Ford's Sale of Volvo to Geely Benefits All Parties

In The Path to Globalization of China's Automotive Industry (GLG News May 18, 2009), I described the motivation and steps to be taken for China's automotive companies to go global. Zhejiang Geely Automotive Group's move to acquire Volvo from Ford represents the most ambitious action to date for a Chinese vehicle manufacturer to accelerate the process of transforming into a global automotive player.

In my recent interview with Bloomberg Network, I stated that this deal would benefit all parties.  Let me describe my rationale in more detail.

By announcing the pending sale of the Volvo car brand, Ford has nearly completed the process of shedding its portfolio of loss-making brands that previously comprised its Premier Automotive Group. In doing so, Ford fulfills its objective of sharpening its focus down to its core mass-market brands. This represents a clear and sound strategy for Ford to focus its management attention and investments in the area of the business it understands best. But how does this deal benefit Volvo and its new suitor, Geely?

Rationale for the Acquisition of Volvo

The roots of the deal require understanding of the how Geely's Chairman Li Shufu views the auto business. Founded in 1986, as a manufacturer of refrigerators, Geely in the early 1990's expanded into motorcycle parts and eventually motorcycles and scooters. After rapidly expanding volume and scale, Geely began producing automobiles in 1998.

Admittedly, Chairman Li's initial view of automobiles was previously quite simplistic. His initial view of a car was essentially "a sofa with 4 wheels". However, Li has quickly become an expert in the car business and increasingly demonstrates an understanding of what needs to be done to become a competitive car company. He has already become quite critical of his initial understanding of the complexities of the automobile and the ingredients behind building global brands.

Specifically, Li recognizes the importance of technology and the capability of developing technology to an automotive company. He also has grown in his appreciation for how multi-national companies must be capable of self-development of technologies of the products they sell.

China and its car companies believe that the country that produces and consumes the most automobiles must be competitive on the world stage. However, leaders like Li Shufu understand that selling cars in China is not the same as in developed countries. Selling affordably priced cars to the vast number of entry-level Chinese consumers is a significant step away from the goal of selling Chinese-branded cars to experienced consumers in mature markets.

Geely's acquisition of Volvo is intended to accelerate the process of achieving this goal.

Geely's Approach to Integration

The industrial revolution started late in China, and is happening on a much shorter time schedule. Chinese car companies are trying to achieve what took many decades for Japanese and Korean companies in a much shorter time frame. Geely will take the approach of "standing next to partners and learning from them". They must find companies to associate with and transfer knowledge from them. Their recent partnership with Manganese Bronze to produce London Taxi parts and vehicles, along with the acquisition of Australian gearbox maker Drivetrain Systems International were examples of this approach.

However, just taking pieces is not sufficient. The approach Geely is taking in the acquisition of Volvo is to study the entire "eco-system" and integrate this into Geely's global strategy.

Geely is based in Zhejiang province, which is a haven for export-oriented companies. Chairman Li is adapting this mindset to into Geely's strategy: a fundamental belief that a viable business must eventually become global and achieve the capability to sell its products around the world.

Geely's approach can be summarized:

1. Learn the Volvo "eco-system" and get in the global game

2. Use this opportunity to promote the corporate Geely name world-wide

3. Learn to manage a high-end car brand: essential skills for a global car company.

Geely describes itself as the "poor boy from the countryside", while Volvo is the "rich girl from the city".  Geely believes that for the marriage to be successful, certain commitments must be made.  Geely therefore strives to preserve Volvo's:

1. Brand Equity

2. Culture

3. Manufacturing and R&D in Europe (to preserve "European-ness")

4. Relationships with Suppliers and Distributors

5. Management Team (use Volvo management to run Volvo, similar in approach to Hong Kong integration: "One Country, Two Systems")

6. Relationship with Labor Union

Strategic Fit

While the viability of Volvo's global business may be challenging in the near-term, Geely believes:

1. Volvo is a small percentage of Ford's overall business, and is not core to Ford's global strategy. Volvo is simply not a priority to Ford.

2. In contrast, Volvo will be core to Geely's global strategy and will be therefore more highly valued.

3. Ford has not placed sufficient emphasis on Volvo in the emerging growth markets - especially China.

Volvo today suffers from a lack of scale across their product portfolio. Volumes are evenly distributed across the portfolio, which creates a cost structure disadvantage versus other global players. By having a number of low-volume products burdens Volvo with high investment with limited scale, which is problematic for a brand trying to compete internationally.

Geely believes there is significant upside potential for Volvo in the China market. Simply put, it is believed that If BMW and Mercedes-Benz can sell over 50,000 cars and Audi can sell over 100,000 cars, then Volvo has the opportunity to grow significantly as a European luxury brand in China. To achieve this, Volvo must be understood in China as a European brand, not just a Scandinavian brand.

There will be very little conflict with Geely's brands, therefore very little brand tension among the parents. In addition, Ford very likely did not leverage low-cost global sourcing to achieve a more competitive cost structure for Volvo. Geely will seek to achieve sourcing efficiencies and cost benefits through further localization in China.

Geely will likely use Volvo to challenge Audi's position as the "government official's car". While Volvo and Geely should have their own strategies as well as management, core business processes (such as Sourcing and Product Development) can be shared. However technology sharing will likely require legal/IP clearance. The partners will also need to align key Volvo and Geely strategies including how to address New Energy/Low Carbon initiatives.

While marrying Volvo appears to be quite ambitious for a "poor boy from the countryside" with only a little more than a decade of automotive experience, the industrial logic appears to be quite pragmatic and sound. With proper attention to the process of post-acquisition integration, Geely can indeed use the Volvo acquisition to accelerate the process of transforming itself into a global automotive player.

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About the author: Bill Russo, Gasgoo's columnist, is a Senior Advisor with Booz & Company as well as the Founder and President of Synergistics Limited. He lives in Beijing and has more than 20 years of experience in the automotive industry, most recently serving as Vice President of Chrysler's business in North East Asia.