Geely's global ambitions

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

But Geely is not concerning itself with obstacles, but rather focusing on the opportunity. There are several factors we see as key to Geely capitalizing on a 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.

Geely's sales are about one-seventh those of leading automaker Shanghai Automotive Industry Corp, but it reportedly has ambitions to buy Volvo to increase its international footprint. Shao Chang

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.

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

(China Daily 09/28/2009 page6)