Geely's next challenge: selling a made-in-China Volvo

Now that Geely Automotive has won the bidding for Sweden's Volvo car unit, China's No. 1 private auto maker is making plans to set up a local production base, according to sources familiar with the company.

An even bigger challenge might be convincing status-conscious Chinese consumers to buy a made-in-China Volvo.

China's car market is certainly an alluring prize. The country's auto sales surpassed those in the United States in 2009, and Beijing has said it would continue to encourage domestic consumers to buy new cars with subsidies.

Those sales are growing fast. This week Geely rivals General Motors and Volkswagen -- the leaders in China's car market -- reported their 2009 China sales leapt 67 and 37 percent, respectively.

Geely's first order of business is to work out where to produce its new vehicles. Sources familiar with Geely's future strategy for Volvo told Reuters that the company plans to cooperate with local city or provincial governments in China to build plants for Volvo cars tailored for Chinese consumers.

In China, Ford currently runs a car venture with Chongqing Changan Automobile Co, a domestic rival of Geely, to make Volvo S40 and S80 cars.

The S40s produced at the Changan plant in western Chinese city of Chongqing sell for around 250,000 yuan ($36,620), or about 50 percent cheaper than the imported made-in-Sweden model.

Geely is in talks with the Chongqing government to continue to make Volvo cars in the city, said the sources, who declined to be identified as they were not authorized to speak to the media.

The company's initial plan is to take over Changan's Volvo production lines and also partner with other Chinese enterprises, which would invest in a new Volvo plant in Chongqing jointly with Geely.

The Chongqing government, whose top boss Bo Xilai is former commerce minister, is keen to keep the Volvo plant in the city, said the sources. But no final deal has been reached yet.

MADE IN CHINA

But do consumers want to buy a made-in-China Volvo?

After all, Volvo cars are known for high safety standards and careful manufacturing. Despite improvements in recent years, Chinese car makers have a different reputation.

According to the 2009 J.D. Powers Initial Quality Study (IQS) -- a measure that tracks new-vehicle quality during the first 90 days of ownership -- China's domestic producers averaged 258 problems per hundred vehicles. That's nearly twice the 142 problems for locally produced international brands. U.S.-made cars had just 108 problems per hundred.

Geely, known in China as the maker of such bargain brands as the Free Cruiser and the Geely King Kong, seems to know what Western customers will want.