Geely acquires Volvo Cars, what will this mean for the global automotive industry?

On 28th March 2010, Geely signed a $1.8Billion deal with Ford to acquire their Volvo car business. Now this is significant for two reasons, firstly it represents the largest deal that a Chinese automotive manufacturer has made to acquire a western car company. Secondly it also brings to an end a 20 year cycle of acquisitions and divestitures across North American and European automotive industries.

Ford has been at the centre of many of the acquisition and divestiture activities over the past twenty years, this was so they could establish their premier automotive group. The recent economic downturn saw Ford disband their premier automotive group leading to the sale of Jaguar Land Rover, Aston Martin and now Volvo. It is important to stress here that it is Volvo Cars that has been sold to Geely, not the remainder of the Volvo Group which includes truck, bus, aerospace, and outboard motor business units. So why would Geely be interested in acquiring Volvo Cars from Ford and what are their long term goals likely to be?

The Chinese automotive industry is the fastest growing of all the major markets around the world. The Chinese automotive industry has been trying very hard to enter western markets but the poor quality and safety record of their vehicles has meant that it has been virtually impossible to enter Europe and North America. The Chinese automotive industry knows that they have a strong advantage in terms of having very low labour costs. They have also been very creative with developing cars for their domestic market and some designs have been heavily influenced by western designs. In fact last year Geely produced one of the most infamous copies of a western design based on a Rolls-Royce Phantom, needless to say Rolls-Royce were not too pleased but it does show the lengths that some Chinese car companies will go to when developing new cars.

However things are different now, I believe we are now entering a new 20 year cycle of merger and acquisition activity, but this time it will be driven by automotive companies based in the BRIC countries. Over the past decade western automotive companies
were forming joint venture partnerships with Chinese automotive companies and they were also buying up other car companies across North America and Europe.

Now things have reversed whereby western car companies are looking to form more joint ventures in North America and Europe and companies based in the BRIC countries are looking to acquire car manufacturers in the western economies. We have already seen Tata
acquire, Jaguar LandRover, Geely acquiring Volvo and the Russian car company AutoVaz has recently partnered with the Renault-Nissan alliance. An amazing turnaround when you think about it!

So why did Geely choose to purse an acquisition of Volvo? Well firstly, many Chinese car companies have been trying to enter the Western European market but have failed because they have been unable to get their cars through the strict crash tests that the European countries have established. By acquiring Volvo, Geely will get access to engineers and resources that have been developing some of the safest cars in the world. Volvo has one of the most advanced crash test facilities located in Sweden and Geely will certainly be looking to utilize those resources should they decide to bring their own cars to the European markets. The Volvo brand is well recognized and their cars are perceived as being well engineered, safe and made from high quality components. Geely will be hoping to utilize some of this expertise with the development of their own cars.

As well as having a strong car brand that they will be able to sell across China, (helped by the setting up of a new factory producing 300,000 Volvo cars per year), Geely will also be looking to expand the Volvo brand in other markets around the world. In addition, Geely will also have access to a ready made distribution network across North America and Western Europe that could possibly help with the distribution of their own cars around the world.

The Volvo brand has been part of Ford for many years and they have had to adhere to certain Ford policies and processes for developing their vehicles. Following the announcement of the acquisition, the global media has been very interested in comments made by Geely’s Chairman, Li Shufu. He referred to the Swedish brand as being a tiger that needs to be free. He said “a tiger belongs to the forest, it belongs to the wild world and not confined to a zoo. We need to liberate this tiger”. Li Shufu immediately announced to the media that they would be building a new Volvo factory in China. Li also said that while European factories are the “heart” of the Volvo tiger, “its power should project it throughout the world”. I think this is a great analogy and the automotive industry is certainly interested in where Geely/Volvo will go from here.

Another area of interest will be how Volvo and Geely integrate their IT environments because I am pretty sure that Volvo’s IT and B2B infrastructures are going to be far more advanced than Geely’s. Also, Volvo has been constrained with how they develop their IT platforms because they have had to adhere to Ford’s global IT policies and processes. Now that the ‘tiger has been unleashed’, Volvo and Geely have a chance to develop new IT and B2B processes to meet the needs of their expanded operations. I will discuss how this acquisition is likely to impact their B2B environment in a future blog entry.