Geely buys Volvo

The announcement of Chinese car manufacturer Geely buying Volvo Cars from Ford Motor Company is a big news. A landmark event or not, remains to be seen. I make this comment because if we consider the popular school of thought, according to which, consolidations in the future would leave about 5 major global automotive companies owning over 30 brands, Geely's acquisition seems like a small ripple in the grander scheme of things; but nevertheless an important milestone, especially for the Chinese automotive industry.

Estimated at USD 1.8 bn, the Geely-Volvo deal marks China's biggest overseas auto purchase and a global shift in manufacturing from North America / Western Europe to China.

According to Geely, its present and near-future aim is not to tap the western market but bring volumes to the the Chinese market and boost manufacturing. This objective is not so simple as it sounds. Volvo Cars sold around 50,000 units in China in 2009, while the market leader in the premium segment in China, Audi, sold almost 130,000 cars in 2009. But the acquisition is a step forward in the right direction for Geely. Already, a big player within its compatriots, Geely now has the famed Volvo safety design and vehicle engineering technologies at its disposal. This will take Geely a few steps ahead of the other Chinese automakers.

The deal took almost 2 years in the making since Geely went to Ford Motor Company with a speculative bid to buy Volvo Cars. But the buy-over did not happen earlier mainly due to two reasons -

1) Fears of loss of Intellectual Property. The Chinese manufacturers do not have a very good reputation of protecting the interest of foreign JV partners. Remember Chery shamelessly copying the design of Daewoo Matiz? (I heard Chery did such a fine imitation that the QQ headlamps would fit like a glove in a Matiz!)

2) Geely is essentially a private firm without government stakes in the company. This does not bode too well for a foreign investor because according to the Government Procurement Law of the People's Republic of China, "...purchasing activities conducted with fiscal funds by government departments, institutions and public organizations at all levels, where the goods, construction and services concerned are in the centralized procurement catalogue complied in accordance with law or the value of the goods, construction or services exceeds the respective prescribed procurement thresholds", basically, fiscal funds can be used only when the government gives a go-ahead.

But what is interesting is that Geely only paid USD 800 mn of the total USD 1.8 bn amount to Ford. The rest of the money comes from "regional investments", which basically means local governments.

After the unsuccessful attempt by the little-known heavy machinery maker Sichuan Tengzhong Heavy Industrial Machinery to buy Hummer, the Geely-Volvo deal is a new chapter in Chinese automotive history. What remains to be seen whether this is a mere ripple in major consolidations in the automotive industry that are to happen in the future or a milestone event that could change the global automotive industry and start a new trend.