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Geely acquires Volvo: Historic deal but challenges ahead

THENBURG, Sweden – China’s Zhejiang Geely Holding Group Co., Ltd. (Geely) signed a definitive stock purchase agreement on March 28 with Ford Motor Company to acquire 100 percent of Volvo Car Corporation (Volvo Cars) and related assets (primarily intellectual property) with a price of $1.8 billion.

The agreement was signed by Geely chairman Li Shufu and Lewis Booth, chief financial officer of Ford Motor Company, at a ceremony at Volvo headquarters witnessed by Li Yizhong, Minister of China’s Ministry of Industry and Information Technology and Swedish Deputy Prime Minister Maud Olofsson.

The deal puts a Chinese company for the first time in charge of one of the most prominent car brands. In the wake of the SAIC-Rover, NAC-MG, SAIC-Ssangyong and BAIC-Saab deals, Volvo became the first major car brand to be wholly owned by a Chinese automaker.

Under the agreement, Geely bought the Volvo brand, the whole product lineups including the S40, S80, C70, C30, XC90, XC60, V50 and V70 models, three vehicle platforms including the P1, P2 and P24, Volvo’s global dealer network, R&D talents and supplier system.

Geely will pay in the form of a note in the amount of $200 million, and the remainder in cash. The Zhejiang-based private automaker said in a statement that it has secured all necessary financing to complete the transaction, and significant working capital facilities to fund Volvo Cars’ ongoing business.

“We think it’s a fair price for a good business,” said Lewis Booth during the signing ceremony. Ford must use about half its sale proceeds to pay down the $23.5 billion debt the company took on in 2006.

Both companies expected to close the transaction in the third quarter of 2010, which is subject to customary closing conditions including receipt of applicable regulatory approvals. Ford has committed to provide vehicle components, engineering support, information technology, access to tooling for common components, and other selected services for a transition period after completion of the sale.

The deal took Geely over two years since Li Shufu expressed formal interest in acquiring Volvo in January 2008. The Chinese central government gave Geely the nod last August to buy the stricken automaker. In October 2009 Ford chose Geely as the preferred Volvo bidder. Two months later, Ford said it had settled all substantive commercial terms with Geely for the sale of Volvo.

 

Two sticky issues solved

Reaching agreement on the purchase price and working capital facilities, instead of intellectual property, were the last hurdles to be stepped over during the negotiation, according a report in Economic Observer, quoting an unnamed source close to the deal.

Since Ford announced Geely as the preferred Volvo bidder last October, negotiation was going smoothly and the two companies planned to sign agreement in early February. But then Ford proposed that enough working capital for Volvo Cars must be secured before the signature. As a result, Li Shufu and his team had to raise more money and delay the date of the signature.

Ford also floated the purchase price, which was negotiated at $1.6 billion in early February, as global economy warmed up and Ford’s business situation went better.

At Geely’s press conference held in Beijing, Geely’s finance director Yin Daqing said the company has secured a total of $2.7 billion for completion of the deal. “About half of the capital was raised in China and the rest from other countries including the U.S. and the Europe.”

 

Intellectual property rights

Before the signature of the deal, analysts doubt if Geely could own much of the real Volvo technologies since the latter has been integrated into Ford Motor’s vehicle platforms. In a company statement, Geely said the deal includes “further agreements on intellectual property rights, supply and R&D arrangements between Volvo Cars, Geely and Ford Motor.” Volvo Cars has solid ground to operate on a standalone basis and deliver its business plan for a sustainable future, said Geely.

An auto analyst from Southwest Securities said that means Volvo’s intellectual property will not be taken away by Ford. Geely and Ford have made a win-win deal on the issue of intellectual property rights, said Li Shufu at the press conference. “Volvo Cars will have the ownership of its core technology and intellectual property rights. As the 100 percent shareholder of Volvo Cars, Geely will also own these technology and intellectual property rights, and rights to use many other key technologies,” said Frank Zhao, vice president of Geely.

 

Revival plan

Geely promised again at the signing ceremony to preserve Volvo Cars’ existing management and manufacturing facilities in Sweden and Belgium, while exploring opportunities to manufacture Volvo vehicles in new production facilities to be built in China for the local market.

The trade unions at Volvo Cars also said yes to the deal on March 27, with the condition that they got required information concerning important issues, according to media reports.

Li said at the press conference that Geely will focus on completion of the deal before choosing production sites. According to earlier media reports, the facilities will be located in the Beijing Yizhuang Economic Zone and boast a capacity of 300,000 vehicles. The new base will need an investment of $1.9 billion, which will be jointly provided by Geely and Beijing municipal government.

Li Shufu said earlier that he planned to eliminate Volvo Cars deficits within two years if everything goes smoothly.

In an interview with sina.com after the signature ceremony, Tong Zhiyuan, who was appointed as COO for the Volvo project late last year, said he has the confidence of bringing Volvo back to the Top 3 premium car brands in the world. Tong disclosed that Geely will firstly improve the utilization rate of Volvo’s European market instead of building new facilities in China. The key to Volvo’s success in China is to improve sales, instead of building new plants, added Tong.

 

A special case

Jia Xinguang, a well-known local auto analyst, is positive about the historic transaction and the marriage between a “Chinese country lad and the Swedish princess.” Only the Chinese market can save the Volvo brand, Jia told auto.sohu.com. “Since the Chinese government has decided to procure more cars from the independent brands, Volvo Cars may benefit from the policy after it is owned by Geely and may replace other luxury brands as a new generation of official cars,” he added.

But other analysts see major challenges ahead for a young carmaker not yet fully established itself in China. “Geely’s acquisition of Volvo is a special case,” said Mei Xinyu from the Institute of International Trade and Economic Cooperation under the Ministry of Commerce in a auto.sohu.com interview. According to his analysis, Chinese acquisitions of foreign brands normally face tremendous challenges in terms of access to technology, debt burdens and trade union relationships. He does not believe that buying foreign car brands is necessarily the best way for Chinese automakers to foray into the overseas market.

“Geely has only completed 20 percent of the acquisition deal after signing the agreement. It has a long way to go as regards to digestion of the Volvo brand and its technology,” Zhao Ying, member of China’s Institute of Society and Science, told auto.sohu.com.

Zhao also suggests that given the current status of Chinese automakers, they should pay more attention to acquisitions of related technologies. “BAIC’s purchase of Saab assets is a good example. BAIC has more chances of success as it has no burdens.”

The other challenge for Geely, according to Dr. Wayne Xing, editor/publisher of CBU/CAR, is that the acquisition does not seem to lead to a future Geely-Volvo, as in the case of other major multinational mergers such as DaimlerChrysler, Nissan-Renault or Fiat-Chrysler. “The relationship between Geely and Volvo will be brotherly rather than a parental,” said Li Shufu at the press conference in Beijing. “Geely will not make Volvo cars and Volvo will not make Geely cars.”

But the biggest challenge for Geely, according to auto analysts Li Chao, is whether Geely will be able to manage a well-known international car brand. The acquisition, writes Li Chao in his blog, is made by Geely supported by local governments. “In essence, the acquisition is a State project that combines the resources of local governments and an automotive enterprise, where Geely functions as the facilitator,” Li says.

“Geely has no money,” Li Shufu admitted, “but we are not short of money.”

To Jack Yu, editor of Qiche Shangwu Pinglun (Auto Business Review), Geely faces two other hurdles in addition to its management capabilities in handling an international brand. “No. 1 is if Geely really understands why Volvo as a brand has been running at a loss,” Yu writes. He believes that Volvo’s problem is in vehicle design and market positioning rather than cost control. He therefore doubts if Li Shufu’s planned China operation of the Volvo will help resolve the problems.

The second hurdle is the availability of ample funds to support the future operations of Volvo globally and in China. “And that would depend on if Geely resolves the first hurdle,” Yu says.

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