Will Volvo transform Geely into a top player?

Geely and Ford agreed yesterday that Volvo will be taken over by Geely. Barring any unforeseen events during the next few months, when the last details are supposed to be ironed out, this would make it the biggest takeover of an international brand by a Chinese carmaker.

But is it a wise move by Geely?

It can hardly be argued that Volvo has been very successful in China. The S40 and the S80, the 2 models produced here, have not exactly sent shivers down the competitor’s spines. The S40 really is sort of an overpriced luxury version of the Ford Focus and finds it hard to compete against larger cars like the Buick Regal and LaCrosse. The S80 competes directly with the Audi A6, which sold 12 times better than the Volvo. The S80 will find it even harder to compete, once the new A6 will be out end of 2011. Including imports of about 9,000 units Volvo sold only 23,000 vehicles in China last year and the current lineup produced in China has very limited potential for growth.

In order to become more competitive, Volvo needs better positioned vehicles. Before the crisis hit the industry, Ford had plans for a new version of the S40. This has changed and Geely will have to live with a model that will be outdated in a couple of years. The S80 is approaching the end of its cycle in 2013, just 2 years after the S40.

Geely will have to invest on a large scale to make Volvo viable in China, be it through new models and/or higher economies of scale. They also have to invest heavily downstream, as Volvo’s dealer network is rather slim. We talk about investments of several billion US$ over the next few years. There are credible reports that the deal gives Geely a working capital of around 900 million US$ and that Volvo has cash reserves of about 450 million US$. It will have to shore up much more than that for the planned facility in Beijing with a capacity of 300,000 units and new models that need to be developed, as Volvo’s global lineup will age rapidly over the next few years. It remains to be seen how much more the Chinese banks want to underwrite and if Geely can get additional money from a possible IPO.

Even if Geely managed turning around Volvo in China, they face a much bigger task of turning around Volvo globally. Volvo sold less than 350,000 cars last year and doesn’t reach economies of scale needed for most of the models. If a global giant like Ford hasn’t managed to make Volvo a success with staying power, why should a smallish Chinese carmaker be able to do just that?

On the other hand, Volvo being free from Detroit’s long arm might be able to get back to the roots and recreate a brand image that works again. Under Ford, Volvo became too much of a producer of somewhat luxury Ford models. The Volvo engineers are capable of creating great cars given the resources. The governments of China, Sweden and Belgium have already had their hands in the negotiations between Ford and Geely. Maybe they will find ways to help Geely/Volvo further down the road, although the European commission will closely watch the developments, as will the European competitors.

Geely should be able to use Volvo’s experience for the development of quality and high level vehicles. From what we understand, Geely will not be allowed to use the Ford technology found in the current Volvo lineup for their own vehicles, but certainly anything that already comes out of Volvo or will be created there.

The takeover of Volvo can’t be compared to the takeover of Rover by SAIC, as this carmaker already was in ruins. Volvo is fairly successful in some segments like station wagons and CUVs, has modern facilities in Gothenburg and Genk and a good reputation. The main problem for Volvo is the brand positioning. It sits uncomfortably between the mass market and the premium market. Even if it was only in the premium market, it would be only one third the size of each of the German premium brands Audi, Mercedes and BMW. Volvo does not have the branding power of these rivals and is very far from their economies of scale. Maybe Volvo should be repositioned as the brand of choice for the intellectuals, the way it was in the 70s and 80s.

In some years, we will either praise Li Shufu’s foresight or we will analyse why it went wrong. It can go both ways, as this is uncharted territory.

About the author:

Jochen Siebert is the founder of JSC Automotive, a consulting firm specialized on the automotive industry in China with locations in Shanghai and Stuttgart. He brings in experience from more than 250 consulting projects in the automotive industry during the last 18 years.