Auto industry ponders Volvo's future after Geely merger

11:08, August 06, 2010      

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The Ford Motor Company officially delivered its Volvo assets to China's Geely Holding Group on Aug. 2, marking the end of legal procedures of the largest overseas merger of a Chinese private enterprise. As the first multinational auto enterprise in China, how far Geely Holding Group can go has recently became the focus of the auto industry.

Li leading a "dream team?"

The new management team of Volvo includes Geely Chairman Li Shufu as the chairman of the board, Hans-Olov Olsson, former president and CEO of Volvo, as the deputy chairman and Stefan Jacoby, former CEO of Volkswagen AG in North America, as the president and CEO of Volvo.

Li clearly expressed earlier that Geely will not directly interfere with the operations of Volvo and the company's management team shows that he did not break his word. In addition to five auto industry elites recruited from around the world, the members of the board also includes three representatives appointed by Volvo's labor union.

Li believes the only thing that the acquired enterprise needs to change is the assessment and incentives. Li also believes the most important thing he did is that he and the foreign senior officers from Volvo's management team jointly decided the new enterprise management system and the departmental and individual assessment method.

Analysts believe Geely obviously drew a lesson from the overseas merger of Chinese private enterprises. It stressed the equal relation between Geely and Volvo at the very beginning, allowing the Volvo staff to feel a sense of security.

It also repeatedly stressed that Geely will make efforts to enable Volvo to turn a profit as soon as possible. Meanwhile, Geely appointed a foreign executive with an excellent reputation as Volvo's CEO and promised to treat Volvo employees kindly. This has laid a good foundation for the recovery of Volvo, analysts say.

Will China's weak auto market produce adverse effects on Volvo's business?

The potential for amazing mutual benefits was a key reason for the cooperation between Volvo and Geely. Li said that since Volvo already has a mature brand and advanced technologies, it only needed Geely's deep understanding of China to help it reduce manufacturing costs and enter China's auto market.

Despite the global financial crisis, China's auto market became the world's largest by sales, which increased Li's confidence. Foreign auto markets were mostly sluggish in 2009, but China's total auto sales last year climbed sharply by 30 percent.

Thanks to a thriving domestic market during the global downturn, Geely achieved a net profit of almost 560 million yuan in the first half of 2009, an increase of 110 percent compared to the same period of 2008. Even Volvo's auto sales in China also rose by 80 percent from 2008 to 2009, despite the fact that its share of the global auto market has been shrinking in recent years.

However, the acquisition took a long time, and now that it has finally been completed, things have changed. China's auto market is now in a period of adjustment, and its auto sales have dropped, though slowly. Analysts said that China's auto market already changed from strong to weak in early 2010.

Experts said that the soaring sales in China's automobile market in 2009 were mainly due to the favorable national policies to address the financial crisis. However, the subsidies and trade-in policies for the rural automobile market will all end in 2010. Therefore, after the third quarter of this year, sales in China's automobile market may experience negative growth compared to the same period last year. For Volvo, a company ready to realize its ambitions in the Chinese market, there is a gap between the shrinking trend and their expectations.

Some analysts believe that Volvo is a world famous automobile brand. After being acquired by Geely, Volvo will definitely own a greater share in China's automobile market.

Alan Mulally, president and CEO of Ford, is optimistic about the future of Volvo. He stated,
"Volvo is an excellent brand with a strong production line and has returned to profitability after the successful reorganization. We believe that Volvo will have a promising future after being acquired by Geely."

How far can China's first multinational auto enterprise go?

Geely is planning to produce luxury cars in China using the Volvo brand, and at the same time, it will keep Volvo's factories in Europe to meet the demands of the international market. However, foreign media groups have speculated that the Volvo brand, characterized by safety and quality, will gradually lose its reputation in China, where cars are manufactured in a large-scale manner.

Jacoby, the new president and CEO of Volvo, believes that these worries are unnecessary.

"All of our staff, suppliers and dealers, especially our customers believe that Volvo will continue to maintain its leading position in car safety and innovation, and it will not be changed while exploring the new market," he said.

According to some experts, although China has decades of joint-venture history and almost all global leading automakers have achieved localized production in China, related core intellectual properties have never belonged to China. The most valuable part of the assets that cost Geely 1.8 billion U.S. dollars is Volvo's core technologies.

"However, purchasing the technologies does not mean that we can assimilate the technologies and make follow-up development," said Huang Xianhai. "Volvo now belongs to China just in terms of law and business, but it does not mean that we have bought its thoughts, insights and wisdom."

Besides the doubts about Geely's ability to assimilate the core technology, there are other potential risks such as Volvo's huge welfare burden, the integration of two different types of culture and the ability for a Chinese private company to integrate an international brand. Experts also said that the only 20 percent of the acquisition was completed after the delivery of Volvo's assets. It still needs to see whether Geely could continually make Volvo profitable in the future.

Li believes that if the cultural difference can be handled well, it will create great energy, which is true globalization.

By People's Daily Online

(Editor:祁澍文)

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