BIZCHINA> Review & Analysis
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BIZCHINA> Review & Analysis
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Geely's global ambitions
By John Bonnell (China Daily)
Updated: 2009-09-28 09:01
Geely Automotive gained legitimacy in the eyes of many this week when Goldman Sachs announced it would invest $250 million in the company's convertible bonds and warrants, potentially leading to a 15 percent ownership of the nascent automaker.
When Goldman Sachs invests in an eight-year old Chinese automaker, it means something. To some, it means a vote of confidence for the can-do approach Geely management takes to building a global automotive company. Indeed, the presence of Goldman Sachs casts new light on Geely's global expansion plan, which features the acquisition of Volvo Car from Ford Motor Co. Often dismissed as impossibly ambitious, Geely's plan all of a sudden looks more feasible. Though the funding from Goldman Sachs is not earmarked for an acquisition, and is in insufficient to cover the purchase of Volvo in any event, a Goldman Sachs position in Geely raises the overall capabilities of the company. Against all odds, a combination of Geely, Volvo and Goldman Sachs might just work.
Of course it is the perception that has changed the most, not the challenge of acquiring and managing an overseas company. That remains daunting, especially for a small inexperienced company like Geely. Established in 2001, Geely will deliver just 300,000 units this year, about one-seventh the volume of the well-established Shanghai Automotive Industry Corp (SAIC), which will deliver with its joint venture partners more than 2 million units. In contrast to the other leading Chinese automakers, which are State-owned enterprises, Geely was built with private capital. Competing at the low end of the market, Geely earns low margins on sales. The combination of small volumes and margins serves to limit the resources available for Geely's ambition to lead China's automotive industry development. Geely's focus is very different from those of the State-owned Chinese manufacturers, which tend to partner with global automotive manufacturers rather than take them over, and tend to focus on the China market rather than look overseas. Geely is more aggressive, but lacks the backing of a government sponsor. Skeptics point to the company's brief history and lack of experience in overseas markets as obstacles that will keep Geely from making an overseas acquisition work. They point to the failed takeover of South Korea's Ssangyong by SAIC to emphasize the point. Adding to the challenge, Geely would acquire Volvo, a brand suffering from declining sales. From a peak of approximately 450,000 units in 2004, sales of Volvo brand vehicles have dropped by a third, to an estimated 300,000 units in 2009. Volvo acquisition
Brand: It takes years to build a reputation in the automotive industry, and a company's brand represents that reputation. Though Volvo sales are declining, the Volvo brand remains strong and well established. The downturn in sales seems more to do with the state of the economy and the low priority placed on the brand by current owner Ford than to a damaged brand. Under new ownership, and with the right care, the Volvo brand could thrive again. The trick for Geely would be to quickly grasp the character of the brand, to understand the source of value for the brand, and to continue to invest to fortify the brand. (For more biz stories, please visit Industries)
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