BIZCHINA> Review & Analysis
Geely's global ambitions
By John Bonnell (China Daily)
Updated: 2009-09-28 09:01

International footprint: Overnight, Geely enters more than 100 markets worldwide. It becomes a global automaker with a global footprint from which to build. With a strong presence in Europe and North America, Geely would gain experience in these top markets. It should continue to build Volvos in Sweden, where the brand gains much of its character. Access to global supply base and distribution networks would serve Geely in time.

Geely will find it challenging in the near term to build Volvo sales overseas, as it would face the same conditions the current owner faces. Geely will need to work to maintain the footprint for when conditions improve.

Management experience: In acquiring Volvo, Geely would acquire a talented and capable management team, with high degree of international experience. Volvo managers have always enjoyed the respect of the industry. Geely's lack of experience overseas can be mitigated by building good relationships with existing management. The international experience of Goldman Sachs could serve to bridge any gaps in communications between management and owners. The key will be an agreement in purpose.

Volvo brand in China

It could be argued that Volvo's weakness stems from the size of its home market, Sweden with a population of only 9 million people. The small domestic market limited the opportunities to gain scale, and ultimately cost Volvo its independence in 1999. Volvo is a strong brand looking for scale.

China is now the world's largest automotive market, and still growing. According to the projections by the JD Power Strategic Advisory Group, passenger vehicles will reach 8.2 million units in 2009, and grow to 12 million units by 2016.

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The big opportunity may be to bring Volvo, as a Chinese owned brand, to China in a meaningful way. The S40, S60 and S80 are strong, positioned among the luxury vehicles in China. Geely should consider positioning these vehicles against the high-end Japanese vehicles. A 5 percent share of the three segments these models compete would amount to 300,000 units in 2009, and nearly 400,000 units in 2012.

Geely will find it imperative to build a close working relationship with Ford, the current parent of Volvo. The current Volvo models are built on Ford-Mazda platforms. Many of the parts are shared across models. The costs to develop new models would likely be prohibitively expensive for the combined Volvo-Geely volumes, less than 1 million units. The same is true for the new technologies required to meet emission, fuel economy and safety standards. By teaming with Ford-Mazda, the development costs would be spread over a bigger volume, improving the viability of the business.

At the end of the day, scale and the efficient management of that scale are key contributors to success in the global automotive industry. And they will determine the success of Geely.

Is the investment by Goldman Sachs a vote of confidence in Geely? We can never be certain when private equity goes to work. These clever guys have more than one way to earn a return on capital. But the investment does encourage a new look at the potential acquisition of Volvo by Geely. With Chinese automotive exports down by more than 50 percent in 2009, and no Chinese automotive company accelerating in international markets, Geely's unique approach to developing an automotive capability might just work.

John Bonnell is senior director of JD Power Asia Pacific Forecasting


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