some 16 million likely to sell in 2010. The country's premium segment, where Volvo will compete, is growing at over 100% a year. Geely plans to boost Volvo's sales in China to between 200,000 and 300,000 units per year—ambitious since Volvo sold only 30,000 cars in China in 2009. While entering China will help Volvo, I don't see the company turning around by 2012, as promised.
M&A in the automobile business have rarely worked. In the past, Li has beaten the odds on his own turf, but he's now fishing in a global pond where the rules are different. Sure, Geely has landed a big catch, but absorbing it isn't going to be easy.
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