Chinese automaker Geely to buy Volvo

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By Steven Mufson
Washington Post Staff Writer
Monday, March 29, 2010

Can the marriage of a Chinese maker of low-end, inexpensive automobiles and a luxury Swedish brand known for safety improve the prospects of both?

That's the gamble China's Zhejiang Geely Holding Group made this weekend by sealing a deal to buy Volvo from Ford Motor for $1.8 billion, one of the largest foreign brand acquisitions by a Chinese company. Ford has said it would continue to share parts and technology with Volvo.

Analysts say the move is designed to be a step toward Geely founder Li Shufu's ambition to build a global company. The acquisition also addresses Li's need to polish up Geely's image in China, which has become the world's largest and fastest-growing car market, and where Geely ranked only 10th among auto companies with less than a 3 percent market share last year.

But the risk is that the acquisition might tarnish the Volvo brand without giving Geely the boost it seeks. And the acquisition poses challenges for Geely, whose revenue is just a fraction of Volvo's.

Li on Sunday said that the acquisition, set to close in the third quarter, was a "milestone." He said Geely would keep open Volvo's car plants in Sweden and Belgium, and open a new one in China.

For Ford, the sale marks the end of a failed venture into luxury European brands. Ford bought Volvo in 1999 for $6.45 billion, but Volvo hasn't turned a profit since 2005. Ford has been seeking to sell the money-losing unit since late 2008. And the sale is the last in a string of divestments of foreign brands by Ford chief executive Alan Mulally, who wants to focus on the Ford line. Since 2007, Ford has also sold Jaguar, Aston Martin and Land Rover.

"Geely is looking, maybe with a realistic eye, and saying, 'Here's an opportunity for us to catch up,' if talking about quality and image, with global manufacturers," said John Bonnell, senior director of market intelligence for J.D. Power Asia Pacific. He said Geely was probably thinking, " 'Maybe, if we invest money in a company like Volvo and build a relationship with Ford -- maybe it's money well spent and cheaper than building that quality ourselves.' "

Geely also has purchased a foreign transmission maker in an effort to boost its technology.

Arthur Kroeber, managing director of Beijing research firm Dragonomics, said "the purchase of Volvo has nothing to do with international expansion. It's all about competing here. . . . The reality is that China is the fastest-growing car market in the world, so Geely needs to improve its technology, brand and look."

In general, Chinese prefer foreign brands, which have two-thirds of the Chinese car market. The six top-selling brands are all foreign, made by joint ventures.

"The Chinese-made and local brand cars don't look as pretty as imported ones," Hu Youqi, a Suzhou architect, said in an interview earlier this year as he eyed a Buick Regal. "And I feel the quality of foreign brands are better than local brands."

Li, whose first business was a photo studio, took over the state-owned Geely in the 1990s when it was a motorcycle manufacturer, and he turned it into a well-known carmaker. Today, it has 30 models and more than 12,000 employees. Li has also cultivated political connections, which helped him win approval and financial backing for the Volvo takeover.

China's car market grew 46 percent in 2009, to 13.6 million vehicles, while U.S. auto sales slumped to 10.4 million.

"China is the biggest market in the world and Geely's ambition is to do well there. But I wouldn't underestimate that they have an eye toward going overseas," said Bonnell. So far, no Chinese company has been able to manufacture a car that meets U.S. safety standards, analysts say, but Volvo could help Geely over that hurdle.

Researcher Zhang Jie in Beijing contributed to this report.


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