China's Geely challenge: High hopes, hard reality

Chinese tycoon Li Shufu's car company Geely has a knack for giving its vehicles oddball names: Gleagle, King Kong, Englon.

Not as memorable for buyers of the King Kong and its stablemates is a standard of quality that's so-so even by the Chinese auto industry's standards.

Zhejiang Geely Holding Co.'s $1.8 billion acquisition of Sweden's iconic Volvo Cars from Ford Motor Co. could offer a shortcut to recognition and better quality for Li's auto empire. But there are growing doubts over the odds for success for a deal that in China is likened to a "snake swallowing an elephant."

Experts working in mergers and acquisitions question Geely's ability to successfully meld corporate cultures so alien to each other — one a private business manned by migrant Chinese workers with modest expectations and the other a much bigger, union-dominated work force used to a more democratic managerial style.

And despite Beijing's apparent support for Li's daring foray into the European auto market — China's first major takeover of an international automaker — the government planning agency whose approval is required for the deal to go through remains noncommittal.

"If the company proposes a reasonable plan, we will take a positive attitude," Zhang Xiaoqing, a deputy minister of the National Development and Reform Commission, China's economic planning agency, told a recent government conference. NDRC officials would not comment further.

Officials vetoed another unlikely auto deal — heavy equipment maker Sichuan Tengzhong's bid for GM's gas-guzzling Hummer brand.

Geely says it is cobbling together $2.7 billion, using a melange of loans, overseas investments, local government funds and its own cash hoard, to cover the $1.8 billion deal and operating costs after it takes over.

"I would be happy to see Geely do a great job, but I have my doubts. Li Shufu should realize that he cannot solve every issue just with money," said Zhang Xin, an auto analyst at Guotai Jun'an Securities in Beijing.

Some of the financing is bound to come from the local government wherever Geely sets up its Volvo China headquarters. On Monday, an official in Shanghai's Jiading district confirmed the automaker was considering putting a factory in its industrial zone — a move that would boost the city's own automaking aspirations and put Volvo at the heart of China's most affluent region.

Geely would not comment on the plan, which would also require NDRC approval.

Li has far more than his reputation as a sharp businessman riding on this deal. In Volvo, Geely gains a coveted foothold, albeit a shrinking one, in Europe, and an immediate doubling in its overall capacity — moving it closer to the 1 million unit annual output that experts say is key for profitability.

Volvo workers also have much at stake. After four straight years of annual losses, the 80-year-old Swedish brand must weather the transition to Chinese ownership without losing its reputation for building safe and sturdy cars.

Many believe it can only do so if Geely honors its pledge to keep a major share of production in Europe.