Auto Industry

Finally to marry

Geely Automobile plans Volvo merger


Heading to the Hong Kong bourse

The place where the Covid-19 virus originated – a Wuhan seafood market where illegal sales of wild animals also took place – presents an image of China that most in the country would rather leave behind. The speedy response of some of its companies to the outbreak, on the other hand, demonstrates the direction China plans to head in.

One such is Geely Automobile. The Hong Kong-listed group has developed an intelligent air purification system (IAPS) for its cars, which is as good as an N95 mask (which block at least 95% of very small particles) in filtering out viruses and other bacterial material.

The company developed IAPS in 20 days and will begin rolling it out next month. The first batch of cars will be delivered to frontline workers battling Covid-19.

IAPS represents another signpost along the road that founder Li Shufu has taken to transform Geely into a global carmaking superstar. As WiC readers are well aware, the first big step dates back to 2010 when Geely purchased Sweden’s Volvo from Ford.

Since then, the Chinese and Swedish brands have worked together on technical collaborations and made a number of joint investments. But they have remained operationally separate, with Volvo owned by Geely’s unlisted parent Zhejiang Geely Holdings.

In 2018 Zhejiang Geely tried to list Volvo in Sweden. It backed off when it couldn’t reach the upper end of its mooted $16 billion to $30 billion valuation target. With that option shelved, last week it announced that it was discussing a full merger between Volvo and Hong Kong-listed Geely Automobile.

It has not yet decided whether to raise fresh equity in Hong Kong or alternately via a secondary listing in Stockholm. Either way, financial analysts say the newly combined group could reach a $30 billion-plus valuation, based on Geely’s current $17.1 billion market capitalisation in Hong Kong.

Investors have responded positively to the February 10 announcement with Geely’s share price rising 10% since then. Financial analysts say that the merger makes a lot of business sense, as the two will be able to achieve greater synergies across their supply chains and R&D teams. It may also speed up Geely’s transition to making electric cars, where Volvo is a step ahead having made a major push into electric engines last year – with plans to make 50% of its cars fully electric by 2025.

The merger may well enable Geely to overtake SAIC as China’s largest listed car company by market value (SAIC has a current capitalisation of $37 billion). It will almost certainly soon surpass Ford on $32 billion. But it still has some way to go before it catches up with Toyota and Tesla – which are at the head of the pack on respective market values of $191 billion and $145 billion.

Geely’s January sales figures will not help it to get there. They plunged 28% year-on-year, much worse than the 18% industry average. Dealers are reporting that February is looking even worse because of the Covid-19 crisis. Analysts predict the sector’s sales halving from the same period in 2019.

Car companies are resorting to desperate measures to keep up sales at a time when most potential buyers are stuck at home. In February, BMW, XPENG and Tesla all launched livestreaming sales initiatives – the former on Tmall and the latter two on Douyin, China’s version of TikTok.

BMW introduced two masked presenters who proceeded to show the audience the interiors and configuration of its X1 sports utility vehicle. However, reported that the German company’s second and third livestreaming events on February 10 only attracted about 2,000 to 3,000 views. The conclusion is obvious. Buying a car is a big-ticket item that is a hands-on experience rather than a virtual one.

Falling sales are unlikely to dampen Geely’s ambitions and there are reports that it wants to add another famous brand to its stable: Aston Martin.

The iconic British company, so closely associated with James Bond, went public in London in 2018. But its share price has not fared very well since then, losing 75% of its value. Aston Martin is said to be offering to sell a 20% stake: a tempting prospect for Geely, which also manufactures another iconic brand in the West Midlands city of Coventry: the London black cab.

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