Introduction After a one-year long and difficult negotiation, on March28 2010, the China Geely Group went where no Chinese auto firm has gone before, buying a luxury car brand, Volvo, for $1. 8billion from Ford, including the 100% shareholder and the relevant assets. It was China’s largest overseas automotive industry acquisition, which was also the first wholly-owned merger. Besides, it was the first time for a Chinese own brand to merge a luxury brand.
This deal proved to be a most ambitious action for the Chinese automaker’s desire to transform itself into an international auto player and wrote a new chapter for the Chinese automotive industry. The deal was greeted with cautious optimism by some experts, saying the move offered a bright future to both buyer and seller, which provided them with long term strategic benefits. Geely sought to tap China’s high-growth auto market by acquisition to upgrade its car lineup, while Volvo tried to gain more profit in the Chinese market. On the contrary, it is commented that Geely had eyes bigger than its stomach, it was an asymmetric merger.
Just as the words of chairman of Geely, Li Shufu, described the deal as the “poor boy from the countryside” (Geely) marrying the “rich girl from the city” (Volvo). No matter what the comments are, securing such a successful acquisition serves as a high standard for other companies to follow and to learn from the experiences and skills gained. Under the background of post-financial-crisis, the Chinese corporations get more opportunities to be players in the international market. Moreover, the Chinese mode, with strong support from the government, may help more firms participate in the international competition.
This article will analyze the factors that contributed to the successful merger between Geely and Volvo from three different perspectives, Geely’s, Volvo’s and some external reasons, which would give an example for other merger. Evaluate the factors from Geely’s perspective Two companies’ complements Geely is a privately owned company which is famous for its low-cost compacts, while Volvo always advocates its energy-saving and environment-friendly measures. Since 2007, Geely’s former competition strategy has changed, from lower price to brand, technology, better service, safety and energy-efficiency.
Because nowadays people pay much more attention to automotive safety and environmental protection, so the Volvo would be a better choice. From this perspective, the support from the customers is beneficial to the merger. Furthermore, comparing with the two companies, their customers come from the opposite wealth class, the two sales markets never overlap, which meant the combination makes them form a stronger and more comprehensive market, and that would do better for both companies. Strong support from the Government
Actually, this successful acquisition is not only a simple cooperation between the two private car companies, but also a political merger with the clear support from the Chinese government. This will be a revolution for the whole Chinese cars industry. As we all know, the Chinese market is the biggest market for cars sales, however, the majority of the markets have been occupied by foreign corporations. Therefore, Chinese corporations are badly in need of western technology to struggle for one slice of cake and save their poor exports. In order to improve the level of domestic cars industry, government helps Geely a lot about the acquisition.
Firstly, Li Yizhong, China’s Minister of Industry and Information Technology, was present at the official signing of the deal in Sweden, this showed that the government took it very seriously. Secondly, the government took political measures, including the “going-out” strategy and the subsidies policy. The former one encouraged the firms to grab the international opportunities for development of knowledge, management and assets, and the latter one subsidized sales of “green vehicles” and offered rebates to customers. Both of these two policies helped Geely develop better in international and domestic markets.
Thirdly, some financial support given to Geely by the government which was also the direct help. Geely smoothly secured $2. 1 billion of loans from Bank of China, China Construction Bank and Export-Import Bank of China. It can be said that the government’s support is one of the most powerful motivators for Geely’s merger. Geely’s unique advantages comparing with other competitors In the negotiation, Geely promised to satisfy all the operational requirements of Ford and Volvo, such as, remaining the independent operation system, non-interference of Volvo’s operational management and promising not to transfer the factory and layoffs.
All these respects gained the affection of Ford and played an invaluable rule in the acquisition. Ford and Volvo shared a lot of classified technologies and patents, therefore Ford didn’t want to sell Volvo to their competitors, while Geely was no threat to Ford at all. This might cause Ford to think more favourably about Geely. Unlike other corporations in foreign countries, Geely relied on the Chinese market which would be more attractive. No matter what car brands, if they seeked for a growth, China was the first choice, and it was not exceptional for Volvo. Joint adventures with Geely in China, Volvo may gain a better development.
Geely’s long-term preparation Geely had been preparing for 8 years in terms of capital, technology and negotiation team. In this period, Geely had practiced twice. In November, 2006 Geely announced plans to become the majority shareholder of Manganese Bronze—the leading manufacturer of the distinctive London black taxi. In March 2009, Geely acquired DSI, an Australian gearbox maker. In addition, in order to ensure a successful bid, the acquisition team, including international investment banks, consulting firms, did adequate research and feasible analysis for the potential acquisition of Volvo matters.
From Volvo’s perspective to analyze the factors Volvo’s international influences—-long history and luxury brand Volvo, about a hundred year’s brand, is associated with safety and reliability, which is accepted by most people in the world. It also gives Geely a trusted brand to open the Chinese market. Geely grabbed the chance to acquire the brand name with a great reputation and 10 billion dollars of brand value. According to the research, Mercedes, BMW, Audi and Lexus occupy almost 90% of sales in China’s luxury car market. However, the Chinese luxury market still has room for some other competitors to come in.
And that’s why Geely merged Volvo. It is more preferable for Chinese customers and easier to help the companies expand the sales. So Volvo in China should keep her own luxury brand to satisfy the domestic customers’ needs. Volvo’s high technology Volvo is a creative company with sustainable development, with 4,000 high-quality R ; D employees and engineers. Moreover, there are 2,500 global dealers across more than 100 countries, among them, 60% and 30% of the dealers are located in Europe and North America respectively. 10 years ago, Ford and Volvo had spent billions of dollars for the development of new energy technologies.
On this point, it was a good deal to pay 1. 8 billion to buy Volvo’s operations, including nine series and three new platforms, more than 2,000 global network of talent and brands, as well as key supplier system. Additionally, Geely not only acquired the entire equity interest of Volvo, but also got the core technology, patents ,other intellectual property rights, manufacturing facilities, and the Volvo’s global distribution channels. Strategically sold by Ford Since 2005, Volvo has been losing money for 5 years which brought Ford huge losses. The brand hasn’t been a real moneymaker for a very long time.
In order to make up for the deficit, Ford changed the original sales strategy into the new idea, “One Ford, One team”, mainly focusing on the brand, Ford. Consequently Volvo would definitely be sold, just like Jaguar, Land Rover selling to Tata and declining the stock of Mazda. The financial crisis impacts on the global economy and the main automotive market has been shrinking. Under the background of international environment, there is no need for Ford holding Volvo, only increasing the financial risk. External reasons To some extent, the economic crisis influenced the economic growth of China.
However, China still has adequate funding for global acquisition. Besides, as China’s GDP grows, there is a trend that Chinese companies are interested in global expansion and tend to go abroad. It also notices that the Chinese management and the Chinese managerial culture is changing to be more open minded in acquiring assets and taking on some risks outside their borders. Due to the financial crisis in 2008, the world economy went into recession and some international institutions went into crisis which caused foreign enterprise value to be underestimated.
According to a report released by International consulting company, Accenture (06/2009), the evaluation of corporations’ assets was lower than any time in the past 20 years. Most competitors became more cautious about the global acquisition. However many companies’ assets, management and operational skills, distribution channels and brands still have immense global value. Now this is a great time for Chinese firms to take advantage of this favorable opportunity, using mergers and acquisitions to acquire those assets at a reasonable price.
Additionally, the international companies who are in a management dilemma offer a channel and opportunity for the Chinese corporations to enter an international competitive environment that the Chinese corporations never participate successfully. Future After so many failed auto deals that have cost tens of billions of dollars, this one would likely be seen as a model for Chinese acquisition, a private firm dominating with strong support from the government. However, the two companies face stern challenges from all the fields. To start with, the two leaders have different perspectives of Volvo’s further development.
Mr. Jacoby, in Volvo, wants to focus on safety and fuel-efficiency with smaller cars, while Mr. Li, in Geely, insists that Volvo expands aggressively into luxury cars to match the Chinese sales market. What’s more, Geely lacks the management experiences of integrating such an international companies, especially the luxury brand cars sales. Another challenge for Geely is to integrate not only the two companies, the two teams, but also the two different cultures and countries. After the acquisition, how to prevent the decline of the talents, suppliers and distributors may become a key aspect to value the deal.
Conclusion Geely’s acquisition with Volvo is like a baby learning how to walk, swaying all the long way and facing huge difficulties. There are full of unpredictable changes at every step. However, as the most difficult M;A case in China, Geely’s success has become an established fact. This deal contains two companies’ efforts. The acquirer, Geely, been preparing for eight years, shows the unique advantages that appeals to Volvo. Moreover, the strong support from the Chinese government is one of the most powerful motivators for Geely’s acquisition with Volvo.
Therefore Geely has enough money to manage the whole operation with the clear political and financial support. Geely’s and Volvo’s complement of each other is also a factor that facilitates the merger and it’s easier for the two corporations’ further cooperation. The acquiree, Volvo, an international brand with about one hundred years’ history, definitely has become the first choice for Geely’s merger. Besides, Volvo has a high reputation for its safety and energy-saving technology, which are the items Geely lacks.
This deal also contains Volvo’s all the operational systems, such as the intellectual property among the world, the global distribution channels. Through buying the foreign high-tech, it helps Geely to achieve the goal to participate in the international cars operation. Meanwhile, the outside investment environment is suitable for the Chinese corporations to grab the opportunities to expand. Due to numbers of international corporations’ value has been underestimated, it is a better chance for Chinese firms to merge at a lower price. However, the merger’s success is just the beginning, the biggest challenge for Geely is how to manage Volvo.
One of the most urgent problems is to position the direction of Volvo’s further development, aiming the luxury cars to fit the Chinese market, as stated by Geely’s CEO, Li Shufu, or focusing on the energy-saving research from the order of Volvo’s CEO. After the merger, Geely should pay much more attention to the protection of technologies and engineers, concluded from the multiple failed cases. REFERENCES 1. NORIHIKO, SHIROUZU. (2011) Chinese Begin Volvo Overhaul. The Wall Street Journal, 7th June, p. 1 2. Bill Russo. Tao Ke. Edward Tse. (2009) An Inorganic Approach To Globalization–The Marriage of Geely and Volvo.
Booz Company. 3. CJ, Sandersfeld. (2010) Geely acquisition of Volvo underscores dynamics of China’s global business policy. [National]. 31th March. Available from: http://www. examiner. com/international-politics-in-national. [Accessed 28/08/2011] 4. William Russo. (2010) Making the Geely and Volvo marriage a success. [G+]. 30th March. Available from: https://www. gplus. com/Consumer-Vehicles/Insight/Making-the-Geely-and-Volvo-Marriage-A-Success-47461. [Accessed 28/08/2011]. 5. Liang Fei. (2011) Volvo opens new China headquarters. [Global Times]. 25th January. Available from: http://msn. huanqiu. com/bizchina/2011-01/1458529. tml. [Accessed 28/08/2011]. 6. Geely. (2011) [online image]. Accessed from: www. geely. com. [Accessed from: 26/08/2011] 7. Volvo. (2011) [online image]. Accessed from: www. volvogroup. com. [Accessed from: 26/08/2011] ——————————————– [ 1 ]. Hui Zhao. (2010) Consulting teams in international merger. Available from: http://wenku. baidu. com/view/aa5ef2748e9951e79b892735. html? from=related [ 2 ]. CJ, Sandersfeld. (2010) Geely acquisition of Volvo underscores dynamics of China’s global business policy. [National]. 31th March. Available from: http://www. examiner. com/international-politics-in-national. Accessed 28/08/2011] [ 3 ]. William Russo. (2010) Making the Geely and Volvo marriage a success. [G+]. 30th March. Available from: https://www. gplus. com/Consumer-Vehicles/Insight/Making-the-Geely-and-Volvo-Marriage-A-Success-47461. [Accessed 28/08/2011]. [ 4 ]. Liang Fei. (2011) Volvo opens new China headquarters. [Global Times]. 25th January. Available from: http://msn. huanqiu. com/bizchina/2011-01/1458529. html. [Accessed 28/08/2011] [ 5 ]. Geely. (2011) [online image]. Accessed from: www. geely. com. [Accessed from:28/08/2011] [ 6 ]. Opportunities in the Chinese Luxury Car Market. Accessed from: