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Geely reportedly a bidder for Volvo, but analysts are doubtful

Chinese automaker Geely has reportedly submitted a bid to Ford Motor Co. for the Swedish Volvo brand.

Geely Chairman Li Shufu met with Ford executives in January during Detroit’s North America International Auto Show. At that time, a Geely spokesman denied that Geely was holding talks with Ford, but the Dearborn, Michigan-based automaker said in early March that Geely and several unnamed automakers were planning to submit bids for the failing Swedish brand.

Ford has put Volvo up for sale since it sold the British Jaguar and Land Rover brands a year ago to India’s Tata Motors, Ltd.

One of the bidders

Geely could be one of the bidders for Volvo, according to an assistant group vice president in charge of overseas market at Ford. And according to a recent Geely statement, the privately owned automaker has an interest in internationalization and Geely chairman Li Shufu expressed that his company is “open for international cooperation.” The possible acquisition of Volvo could provide premium cars for Geely to assemble in China as a cost-reduction strategy.

The Ford Credit 10-K report for 2008 states that the Ford financing subsidiary serves Volvo dealers in the U.S. and is operational as a financing source for Ford cars sold in China. Ford Credit could be a valuable participant in financing the purchase of Volvo by Geely, according to the source, and subsequent floor planning and retail loans for Geely and Volvo vehicles sold in China. Ford Credit reported financing revenues of $16.4 billion in 2008, down slightly from $16.7 billion in 2007.

In terms of vehicle production, however, Geely is half the size of Volvo. Volvo produced 374,297 vehicles in 2008, while Geely built 204,205 units. The Swedish brand, based in Gothenburg, reported 2008 revenues of $32.92 billion, almost twice as much as Geely’s $17.69 billion.

Based in Hangzhou, Geely reportedly plans to maintain Volvo as an international brand, rather than shift the core of its operations to China. Volvo’s principal assembly plant is in Gothenburg and it employs about 24,000 persons globally, compared to Geely’s 7,000 persons.

Li Shufu has been outspoken about his desire to make Geely into a global automaker. Volvo has been an international seller since its creation after World War II, and Ford kept its headquarters and main assembly plant in Sweden during the nearly 20 years it has owned the brand.

In 2008, Volvo’s U.S. sales skidded 32 percent from 2007 to 73,102 units. The brand reported an operating loss of $736 million in the fourth quarter and reduced its work force by 25 percent in 2008. Volvo’s production of sports sedans and XC9 SUVs has been trimmed by about 45,000 units in the first quarter of 2009. Volvo has 355 dealers in the U.S., of whom 152 are single-brand stores.

Geely needs money, not Volvo

But analysts believe that Geely needs money, not Volvo. Recently, Geely has been approaching international investment banks like Carlyle Group for funds, disclosed a source with Geely, to pay back the principal and interest of $100 million worth of convertible bonds. The convertible bonds were issued by The Stock Exchange of Hong Kong Ltd. in 1996 and Citibank was the book-runner.

Apart from the loan, Geely also needs money to inject into its numerous production facilities. The Zhejiang-based automaker started expansion two years ago by adding seven plants in several provinces in China.

Local governments have been giving strong support to Geely on the premise that Geely would produce 2 million vehicles by 2015. In order to fulfill that promise, Geely plans to launch five key-technology platforms, 15 vehicle platforms and 41 new models within five years. However, most of its existing production facilities in Shanghai, Taizhou and Ningbo are reportedly still losing money, badly in need of capital injection.

“Li Shufu did mention acquiring a European brand a long time ago to lift the brand image of Geely,” said a Geely insider, “but that was before Geely signed the JV contract with Manganese Bronze Holdings PLC (MBH)”.

After Geely started cooperation with MBH in November 2006, it has been in a position to develop high-end products. Geely even posted a ¥3.5 million ($500,000) reward for a new logo design in 2007. It has finalized a development strategy for four separate brands.

“In fact, Geely is now not in dire need of a high-end brand to lift its own,” said an analyst. Acquiring the Volvo might distract Geely from promoting its own brand, the analyst warned.

However, sources from a British law firm did confirm that Geely “has clearly expressed its intent to acquire Volvo at a cost of several billion dollars.”

A Geely insider revealed to the local media that Li Shufu approached Volvo to see if it would be a bargain deal for a famous brand.

 

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