Auto Industry

Yield or merge?

Geely deepens integration with Volvo amid IPO spin-off talks

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In June 2010 Tesla became the first American car company to go public since Ford Motor’s listing in 1956. Less than seven years later, Tesla’s market value has now surpassed that of Ford, closing at $49 billion on Monday, above Ford’s $46 billion.

The same year that Tesla joined the Nasdaq, Ford was busy trimming its assets, and Swedish brand Volvo was part of the extra weight it decided to shed, selling the unit to Chinese car maker Zhejiang Geely for $1.8 billion.

To ease fears that Volvo jobs would be moved to China, Geely executives promised to keep the two companies separate. But with recent murmurs that Volvo is going to be spun off from its Chinese owner via an IPO, the pair’s relationship has been under the spotlight again.

Time Weekly argues that Volvo has been acting like a listed company for a number of years already.  The Swedish carmaker publishes quarterly reports and its financial health has been made yet more transparent with a number of bond issuances in recent years. The sale of $500 million worth of preference shares to a group of Swedish investors last December also hinted that Volvo was a step closer to a stock market flotation. According to analysts it could happen this year.

But Volvo has been opaque about the timetable of its listing plan. “It is clear that an IPO is an option, as we stated when we issued preference shares late last year. There are, however, no current plans,” company representatives told reporters recently, adding that it is a decision for Geely.

Despite promises to allow Volvo to operate independently, Geely has already integrated with it in various ways. For instance, the duo created a platform for compact car development, which led to the creation of Geely’s new brand Lynk & Co.

Lynk is distinct in its business model: the new car won’t be available at many dealerships, but will be sold online and then delivered to the customer’s door. An app has been developed to control many features of the car, including the sharing of electronic “keys”, making Lynk a vehicle ideally suited to China’s booming sharing economy.

Hakan Samuelsson, chief executive of Volvo, said the two companies are “sharing the development of intensive components” and that they can do so without jeopardising the separate identities of the two brands (there was concern when Geely first purchased Volvo that it would tarnish the latter’s reputation, see WiC55). The Lynk model is being created at the same Chinese factory as Volvo’s 40 series, and Autonews speculates that when Lynk is ready for launch in Europe in 2018, the units will be produced at Volvo’s European factories.

According to the Financial Times, this marks the first time that domestic and foreign marques have been manufactured on the same production lines in China. It writes, “The move to bring manufacturing under the same roof is the latest step in efforts to tighten ties between Volvo and Geely by transferring European know-how to Geely while maintaining the Swedish automaker’s business and reputation.”

Geely’s investment in Volvo seems to have defied the sceptics. Its 2016 net profit more than doubled to Rmb5.1 billion ($739 million), its biggest earnings in eight years. The FT suggests the growth spurt is due to the introduction of a new range of SUVs for the Chinese market, which were crafted by former Volvo designer Peter Horbury. (The demand for SUVs in China has surged in recent years, see WiC313). Earlier this year, Geely was also included in the Hang Seng Index, the first Chinese carmaker to be added to this basket of Hong Kong’s most blue-chip stocks.

An IPO of Volvo would nevertheless be an interesting litmus test for how investors view Geely’s stewardship of the Scandinavian carmaker. A successful listing would also suggest that fund managers concur with management that Volvo is now positioned to challenge BMW and Mercede in the luxury segment.


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