Go, Geely, go!

Geely wants to buy Volvo. Good choice or bad? Perfect choice, I’d say.

A while ago, when discussing whether it makes sense for a Chinese auto manufacturer to buy a foreign brand (if it can be bought cheaply), I said: “My first choice would be Volvo.” Geely and I seem to have a meeting of the minds. Last week, the Wall Street Journal reported that Geely is expected to make a formal offer for Volvo within the next few days. They should, and Ford should take it. According to the WSJ, the offer “is anticipated to be around $2 billion.” When Ford bought Volvo in 1999, they paid $6.45 billion. Who says only cars depreciate?

(To be honest, I thought buying Volvo would be the perfect choice for Volvo’s joint venture partner Chang’an. But if they don’t seize the opportunity, someone else will.)

The purchase of Volvo could be the key to unlock a conundrum that has plagued the Chinese auto industry: China is currently the world’s largest car market. According to all indications, it will stay the world’s largest car market for years to come.

However, China’s whole car exports are negligible.

Sure, there are some exports. According to OICA, China produced 9,345,101 vehicles last year. Of those, only 680,700 were exported, CAAM says. Compare that to other countries. Germany produced roughly 6 million vehicles in 2008. Half of those were sold at home. The other half was exported. Japan built 11 million vehicles in 2008. Japan sold 5 million at home. 6 million were exported.

China is the world’s export powerhouse. The world’s low cost producer. Stable. Reliable. Why can’t China export more cars? The German and Japanese examples give an alluring perspective: If China could do as Germany and Japan can, China would produce 22 million cars this year. 11 million sold at home, 11 million exported.

Why are the export numbers so anemic? China is in a tough position: Most cars made under joint venture contracts are world class automobiles and could be exported immediately. But the joint venture contracts forbid it. (We pick up snippets of test sales here and there, but snippets they remain.)

The home grown brands have a hard time getting a foothold in the developed markets. Unless you sell to third world countries, you have to maneuver through a thicket of tests and regulations. Safety, emissions, mileage, crash-worthiness. Regulations which need a law degree to understand. Even if successfully tested, approved and certified, someone can perform a rigged crash test, put the video on Youtube, and all sales forecasts are history.

Every so often, someone has the great idea to bring low cost cars from China to the U.S.A. or Europe. Then the idea fizzles. Why?

In most developed markets, people do not buy a car. They buy a brand. Creating a brand costs time and money. Lots of time and lots of money. It took Toyota and Volkswagen 50 years to get where they are today. At the speed China is moving, I don’t think China wants to wait 50 years.

With an accepted brand such as Volvo, all the above is a non-issue. Volvo is a known and respected name. Existing Volvo cars already have undergone the testing and certifications. They could be exported immediately. It doesn’t matter where they are made - as long as they are produced with the same care and quality as a picky Volvo customer expects.

The fact that these Volvos are type-approved, certified, tested and insurance rated, that alone should be worth a good chunk of the purchase price.

Geely’s approach to keep the seasoned engineers in Sweden, and hand the menial tasks to lower paid personnel in China is ingenious. By “conducting basic engineering tasks like generating digital blueprints of parts designed by more seasoned engineers in Sweden” (as the Wall Street Journal wrote), young engineers will train on the job. (I would bring some Swedish engineers here to do QA.)

Keeping design and engineering centers in your target markets is important. Car makers the world over have learned this lesson. You need to have an ingrained feeling for what the market expects. Production can be done anywhere, as long as it makes sense.

There is another reason why Volvo is a good choice. It’s the perfect time for its come-back. “Volvo” stands for safety, for common sense, for green, for frugality, for intelligence. The Volvo buyer used to be an individualist; he didn’t care very much what others think about him. By driving a Volvo, he says: “I’m different.”

The trouble was, when Ford reached for the more luxurious segments with Volvo, Volvo left its core buyers behind. I have several well-heeled friends in Europe who were devoted Volvo owners. When Volvo got too big and too ostentatious, they became embarrassed and changed the brand.
The market for luxury automobiles was never that big. These days, luxury equals loss for most carmakers.

In the ten years Ford owned Volvo, Volvo received the reputation of being less reliable and more expensive. It’s time to take Volvo home to its roots: Safe, reliable, minimalist.

Then, surprise the customer with a price unheard of for a Volvo.

It will be a runaway hit. And it will once and for all shut up the China-bashers: The world’s safest car (at least in the minds of many), made in China.

The western markets move away from ostentatious luxury, towards low-cost, fuel efficient, utilitarian cars that provide mobility for less money. This is the window of opportunity for a successful Chinese entry.

In Europe, cars that sell for less than 10,000 Euro are flying off the dealers’ lots. If someone comes to that market with a familiar brand, with good quality, and at a price people can afford, it will be a huge success.

Go for it, Geely! Good luck to you. And may many other manufacturers follow your example.

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About the author: Bertel Schmitt, Gasgoo's columnist, is CEO of Hong Kong based parts sourcing company Sinamotive. Before founding Sinamotive, with the assistance of U.S. venture capital, Mr. Schmitt was a marketing consultant to Volkswagen AG.