China Ink

Home, Swede home

After months of waiting, Geely has finally got its hands on Volvo. The history of automotive M&A is not a happy one. Can Geely succeed where others have failed?

Home, Swede home

The significance of the deal

Last Sunday, Chinese carmaker Geely Holdings signed a deal to purchase the Volvo brand from Ford Motor for a total consideration of $2.7 billion, the largest ever cross-border M&A deal made by a Chinese car company. Since the acquisition had the backing of the government (vice-president Xi Jinping flew to Gothenburg to attend the signing ceremony), it should be no surprise that the state television broadcaster, CCTV, praised the deal. Ma Xiaolin, a commentator for the broadcaster, said that “it is an important case of a Chinese enterprise taking advantage of the financial crisis to make overseas mergers and acquisitions, which is bound to change the world’s automotive market structure.”

The purchase of Volvo could go either way for Geely, according to Patti Waldmeir of the Financial Times: “Perhaps [the deal] will go down in automative history as just another mergers and acquisitions lemon – or maybe it will make Geely a household name.” The newspaper says that the deal gives Geely, a company known for making cheap cars, access to an international brand with everything that a Chinese carmaker needs: “Technology, research and development, service and quality.” The trick however, will be doing what Ford was unable to do – make Volvo a profitable company.

Challenges ahead

The Economic Observer thinks that the Volvo brand could actually be tarnished by its association with Geely, which it describes as a “low-end car company”. It cites a popular sentiment currently being aired by China’s community of microbloggers: “When you drive a S80 under Geely Holdings, will you still feel the same sense of pride and honour as before?”

The Phoenix Weekly agreed that Geely still has to clear more than a few hurdles before it can claim success. Chinese car companies looking to buy their counterparts in developed countries need to pay attention to two key issues: first, they need to be aware of the “burdens” on the balance sheet of the company they intend to acquire; after that, they need to be fully aware of the laws and regulations of the country where the target is located. “From this point of view, Geely has only taken the first step, and next it will face Volvo’s strong trade unions, as well as how best to solve staff problems.” As the China Daily speculates: “Geely could find Volvo a tough nut to crack.”

History is against Geely, according to the Economist. The paper compares the purchase of Volvo with a long list of disappointing M&A deals in the car industry: Daimler and Chrysler, BMW and Rover, and Ford’s purchase of a range of European car brands, including Volvo. “It will be a remarkable feat if Geely is able to buck that trend,” the paper says.

TIME’s Michael Schuman is generally pessimistic about the kind of deal where a company in an emerging market buys a developed international brand to make gains in technology, brand equity and market share. “Usually the sellers of these operations want to ditch them for good reason – because they’re in some way troubled or dog-eared, and need some hefty restoration work to make them into viable sustainable businesses.” He says that Geely’s Chinese management has no experience in managing a Swedish workforce. And even if it manages to overcome the cultural obstacles, Volvo’s image needs revamping: “My mom has driven Volvos for as long as I can remember. Need I say more?” says Schuman.

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